PP & E: Cost Basis

Question 1

When should interest incurred to acquire land be capitalize?

Answer 1

Interest should only be capitalized in connection with a “discrete manufacturing activity”

Question 2

How should interest incurred to acquire land be treated?

Answer 2

Interest incurred to acquire land should be expensed when incurred.

Question 3

How should interest cost incurred during construction of machinery used by a firm as fixed assets be treated?

Answer 3

It should be capitalized.

Question 4

How should interest cost after completion of construction of fixed assets be treated?

Answer 4

Interest costs on fixed assets after completion of construction as well as all interest on routine manufacture of machinery for sale to customers must be expensed.

Question 5

Please note

Answer 5

Ordinary repairs should be expensed

Extraordinary repairs should be capitalized. Treat repairs a an improvement or replacement as appropriate.

Question 6

How is the increase in life of an improvement/replacement of a fixed asset and for both ordinary and extraordinary repairs treated?

Answer 6

Increase life of an asset reduce/decrease the accumulated depreciation

Question 7

Two rules concerning capitalized interest.

Answer 7

Rule 1: Only capitalize interest on money spent not on the total amount
borrowed.

Rule 2: The amount of the capitalized interest is the lower of :

• actual interest cost incurred or
• computed capitalized interest (avoidable interest)