Final Answer:
The rationale for capitalizing interest on a self-constructed asset is that interest expense is incurred while getting the asset ready for its intended use and therefore, should be capitalized. Thus, the correct answer is option 1) interest expense is incurred while getting the asset ready for its intended use and therefore, should be capitalized.
Step-by-step explanation:
Capitalizing interest on a self-constructed asset aligns with the principle that costs directly attributable to bringing an asset to its intended use should be included in its carrying amount. The capitalization of interest recognizes that borrowing costs are a necessary part of the process to prepare an asset for its intended use. This approach is consistent with matching costs to the periods benefiting from those costs.
Unlike labor, material, and overhead costs that directly contribute to the physical construction, interest expense represents the cost of financing the construction. Recognizing interest as a period expense (Option 3) could distort the matching of costs with revenues, as it fails to acknowledge the direct relationship between interest incurred and the asset's construction.
Treating interest as a financing activity and expensing it in the period incurred (Option 4) overlooks the capital nature of interest during the asset's construction phase. Capitalizing interest is a prudent accounting practice that reflects the economic reality of the borrowing costs incurred to bring the asset into the condition necessary for its intended use.
Thus, the correct answer is option 1) interest expense is incurred while getting the asset ready for its intended use and therefore, should be capitalized.