FAR - PP&E

Question 1

A company is constructing an asset for its own use. Construction began in Year 3. The asset is being financed entirely with a specific new borrowing. Construction expenditures were made in Year 3 and Year 4 at the end of each quarter. The total amount of interest cost capitalized in Year 4 should be determined by applying the interest rate on the specific new borrowing to the

Answer 1

Average accumulated expenditures for the asset in Year 3 and Year 4.

An asset constructed for an entity’s own use qualifies for capitalization of interest if (1) relevant expenditures have been made, (2) activities necessary to prepare the asset for its intended use are in progress, and (3) interest is being incurred. The capitalized amount is determined by applying an interest rate to the average qualifying expenditures accumulated during the period. These expenditures in any given period include those incurred in that period plus those incurred in the construction of the asset in all previous periods. Thus, the total interest cost capitalized in Year 4 equals the interest rate on the specific new borrowing times the average accumulated expenditures for the asset in Year 3 and Year 4.​