Lesson 2 Flashcards
Examples of assets that do not qualify for interest capitalization are:
- assets that are in use or ready for their intended use.
- Assets that the company does not use in its earnings activities and that are not undergoing the activities necessary to get them ready for use.
To qualify for interest capitalization:
Assets must require a period of time to get them ready for their intended use.
Capitalization Period
Is the period of time during which a company must capitalize interest.
What are the three conditions of the capitalization period?
- Expenditures for the asset have been made.
- Activities that are necessary to get the asset ready for its intended use are in progress.
- Interest cost is being incurred.
When does the capitalization period end?
When the asset is substantially complete and ready for its intended use.
Avoidable Interest
is the amount of interest cost during the period that a company could avoid if it had not made expenditures for the asset.
Weighted Average Accumulated Expenditures
Expenditures weighted by the amount of time (fraction of a year or accounting period) in which interest can be incurred on the cost.
What are the two issues related to interest capitalization that merit special attention?
- Expenditures for land.
- Interest revenue.
How does GAAP recommend accounting for interest costs incurred during construction?
Capitalize the actual interest cost for the period incurred during the period.
Using this approach ignores the implicit interest cost associated with the use of the cash.
What assets qualify for interest cost capitalization?
Assets that are under construction for a company’s own use.
For the purposes of interest cost capitalization, qualifying assets must require a period of time to get the asset ready for their intended purposes.
When computing the amount of interest cost to be capitalized, What does the concept of “avoidable interest” refer to?
The portion of total interest cost which would not have been incurred if expenditures for asset construction had not been made.
Avoidable interest is the amount of interest cost during get period that a company could avoid if it had not made the decision to purchase the asset in the first place.
What best describes the correct treatment of the interest costs capitalized during the period of construction when a company purchases land as a site for a plant?
Regard as a cost of the plant.
Interest costs may only be included in the cost of qualifying assets, or assets that are constructed for the company’s own use and those assets intended to be sold/leased.
On January 2, 2020, Indian River Groves began construction of a new plant. The plant was finished and ready for use on Sept 30, 2021. Expenditures were as follows:
Jan 2, 2020 $600,000
Sept 1, 2020 $1,800,000
Dec 31, 2020 $1,800,000
Mar 31, 2021 $1,800,000
Sept 30, 2021 $1,200,00
Indian River Groves borrowed $3,300,000 on a construction loan at 12% interest.
What were the weighted average accumulated expenditures of 2020?
$1,200,000
The weighted average for 2020 are calculated as follows: ($600,000X12/12) +( $1,800,000X4/12) + ($1,800,000 X 0/12) = $1,200,000
On January 2, 2020, Indian River Groves began construction of a new plant. The plant was finished and ready for use on Sept 30, 2021. Expenditures were as follows:
Jan 2, 2020 $600,000
Sept 1, 2020 $1,800,000
Dec 31, 2020 $1,800,000
Mar 31, 2021 $1,800,000
Sept 30, 2021 $1,200,00
Indian River Groves borrowed $3,300,000 on a construction loan at 12% interest.
What was the capitalized interest for 2020?
$144,000
The amount of interest to capitalize is based on the weighted average. Weighted average equaled to $1,200,000. To calculated capitalized interests $1,200,000 X 12% = $144,000
