Answer to Question #197362 in Accounting for Milan

Question

On January 1, Lyle Co. purchased a manufacturing facility. After remodeling was completed, the

facility was ready for use on March 1. On April 1, production began. Interest costs were

incurred as follows:

January 1 to March 1

• Building = $10,000
• Remodeling = 2000

March 1 to April 3

• Building = $5000
• Remodeling = 3000

What amount of interest should Lyle capitalize during the current year?

A. $10,000

B. $12,000

C. $15,000

D. $20,000

Answer 1

Solution:

The correct answer is D. $20,000

The amount of interest Lyle should capitalize during the current year is $20,000.

The total interest cost of building and remodeling is what will be capitalized since capitalized interest is the cost of borrowing to acquire or construct a long-term asset, including remodeling and installation costs.

January 1 to March 1 = $12,000

March 1 to April 3 =    $8,000

Total Interest cost to be capitalized during the current year = $20,000