Final answer:
ASC 835-20 in the FASB Accounting Standards Codification provides guidance for Biological Industries Inc. on how to capitalize interest cost during the six-month setup period of manufacturing equipment despite immediate payments on the note receivable beginning.
Step-by-step explanation:
The correct accounting treatment of interest cost capitalized as part of the historical cost of a long-lived tangible asset is described by the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC). The specific section relevant to this scenario is ASC 835-20, which addresses interest capitalization. Biological Industries Inc. would refer to these guidelines to determine how to treat the interest on the note receivable that begins immediately, while the equipment is still being installed and setup.
According to ASC 835-20, the amount of interest to capitalize involves the expenditures for the asset and the weighted-average accumulated expenditures. The interest capitalization should begin when three conditions are met: expenditures for the asset have been made, activities that are necessary to get the asset ready for its intended use are in progress, and interest cost is being incurred. As payments on the note begin immediately, and the setup of the equipment takes 6 months, Biological Industries Inc. is likely to capitalize the interest cost during this period until the asset is ready for use.