Borrowing Cost

True or False? When capitalizing interest during construction of an asset, an imputed interest cost on stock financing must be included.

• True

• False

True or False? Assets under construction for a company’s own use do not qualify for interest cost capitalization.

• True

• False

True or False? Avoidable interest is the amount of interest cost that a company could theoretically avoid if it had not made expenditures for the asset.

• True

• False

True or False? When a company purchases land with the intention of developing it for a particular use, interest costs associated with those expenditures qualify for interest capitalization.

• True

• False

Which of the following assets do not qualify for capitalization of interest costs incurred during construction of the assets?

• Assets under construction for an enterprise's own use.

• Assets intended for sale or lease that are produced as discrete projects.

• Assets financed through the issuance of long-term debt.

• Assets not currently undergoing the activities necessary to prepare them for their intended use.

Assets that qualify for interest cost capitalization include

• assets under construction for a company's own use.

• assets that are ready for their intended use in the earnings of the company.

• assets that are not currently being used because of excess capacity.

• All of these assets qualify for interest cost capitalization.

The period of time during which interest must be capitalized ends when

• the asset is substantially complete and ready for its intended use.

• no further interest cost is being incurred.

• the asset is abandoned, sold, or fully depreciated.

• the activities that are necessary to get the asset ready for its intended use have begun.

Which of the following is not a condition that must be satisfied before interest capitalization can begin on a qualifying asset?

• Interest cost is being incurred.

• Expenditures for the assets have been made.

• The interest rate is equal to or greater than the company's cost of capital.

• Activities that are necessary to get the asset ready for its intended use are in progress.

Interest cost that is capitalized should

• be written off over the remaining term of the debt

• be accumulated in a separate deferred charge account and written off equally over a 40-year period

• not be written off until the related asset is fully depreciated or disposed of

• none of these

When funds are borrowed to pay for construction of assets that qualify for capitalization of interest, the excess funds not needed to pay for construction may be temporarily invested in interest-bearing securities. Interest earned on these temporary investments should be

• offset against interest cost incurred during construction.

• used to reduce the cost of assets being constructed.

• multiplied by an appropriate interest rate to determine the amount of interest to be capitalized.

• recognized as revenue of the period.