11. [Int Cap] Which of the following assets do not qualify for interest capitali

Question

11. [Int Cap] Which of the following assets do not qualify for interest capitalization?

a. A new building that is under construction and intended for use by the company.                        

b. A new building that was purchased ready for use by the company.

c. A new building that a company is building and intends to sell for a profit.

12. When does the period of interest capitalization begin?

a. When expenditures for the asset have been made.

b. When activities that are necessary to get it ready for its intended use are in progress.

c. When interest cost is being incurred.

d. Only when all three of the above conditions are met.

13. [COGS] The Grievance Co. uses the periodic inventory procedure and provided the following information: Sales = $100,000;   Beginning Inventory = $30,000; Accounts Receivable = $20,000; Ending Inventory = $40,000; Purchases = $90,000 Which of the following is the correct journal entry for recording COGS under the periodic procedure.

a. dr Merch Invty 30,000; dr. COGS   80,000;   cr. Purchases 70,000; cr Merch. Invty 40,000

b. dr Merch Invty 40,000; dr. COGS   80,000;   cr. Purchases 90,000; cr Merch. Invty 30,000

c. dr Merch Invty 40,000; dr Purchases 90,000; cr. Merch. Invty 30,000; cr COGS 100,000.

d. dr Purchases 90,000; cr. COGS 80,000;        cr. Merch. Invty 10,000;

Explanation / Answer

11)

As per relevant accounting standards, an asset which is purchased and is ready for use and interest cost is incurred after the asset is put to use then the interest cost cannot be capitalized. It has to be charged to profit and loss.

Also, interest cost on assets under construction or inventory under construction can be capitalized unless the asset/inventory is ready for its use/sale.

So, option b is the correct solution

12)

Interest capitalization begins only after all the conditions mentioned in a, b and c are met. No interest can be capitalized unless the principal is used for construction and is expensed, also, interest can only be capitalized when activities that are necessary to get the asset ready are in progress and interest can be capitalized only when interest is incurred.

So, option d is the correct solution

13)

Cost of goods sold

= Opening inventory + Purchases - Closing inventory

= $ 30,000 + $ 90,000 - $ 40,000

= $ 80,000

The entry will be

dr Merch Invty 40,000; dr. COGS   80,000;   cr. Purchases 90,000; cr Merch. Invty 30,000

So, option b is the correct solution

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.