Question

Question ID: 54295FAR2014H

An entity purchased new machinery from a supplier before the entity’s year end. The entity paid freight charges for the purchased machinery. The entity took out a loan from a bank to finance the purchase. What is the proper accounting treatment for the freight and interest costs related to the machinery purchase?

a. The freight and interest costs should be immediately expensed.
b. The freight and interest costs should be capitalized as part of property, plant, and equipment.
c. The interest cost should be capitalized as part of property, plant, and equipment, and the freight cost should be immediately expensed.
d. The freight cost should be capitalized as part of property, plant, and equipment, and the interest cost should be immediately expensed.


Solution

Correct answer: d.

Interest should not be capitalized for assets that are in use or ready for use or assets that are not undergoing the activities necessary to get them ready for their intended use in the earning activities of the entity. Costs such as initial delivery and handling costs that are directly attributable to bringing the asset to the condition and location necessary for its intended use are included as part of the historical cost of the asset.