You have just received an email from the new staff person, Jennifer Lark. She has just started working in the Fixed Assets Department of your company. She would like to know under what circumstances should she capitalize interest as part of the cost of an asset. In a brief memo, explain the issues to Ms. Lark

Answer 1

INTERNAL MEMORANDUM
TO: Ms. Jennifer Lark, Fixed Asset Department
FROM: (student name)
DATE: xxx
Generally, interest on borrowed money should be treated as an expense of the period. If our company buys an asset and borrows money to finance the purchase, the interest on the borrowed money is not considered part of the asset's cost. Therefore, interest is treated as a period cost and should appear on the income statement as interest expense in the period incurred. There is one exception to this general guideline. If our company constructs an asset over a period of time and borrows money to finance the construction, the interest incurred during the construction period is not treated as interest expense. Instead, the interest is included as part of the acquisition cost of the asset.