A company is constructing an asset for its own use. Construction began in 2014. The asset is being financed entirely with a specific new borrowing. Construction expenditures were made in 2014 and 2015 at the end of each quarter. The total amount of interest cost capitalized in 2015 should be determined by applying the interest rate on the specific new borrowing to the
A) total accumulated expenditures for the asset in 2014 and 2015.
B) weighed-average accumulated expenditures for the asset in 2014 and 2015.
C) weighed-average expenditures for the asset in 2015.
D) total expenditures for the asset in 2015.

Question

Quizplus · Accepted Answer

The weighted-average accumulated expenditures for the asset in 2014 and 2015 should be used to determine the amount of interest cost capitalized in 2015. This is because interest cost should only be capitalized during the period in which construction is ongoing and interest is being incurred on the borrowing used to finance the asset. Weighing the expenditures for each period takes into account the timing and amount of each expenditure, providing a more accurate calculation of the overall interest cost to be capitalized.

A Company Is Constructing an Asset for Its Own Use