accounting case 2
MEMORANDUM
To: Ms. Jane Becker, COO
From:
Subject: Interest Capitalization on New Expansion
Date: 10/30/13
Introduction
There has been some recent confusion over whether ARC Manufacturing should capitalize the interest costs associated with the construction of your new manufacturing facility, and if you are obligated to do so. After extensive research, and by examining the procedures for capitalizing interest laid out by the Federal
Accounting Services Board (FASB), ARC can capitalize the interest, and is most likely required to do so.
Capitalization of Interest
Interest on an asset must meet various criteria to be eligible for capitalization. First, the asset must require a period of time to prepare it for its actual use (FASB 835-20-15-01). After meeting this basic criterion, interest on the asset may still be capitalized if the asset in construction is being produced for the company’s own use (FASB 835-20-15-05). The interest from the construction of the new manufacturing facility for ARC is then eligible for capitalization because it meets these two conditions. Hiring another company to build the facility for
ARC does not change ARC’s ability to capitalize the interest, because the building
is still being produced for use by ARC (FASB 835-20-15-05). ARC is also required to capitalize the interest on the facility, as the construction of the manufacturing facility is a discrete project which has a large amount of interest cost. Capitalizing this interest will provide a better representation of what it actually costs to build the building (FASB 835-20-15-03).
Capitalization of Interest on Land
If ARC needs to purchase the land on which the facility will be built, costs associated with acquiring the land may be capitalized while the land is being developed for the construction of the plant. These interest costs incurred during the period of construction are included as part of the cost basis of the plant, not the land (FASB
To: Ms. Jane Becker, COO
From:
Subject: Interest Capitalization on New Expansion
Date: 10/30/13
Introduction
There has been some recent confusion over whether ARC Manufacturing should capitalize the interest costs associated with the construction of your new manufacturing facility, and if you are obligated to do so. After extensive research, and by examining the procedures for capitalizing interest laid out by the Federal
Accounting Services Board (FASB), ARC can capitalize the interest, and is most likely required to do so.
Capitalization of Interest
Interest on an asset must meet various criteria to be eligible for capitalization. First, the asset must require a period of time to prepare it for its actual use (FASB 835-20-15-01). After meeting this basic criterion, interest on the asset may still be capitalized if the asset in construction is being produced for the company’s own use (FASB 835-20-15-05). The interest from the construction of the new manufacturing facility for ARC is then eligible for capitalization because it meets these two conditions. Hiring another company to build the facility for
ARC does not change ARC’s ability to capitalize the interest, because the building
is still being produced for use by ARC (FASB 835-20-15-05). ARC is also required to capitalize the interest on the facility, as the construction of the manufacturing facility is a discrete project which has a large amount of interest cost. Capitalizing this interest will provide a better representation of what it actually costs to build the building (FASB 835-20-15-03).
Capitalization of Interest on Land
If ARC needs to purchase the land on which the facility will be built, costs associated with acquiring the land may be capitalized while the land is being developed for the construction of the plant. These interest costs incurred during the period of construction are included as part of the cost basis of the plant, not the land (FASB