How should borrowing costs relating to an asset being constructed over a substantial period of time be treated in the financial statements?
A)expensed as incurred
B)capitalised and amortised over the period of the construction of the asset
C)accrued and amortised over the period of the loan
D)capitalised as part of the cost of the asset

Question

Quizplus · Accepted Answer

Borrowing costs related to an asset that takes a substantial amount of time to construct should be capitalized as part of the cost of the asset. This is in line with the matching principle, which requires that expenses should be recognized in the same period as the corresponding income. Since the asset will generate future economic benefits, the borrowing cost should be allocated to that period which the asset generates the income. This also results in a higher value of the asset on the balance sheet, which reflects the true cost of constructing the asset.

How Should Borrowing Costs Relating to an Asset Being Constructed