A) Your Company is constructing a factory building for its own use and takes out a $2 million loan (10% interest rate) from a local bank to directly finance the project. You are not sure whether the interest from the loan should be expensed or capitalized for this asset. Identify the authoritative guidance that indicates qualifying assets for interest capitalization
(B) After confirming that the asset qualifies for interest capitalization, you need to determine the conditions required to start capitalizing the interest. Your friend, Sally, tells you that the only two requirements regarding when interest capitalization should begin are: 1) Expenditures for the asset have been made, and 2) Interest cost is being incurred.
Required:
(1) Is Sally correct? (answer either YES or NO)
(2) Cite the authoritative guidance to support your answer to (1).
(C) Assume that you have determined that your company can capitalize interest this period. Average accumulated expenditures relating to the factory building amounted to $1.8 million this year. Identify the appropriate literature and determine how much interest cost can be capitalized.
Required:
(1) Compute how much interest your company should capitalize.
(2) Cite the authoritative guidance that supports your answer to (1).