Reference no: EM132678233

Question - Yamashita was constructing a building throughout Year 1 to be completed in the summer of Year 2. The building will be used to expand the current furniture, production-facility operations. The total cost of the building is estimated to be $3,000,000. During Year 1, construction costs were incurred evenly throughout the year and totaled $2,000,000. As of January 1, Year 1 and throughout all of Year 1, Yamashita had borrowed $700,000 at a 5% interest rate specifically to finance the construction of the new building.

Yamashita's other interest-bearing debt, outstanding throughout Year One, includes $1,000,000 of 10% debentures and $500,000 of 7% debentures.

Note: All interest amounts are per annum.

Using the facts above, determine whether each statement is true or false by selecting the appropriate response from the menu next to each statement.

1. The total amount of additional interest that Yamashita should capitalize on its balance sheet for Year 1 is $62,000.

2. The $700,000 that was borrowed to finance the construction was temporarily invested by Yamashita until the funds were actually needed in March, Year 1. The $5,000 of interest income earned on those funds may be offset against the interest expense to be capitalized.

3. Interest capitalization is an example of the application of the matching principle.

4. The only two requirements regarding when interest capitalization should begin are: Expenditures for the asset have been made and, Interest cost is being incurred.

5. Since Yamashita is developing land to house the building, the expenditures to acquire the land qualify for interest capitalization.