Question

To prepare for the construction of its new headquarters, Baker Co. purchased a 500-acre plot of land on August 5, Year 1. Baker purchased the land using 25% cash and financed the balance using a 9% loan from First Bank. The company began preparation of the land for the construction of the building on January 30, Year 2. Which section of the authoritative guidance explicitly states whether the Year 1 interest on the bank loan qualifies for capitalization

Answer 1

Answer:

FASB ASC 835-20-15-8

Explanation:

This section explicitly states that in order for interests to qualify for interest capitalization, the assets purchased through the loan must be getting ready for its intended use. E.g. if you want to capitalize the interests on the land, you must carry out activities necessary to prepare it for its intended use. Or if you purchase a machinery, you must be installing it in order to get it ready to produce.