A company is constructing an asset for its own use. Construction began in 2010. The asset is being financed entirely with a specific new borrowing. Construction expenditures were made in 2010 and 2011 at the end of each quarter. The total amount of interest cost capitalized in 2011 should be determined by applying the interest rate on the specific new borrowing to the
A) total accumulated expenditures for the asset in 2011.
B) average accumulated expenditures for the asset in 2011.
C) average expenditures for the asset in 2011.
D) total expenditures for the asset in 2011.

Question

Quizplus · Accepted Answer

The best choice is to apply the interest rate on the specific new borrowing to the average accumulated expenditures for the asset in 2011. This is because interest costs can only be capitalized during the construction period when there are actual construction expenditures. Since expenditures were made at the end of each quarter in 2010 and 2011, the average accumulated expenditures for 2011 will most accurately reflect the cost of borrowing used for construction during that year.

A Company Is Constructing an Asset for Its Own Use