Interest Capitalization Decision
For each of the situations described here, indicate when interest should be capitalized (C) and when it should not be capitalized (NC).
(a) Queen Company is constructing a piece of equipment for its own use. Total construction costs are expected to be $4 million, and the construction period will be 1 month.
(b) Ferney Company is constructing a piece of equipment for sale. Total construction costs are expected to exceed $10 million, and the construction period will be about 15 months. This is a special order. Ferney has never produced a piece of equipment like this before.
(c) Patterson Company is constructing a piece of equipment for its own use. Total construction costs are expected to be $15 million, and the construction period will be about two years. The forecasted total construction cost is only a very rough estimate because Patterson has no system in place to accumulate separately the costs associated with this project.
(d) Savis Company is constructing a piece of equipment for its own use. Total construction costs are expected to be $350, and the construction period will be nine months.
(e) Platt Company is constructing a piece of equipment for sale. Total construction costs are expected to exceed $10 million, and the construction period will be about 15 months.This particular piece of equipment is Platt’s best seller.
(f) Stowell Company is in the process of renovating its corporate office building. The project will cost $7.5 million and will take about 15 months. The building will remain in use throughout the project.
(g) Jackson Company owns a piece of undeveloped land. The land originally cost $21 million. Jackson plans to hold onto the land for three to four years and then develop it into a vacation resort.
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