If a company constructs an asset over a period of time and borrows money, the amount of interest incurred during construction on the borrowed money is
a.amortized over the construction period.
b.reported as interest expense on the income statement.
c.capitalized as part of the cost of the plant asset.
d.reported as depletion on the income statement.
Answer: c
This is to be capitalized.
Since the asset is in construction phase, it can’t generate revenue right now. Amortization could only be possible once the construction is over and it starts earning revenues. Until then the interest of each period should be capitalized, which increases the cost basis of the asset.
Other options are not correct:
Option a: it should not be amortized in the construction phase.
Option b: there is no interest expense, because revenue earning is not yet started.
Option d: there is no depletion, as the income statement is yet to be started.
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