Deck 36: Borrowing Costs

Question 1

The proper accounting for borrowing costs has been a long-standing controversy. Which of the following is not a generally accepted approach to accounting for borrowing costs?

A) Recognize as expense all borrowing costs.
B) Capitalize all costs of funds employed during development.
C) Capitalize only actual borrowing costs on a qualifying asset under development.
D) Capitalize only borrowing costs that are associated with interest rates above the market interest rate.

Answer 1

Capitalize only borrowing costs that are associated with interest rates above the market interest rate.

Question 2

Which of the following is NOT an example of an asset that qualifies for interest capitalization?

A) A building under construction for the entity's new corporate headquarters.
B) A cruise ship under construction for a specific client.
C) An occupied apartment building purchased as an investment property
D) Rain forest land purchased to develop a palm oil plantation.

Answer 2

An occupied apartment building purchased as an investment property

Question 3

On January 1, 20X0, Jones Industries Entity (JIE) borrows $1,000,000 to build a new qualifying asset. The terms of the agreement are that the entire loan amount will be paid exactly one year from the borrowing date. Additionally, the borrowed funds include a 10 percent interest payment at the time of repayment. All funds were borrowed specifically for this project. The firm has no other outstanding borrowings. Ignore time value of money. What amount of borrowing cost should be capitalized in the factory?

A) $1,000,000
B) $1,100,000
C) $100,000
D) None of the above.

Answer 3

$100,000

Question 4

On January 1, 20X0 Spencer Heavy Lifting Entity (SHLE) borrows $2,000,000 to build a new qualifying asset. The terms of the agreement are that the entire loan amount will be paid exactly one year from the borrowing date. Additionally, the borrowed funds include a 10 percent interest payment at the time of repayment. Forty percent of the borrowed funds were used for the factory. All funds were initially borrowed specifically for this project. The firm has no other outstanding borrowings. Ignore time value of money. What amount of the borrowing cost should be capitalized?

A) $800,000
B) $2,000,000
C) $880,000
D) $2,200,000
E) $80,000
F) $200,000

Question 5

On January 1, 20X0 Wayne Defense Entity (WDE) borrows $3,000,000 to build a new qualifying asset. The terms of the agreement are that the entire loan amount will be paid exactly one year from the borrowing date. Additionally, the borrowed funds include an 8 percent interest payment at the time of repayment. One third of the borrowed funds were used for the asset. Before the funds were used for construction, all funds were invested and yielded a 5 percent return. All funds were initially borrowed specifically for this project. The firm has no other outstanding borrowings. Ignore time value of money. What amount of the borrowing cost should be capitalized?

A) $30,000
B) $50,000
C) $80,000
D) $90,000
E) $110,000
F) $150,000
G) $240,000

Question 6

To qualify for borrowing cost capitalization, what condition must be met?

A) Assets must require substantial time to get ready for their intended use.
B) Assets must have a high value.
C) Assets must be new and self-constructed.
D) Assets cannot be acquire or develop with the intent to resale them.

Question 7

Which of the following is not required for the commencement date for capitalization of borrowing costs?

A) Expenditures incurred for the asset.
B) Incurred borrowing costs are paid
C) Activities necessary to prepare the asset for its intended use or sale have begun.
D) All of the above are necessary.

Question 8

Capitalization of borrowing costs must cease when

A) The firm believes that no more financing will be necessary.
B) The firm has completed some activity and no more financing is necessary.
C) The firm has completed has completed major construction, although administrative work and minor modifications remain.
D) None of the above.

Question 9

The amount of borrowing costs capitalized during a period must include the amount of borrowing costs projected to be incurred during that period.

Question 10

If the carrying amount or expected ultimate cost of a qualifying asset, including capitalized interest cost, exceeds its recoverable amount, the carrying amount is written down.

Question 11

A company should not suspend capitalizing borrowing costs during a period when a temporary delay is necessary in its preparation for intended use.

Question 12

Capitalization of borrowing costs must cease when substantially all the activities necessary to prepare the asset for its intended use or sale are complete.

Question 13

IAS 23 requires an entity to capitalize borrowing costs incurred during the acquisition, construction or production of qualifying assets as part of the cost of those assets.

Question 14

Qualifying assets (for interest capitalization) are assets that require substantial time to get them ready for their intended use or sale.

Question 15

When borrowed funds are temporarily invested pending their expenditure on qualifying assets, any investment income earned on such temporary investments is deducted when determining borrowing costs eligible for capitalization.

Question 16

Intangible assets are never qualifying assets for borrowing cost capitalization.

Question 17

The amount of borrowing costs capitalized during a period cannot exceed the amount of borrowing costs actually incurred during that period

Question 18

Interest incurred for any asset purchased or constructed for which an entity borrows money should be capitalized.

Question 19

What are the three conditions an entity needs to meet at the commencement date for capitalization of borrowing costs?

Question 20

The text outlines four steps to determine borrowing costs to be capitalized. Briefly describe those steps and how each step ensures the reliability and faithful representation of financial statements as outlined in the Conceptual Framework.