[GeauxAwayCPA]

NINJA Question –

Can someone please confirm I’m not going crazy?

The solution to the below question says the correct answer is D. I chose C thinking that the interest after completion would be expensed in both situations. The solution explanation is below. Doesn’t that sound like it would C and not D? Am I overlooking or misreading something?

Once an asset is complete, and ready for use or sale, then any interest incurred after that is an interest expense, not capitalized.

During the year, Bay Co. constructed machinery for its own use and for sale to customers. Bank loans financed these assets both during construction and after construction was complete. How much of the interest incurred should be reported as interest expense in the year-end income statement?
A. Interest incurred for machinery for own use: all interest incurred; Interest incurred for machinery held for sale: all interest incurred
B. Interest incurred for machinery for own use: all interest incurred; Interest incurred for machinery held for sale: interest incurred after completion
C. Interest incurred for machinery for own use: interest incurred after completion; Interest incurred for machinery held for sale: interest incurred after completion
D. Interest incurred for machinery for own use: interest incurred after completion; Interest incurred for machinery held for sale: all interest incurred

[thebigguy1992]

the wording on this question is so weird that i don't think you would see anything like it on the exam. just know that any interest on a project for your own use is capitalized, and once that project would be complete any interest after it would be expensed. the wording is so confusing because it just jumbles phrases up together that all sound similar and i can see why people get mixed up so easily. just know the basic rule stated and the answer and move on and you'll be good.

the basic take away is this: any interest on a project held for you own use is capitalized up until completion (expensed after completion) and any interest on a project that is held for sale is capitalized AFTER completion.

[GeauxAwayCPA]

@thebigguy1992 it's definitely confusing. I definitely wanted to just move on but figured I should ask haha.

Thanks for the response though. Did you mean any interest on a project that is held for sale is expensed after completion? I don't see any of the answer options that say you capitalize after completion. Looks like it's either all interest incurred is expensed or interest incurred after completion is expensed (so the interest prior to completion would be capitalized)

ugh, sorry. #MentalGymnastics

[tman102938]

The key to this question imo is “the year-end statements”…they are looking for you to understand how things should be allocated in the current year-end statements… (as @thebigguy1992 said) you capitalize interest on projects held for use until construction is completed and expense immediately interest on projects held for sale.

When capitalizing interest you DO NOT expense it, so any capitalized interest would not be shown as interest expense. Therefore, the only answer that makes sense would be D because:

1. Machinery held for use is capitalized until construction is completed..meaning that nothing is expensed until the construction is completed (expense only the interest incurred after completion)

…and…

2. Machinery held for sale is always IMMEDIATELY expensed in the period. (all interest incurred is expensed)

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[GeauxAwayCPA]

Got it now. Thanks @tman102938 and @thebigguy1992 !!

[Author]

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