Question

T COMPANY OPERATES A WINERY. THE WINERY AGES THE WINE FOR THREE YEARS BEFORE IT IS...

T COMPANY OPERATES A WINERY. THE WINERY AGES THE WINE FOR THREE YEARS BEFORE IT IS OFFERED FOR SALE. WHICH IS CORRECT

T COMPANY MUST CAPITALIZE INTEREST DURING THAT PERIOD

T COMPANY MUST CAPITALIZE INTEREST IF THE TOTAL INVENTORY COST EXCEED 1 MILLION

T COMPANY CAN ELECT NOT TO CAPITALIZE THE INTEREST

T COMPANY IS NOT REQUIRED TO CAPITALIZE INTEREST DURING THE AGING PROCESS

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Homework Answers

Answer #1

Interest expense can be capitalised when all the below conditions are satisfied:-

  1. Interest expense is incurred
  2. Activities related to construction of asset are ongoing
  3. Expenditures are made

But the interest cost in this case is for inventory and the standard does not mandate to capitalise the borrowing cost incurred on inventory. The choice is on company whether to capitalise the borrowing cost or expense it out as this is choice of accounting policy.

Hence,

T COMPANY CAN ELECT NOT TO CAPITALIZE THE INTEREST

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