Question

Li Corp. purchased a container load of antiques for resale at an invoice cost of $1,100,000. The goods were paid for when they were shipped in early June. The container arrived in Canada at the end of August, and then at Li’s location, by rail, at the end of September. The goods were then available for sale. Freight costs of $115,500 were paid in October. Li has recorded $165,300 of total interest expense from $2,900,000 of general borrowing over the year.

Required:
Prepare the adjusting journal entry to capitalize borrowing costs on inventory at year-end December 31. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Do not round intermediate calculations.)

Answer 1

The interest expense cab be capitalized only if the borrwoing is for aquiring or constructing a long term asset, because many of the companies finance the construction of long term asset with debt. The GAAP (Generally Accepted Accounting Principle) allow the firms to avoind expensing interest on such debt and include it on their balance sheet as part of historical cost of long term asset.

Example: A company construct its on buliding using loan, the interest of this loan can be capitized

Li Corp. cannot capitalize any interest, becase the borrowing wasn't for constructing a long term asset.