COST ACCOUNTING
INTRODUCTION TO COST ACCOUNTING
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Determine interest costs that can be capitalized
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Create and execute operating budgets
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Establish the cost method in controlling activities
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Determine the company’s costs and profits in a period
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Detailed explanation-1: -As detailed in ASC 835-20, interest is only required to be capitalized when the benefit outweighs the cost. In concept, interest cost is capitalizable for all assets that require a period of time to get them ready for their intended use (an acquisition period).
Detailed explanation-2: -To capitalize is to record a cost or expense on the balance sheet for the purposes of delaying full recognition of the expense. In general, capitalizing expenses is beneficial as companies acquiring new assets with long-term lifespans can amortize or depreciate the costs. This process is known as capitalization.
Detailed explanation-3: -Capitalized interest refers to accrued interest on an asset or loan that is not immediately reported on the company’s income statement as an expense like other interests.
Detailed explanation-4: -Capitalized interest refers to the cost of the funds used to finance the construction of a long-term asset that a company constructs. This treatment of interest is a requirement under the accrual basis of accounting and increases the amount of the fixed asset on a company’s balance sheet.