Q 1 what are the items considered in Capitalization of interests? Describe each item [2 marks]
Companies consider three items in Capitalization of interest:
1. Qualifying assets.
Qualify for interest capitalization, assets must require a substantial period of time to get them ready for their intended use or sale. A company capitalizes interest costs starting with the first expenditure related to the asset. Capitalization continues until the company substantially readies the asset for its intended use. Assets that qualify for interest cost capitalization include assets under construction for a company’s own use (including buildings, plants, and large machinery) and assets intended for sale or lease that are constructed or otherwise produced as discrete projects
2. Capitalization period.
The capitalization period is the period of time during which a company must capitalize interest. It begins with the presence of three conditions:
Expenditures for the asset are being incurred.
Activities that are necessary to get the asset ready for its intended use or sale are in progress.
Interest cost is being incurred.
The capitalization period ends when the asset is substantially complete and ready for its intended use.
3. Amount to capitalize.
The amount of interest to capitalize is limited to the lower of actual interest cost incurred during the period or avoidable interest. Avoidable interest is the amount of interest cost during the period that a company could theoretically avoid if it had not made expenditures for the asset.
Q2 Intangible assets have three main characteristics: (1) they are identifiable, (2) they lack physical existence, and (3) they are not monetary assets.
Instructions
(a) Explain why intangibles are classified as assets if they have no physical existence.
[1 mark]
Intangible assets are usually classified as noncurrent (long-term) assets because they produce benefits over several years. They are valuable because they provide rights and privileges to their owners.
(b) Explain why intangibles are not considered monetary assets. [1 mark]
Because Intangible assets are not readily or easily convertible into cash or cash equivalents and it is not possible to precisely determine a dollar value.
(c) And, why does the accounting profession make a distinction between internally created intangible assets and purchased intangible assets? [1 mark]
When intangible assets are created internally, it is often difficult to determine the validity of any future service potential. To permit deferral of these types of costs would lead to a great deal of subjectivity because management could argue that almost any expense could be capitalized on the basis that it will increase future benefits. The cost of purchased intangible assets, however, is capitalized because its cost can be objectively verified and reflects its fair value at the date of acquisition.