Question

On January 1, 2018, Dreamworld Co. began construction of a new warehouse. The building was finished and ready for use on September 30, 2019. Expenditures on the project were as follows:

January 1, 2018	$	336,000
September 1, 2018	$	504,000
December 31, 2018	$	504,000
March 31, 2019	$	504,000
September 30, 2019	$	336,000

Dreamworld had $6,800,000 in 10% bonds outstanding through both years.

What was the final cost of Dreamworld's warehouse?

Answer 1

1.Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset. Other borrowing costs are recognized as an expense.

2. Borrowing costs are interest and other costs that an entity incurs in connection with the borrowing of funds.

3. A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale.

4.To the extent that an entity borrows funds specifically for the purpose of obtaining a qualifying asset, the entity shall determine the amount of borrowing costs eligible for capitalisation as the actual borrowing costs incurred on that borrowing during the period less any investment income on the temporary investment of those borrowings.

5.Commencement of capitalisation :

An entity shall begin capitalizing borrowing costs as part of the cost of a qualifying asset on the commencement date. The commencement date for capitalization is the date when the entity first meets all of the following conditions:

(a) it incurs expenditures for the asset;

(b) it incurs borrowing costs, and

(c) it undertakes activities that are necessary to prepare the asset for its intended use or sale.

6.Cessation of capitalisation :

An entity shall cease capitalizing borrowing costs when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete.