When funds are borrowed to pay for construction of assets that qualify for capitalization of interest, the excess funds not needed to pay for construction may be temporarily invested in interest-bearing securities. Interest earned on these temporary investments should be

a. offset against interest cost incurred during construction.

b. used to reduce the cost of assets being constructed.

c. multiplied by an appropriate interest rate to determine the amount of interest to be capitalized.

d. recognized as revenue of the period.

Question

Business

Santino Roman

21 January, 14:26

When funds are borrowed to pay for construction of assets that qualify for capitalization of interest, the excess funds not needed to pay for construction may be temporarily invested in interest-bearing securities. Interest earned on these temporary investments should be

a. offset against interest cost incurred during construction.

b. used to reduce the cost of assets being constructed.

c. multiplied by an appropriate interest rate to determine the amount of interest to be capitalized.

d. recognized as revenue of the period.

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Answers (1)

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Mikayla Booker · Answer 1

d. recognized as revenue of the period.

Explanation:

As per general accounting principles, when amount is borrowed for construction of capital asset then the interest is capitalized as the asset qualifies for capitalization being a long term assets.

Sometimes the funds remain idle and that the funds are invested in some other source for income, which might be in the form of interest.

This basically is an income for the company, no matter what was the exact purpose of such funds.

Even though interest expense is to be capitalized but interest income is a revenue income.