Coffee-Bean Company built two similar buildings. Each building took one year to build and required $25 million in construction costs. Given the Company's limited internal financial resources, only Building Hazel could be internally financed; Building Cinnamon was financed by a $20 million loan evenly over the year (i.e., zero at the beginning and increasing to $20 million by the end of the year). The interest rate on the loan is 8%.
Both projects were finished on December 31, 2019 and were ready for occupancy immediately. The Hazel building will have an estimated useful life of 30 years while the Cinnamon building will have an expected useful life of 40 years. Neither building will have a residual value. The Company uses the straight-line method for depreciation.
Required:
a. How much interest cost can be capitalized on Building Cinnamon?
b. What will be the annual depreciation expense for each of the two buildings?
c. ASPE allows interest capitalization while IFRS recommends capitalization of interest on construction-specific loans. Ignoring the complexities of how to determine how much interest to capitalize, which treatment of interest costs is conceptually more correct? Explain your conclusion.
d. Why can interest costs not continue to be capitalized after the self-construction period is completed?

Question

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The Answer of Coffee-Bean Company built two similar buildings. Each building took one year to build and required $25 million in construction costs. Given the Company's limited internal financial resources, only Building Hazel could be internally financed; Building Cinnamon was financed by a $20 million loan evenly over the year (i.e., zero at the beginning and increasing to $20 million by the end of the year). The interest rate on the loan is 8%.
Both projects were finished on December 31, 2019 and were ready for occupancy immediately. The Hazel building will have an estimated useful life of 30 years while the Cinnamon building will have an expected useful life of 40 years. Neither building will have a residual value. The Company uses the straight-line method for depreciation.
Required:
a. How much interest cost can be capitalized on Building Cinnamon?
b. What will be the annual depreciation expense for each of the two buildings?
c. ASPE allows interest capitalization while IFRS recommends capitalization of interest on construction-specific loans. Ignoring the complexities of how to determine how much interest to capitalize, which treatment of interest costs is conceptually more correct? Explain your conclusion.
d. Why can interest costs not continue to be capitalized after the self-construction period is completed?

Coffee-Bean Company Built Two Similar Buildings