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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Under what conditions does a company capitalize the interest incurred during self-construction of an asset? Contrast your answer with accounting for interest on a note payable that is not associated with the construction of an asset.

To determine

State the conditions under which the company capitalizes the interest incurred during self-construction of an asset and contrast the answer with accounting for interest on a note payable that is not connected with the construction of an asset.

Explanation

Capitalized interest:

Interest Cost incurred to finance the construction of a long-term construction projects are known as capitalized interest.

Cost of self-constructed assets:

Company sometimes constructs an item of “property, plant and equipment” which is used in the “business operations” and these are known as self-constructed assets. The cost of self-constructed assets comprises of expenses that are required to build an asset and put it in operating condition.

A company capitalizes interest on the self-construction

  • When the asset is produced for a company’s own use or lease to others or as a separate project for sale...

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