When Funds Are Borrowed to Pay for Construction of Assets

question 164

Multiple Choice

When funds are borrowed to pay for construction of assets that qualify for capitalization of interest, the excess funds not needed to pay for construction may be temporarily invested in interest-bearing securities. Interest earned on these temporary investments should be

• A) offset against interest cost incurred during construction.
• B) used to reduce the cost of assets being constructed.
• C) multiplied by an appropriate interest rate to determine the amount of interest to be capitalized.
• D) recognized as revenue of the period.

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Definitions:

Equilibrium Constant

A numerical value that expresses the ratio of products to reactants at equilibrium for a given chemical reaction, indicating the extent to which a reaction proceeds.

Reaction

A reaction is a process in chemistry where one or more substances, the reactants, undergo a transformation to form one or more different substances, the products.

Product Concentration

The amount of a substance per defined space; typically refers to the amount of a reactant or product in a solution or reaction mixture.

Hemoglobin

An iron-containing protein in red blood cells that transports oxygen from the lungs to the tissues of the body.