A company is constructing an asset for its own use. Construction began in 2020. The asset is being financed entirely with a specific new borrowing. Construction expenditures were made in 2020 and 2021 at the end of each quarter. The total amount of interest cost capitalized in 2021 should be determined by applying the interest rate on the specific new borrowing to the
A) total accumulated expenditures for the asset in 2020 and 2021.
B) weighted-average accumulated expenditures for the asset in 2020 and 2021.
C) weighted-average expenditures for the asset in 2021.
D) total expenditures for the asset in 2021.

Question

Quizplus · Accepted Answer

The most appropriate method to determine the amount of interest cost capitalized for a self-constructed asset is to use the weighted-average accumulated expenditures. This method takes into account the fact that expenditures are made at different points in time and the construction period may span over more than one accounting period. The weighted-average accumulated expenditures are calculated by multiplying the amount spent during each period with the time-weighted fraction of the period during which the expenditure was made. By applying the interest rate on the specific new borrowing to the weighted-average accumulated expenditures, the amount of interest cost capitalized in 2021 can be determined.

A Company Is Constructing an Asset for Its Own Use