Gaap Memo

In: Business and Management

Submitted By mcurbano17
Words 808
Pages 4
RE: | Interest costs on new warehouse construction
Memo Overview
It is permissible to capitalize interest into the cost of this warehouse. GAAP requires that only actual interest costs incurred during construction are to be capitalized. To qualify for interest capitalization, an asset must require a period of time to ready the asset for its intended use. Section 835-20-05 of the Accounting Standards Codification explains that capitalized interest costs are a part of the historical cost of acquiring certain assets. Therefore, costs that consequently arise in order to bring the warehouse to the ready condition and site for its intended use are included as part of the historical cost of acquisition. All of the costs associated with the construction of this asset, including the incurred interest, should be capitalized. A company capitalizes interest costs beginning with the very first expenditure appropriately related to the asset.

The rationale or capitalizing interest costs on an asset is based on deferring interest costs. This is because during the time of construction, the asset is not generating revenues.

There are two main objectives of capitalizing interest. These objectives can be found in the codification 835-20-10. The first objective is intended to gain a measure of acquisition cost that will thoroughly reflect an entity’s total investment in a certain asset.

The second main purpose is “to charge a cost that relates to the acquisition of a resources that will benefit future periods against the revenues of the periods benefitted” (835-20-10-2). Capitalization of interest on this warehouse is done so that the costs can be matched to the revenues, which, in the future, the new asset will subsequently help to generate.

Debt will inevitably be involved in expanding your plant. By…...

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