FAR: All: TBS 3/15/2018

Question 1

The $700,000 that was borrowed to finance the construction was temporarily invested by Yamashita until the funds were actually needed in March, Year 1. The $5,000 of interest income earned on those funds may be offset against the interest expense to be capitalized:

True or False

Answer 1

False

The interest earned on the funds must be recognized as revenue and may not be offset against the interest expense to be capitalized.

Question 2

Interest capitalization is an example of the application of the matching principle.

True or False

Answer 2

True

The rationale for interest capitalization is to reflect an asset’s total acquisition cost and to match the asset’s cost with the revenue of future periods that benefit from its use.

Question 3

The interest capitalization period begins when, and continues as long as, all three of the following conditions are met:

Answer 3

1) Expenditures for the asset have been made.
2) Activities necessary to get the asset ready for its intended use are in progress.
3) Interest cost is being incurred.

Question 4

Since Yamashita is developing land to house the building, the expenditures to acquire the land qualify for interest capitalization.

True of False

Answer 4

True

The capitalization period begins when activities necessary to construct the building commences and ends when the building is substantially complete. Interest capitalized relating to the land becomes part of the cost of the building because the land is being developed together with the building. Even though land itself is not depreciable, the interest cost connected to the land is capitalized as part of the cost of the building and depreciated.