Question

Which of the following types of interest cost incurred in connection with the purchase or manufacture of inventory should be capitalized as a product cost?

a. Purchase discounts lost
b. Interest incurred during the production of discrete projects such as ships or real estate projects
c. Interest incurred on notes payable to vendors for routine purchases made on a repetitive basis
d. All of these should be capitalized.

Answer 1

In terms of capitalizing interest costs as a product cost, only interest incurred during the production of discrete projects such as ships or real estate projects should be capitalized, in line with accounting standards that suggest such interest is part of the construction cost of an asset that will deliver future benefits. Option b is the correct answer.

Step-by-step explanation:

When addressing which types of interest costs incurred in connection with the purchase or manufacture of inventory should be capitalized as a product cost, it's essential to understand accounting principles and business investment decisions.

According to accounting standards, not all interest costs are treated equally. Specifically,

• Purchase discounts lost are generally taken as an immediate expense rather than capitalized,
• Interest incurred during the production of discrete projects such as ships or real estate projects is typically capitalized,
• Interest incurred on notes payable to vendors for routine purchases made on a repetitive basis is usually not capitalized.

Therefore, the correct answer is that only the interest incurred during the production of discrete projects should be capitalized as a product cost. This aligns with the concept that such interest is part of the cost of constructing an asset, which will provide future economic benefits.