When Funds Are Borrowed to Pay for Construction of Assets

question 22

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 increase 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:

Real Interest Rates

The interest rate adjusted for inflation, representing the true cost of borrowing and the real yield to lenders.

British Pound

The United Kingdom's currency, a major global currency involved in international trading.

U.S. Dollar

The official currency of the United States, widely used as a benchmark in international trade and finance.