Question

During 2007, Belardo Corporation constructed and manufactured certain assets, and incurred the following interest costs in connection with those activities:

Particulars Interest costs incurred
Warehouse constructed for Belardo's own use $20,000
Special-order machine for sale to unrelated customer produced according to customers specifications $9,000
Inventories routinely manufactured, produced on a repetitive basis $7,000
All of these assets required an extended period of time for completion. Assuming that the effect of interest capitalization is material, what is the total amount of interest costs to be capitalized?
a. $0
b. $20,000
c. $29,000
d. $36,000

Answer 1

Interest costs for the warehouse and the special-order machine amounting to $29,000 should be capitalized, while interest costs for inventories produced on a repetitive basis are expensed and not capitalized.

Step-by-step explanation:

According to the guidelines on interest capitalization provided by the Generally Accepted Accounting Principles (GAAP), interest on debt incurred during the construction of long-term assets for a company's own use or assets produced as discrete projects for sale, such as a special-order machine, can be capitalized. However, interest associated with inventories that are routinely manufactured or otherwise not qualifying assets are expensed, not capitalized.

The interest cost to be capitalized in this scenario would include the cost for both the warehouse and the special-order machine. Therefore, the interest costs to be capitalized for the warehouse are $20,000 and for the special-order machine are $9,000.

The inventories manufactured on a repetitive basis cannot have their interest costs capitalized, so the $7,000 will be expensed instead. Adding the costs for the warehouse and the special-order machine gives us a total capitalized interest cost of $29,000.