Question

Which items qualify for interest capitalization?

1) Purchased assets
2) Assets built for a company's own use
3) Assets built as discrete projects for sale or lease
4) Inventories routinely manufactured in large quantities
5) Franchise agreements

Answer 1

Interest capitalization applies to purchased assets that require preparation, assets built for a company's own use, and discrete projects intended for sale or lease. Hence, the correct answer is option (2) and (3).

Step-by-step explanation:

Interest capitalization involves adding the interest accrued during the construction or production period of an asset to the cost of the asset, rather than expensing it immediately. In the context of investment in capital goods, interest capitalization may apply to certain assets that are being constructed or developed for a company's use, such as:

• Purchased assets that require a substantial period for readying them for their intended use or sale.
• Assets built for a company's own use, which include nonresidential structures like factories or offices.
• Assets built as discrete projects for sale or lease, which may be part of a company's investment in nonresidential structures or producer's durable equipment.

However, interest capitalization would typically not apply to inventories routinely manufactured since they are not capital-intensive goods that necessitate a lengthy preparation period. Similarly, franchise agreements are not physical assets being constructed, so interest costs would generally be expensed as incurred rather than capitalized.