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One financial accounting issue encountered when a company constructs its own plan is whether the interest...

One financial accounting issue encountered when a company constructs its own plan is whether the interest costs on funds borrowed to finance construction should be capitalized and then amortized over the life of the assets constructed. What is the justification for capitalizing such interest?

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Answer #1

All cost incurred to make asset ready for use is to be capitalized (that is added to cost of asset )and is to be depreciated over its useful life. Also ,all cost that increases asset efficiency is to be added to cost of asset

So Interest cost incurred on loan taken for construction of asset is to be capitalized during the period of construction since that cost is incurred to bring the asset ready for use. Interest cost incurred after the construction is charged to revenue because that cost neither increases asset efficiency nor its useful life .

So the only reason for capitalisation of interest cost during the period of construction is that incurrence of such cost helps to brings an asset in to existence.

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