Question

The amount of interest to capitalize is limited to the lower of actual interest cost incurred during the period or avoidable interest.

Select one:

a. False

b. True

X company exchanged old equipment with a new one. There is commercial substance of transaction. Cost of old equipment 15000, Accumulated depreciation of old equipment 7000, The list price of new equipment 20000, Trade in allowance for old 11000, Fair market value of old 11500. The cost of new asset is ---------

Select one:

a. $7000.

b. $20500.

c. $9000.

d. $8000.

Answer 1

a. True

The avoidable interest is the interest that would have been avoided if the expenditure on asset would not have been made.

Example if the business has cash and decides to spend this on construction of new building instead of using it to reduce borrowing. Since interest would have been avoided had the cash not been spend on building the part of it shall be capitalised

b. B)20500

The asset exchanged shall be measured at fair value hence, cost of new equipment would be 20000+500(excess of fair market value or trade-in value of old equipment)