Coffee-Bean Company Built Two Similar Buildings

Question

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The Answer is a. (20 million / 2)× 8%
= $800,000
b. Annual depreciation expense-Building Hazel: $25,000,000 / 30 = $833,333
Annual depreciation expense-Building Cinnamon: $25,800,000 / 40 = $645,000.
c. Conceptually, the treatment of interest costs by IFRS is more correct.
Interest cost is as much an essential cost of a self-constructed asset as the concrete and steel.
Without the financing, the construction would not have occurred. The benefit of the interest expenditure on the debt used to finance the asset is realized over the period of time when the completed asset is used.
Therefore, this cost should be added to the cost of the self-constructed asset and expensed via an increased depreciation expense.
Further, if the construction of the asset were outsourced, the contractor would have included its cost of financing the project as part of the contracted price.
Expensing immediately results in poor matching of expense with the realization of the benefit of the expenditure (which is the finished self-constructed asset).
d. Interest costs may be capitalized only during the construction period because once construction is completed there is no logistical reason why the owner of the asset cannot start to generate revenues or cost savings from the use of the asset. While under construction it is impossible to generate a benefit from the asset, and this is the condition that permits capitalization. Once construction is completed there is no impediment to delay the matching of expense to revenues as the item is available for use. Therefore, after completion of the construction process, interest is a period cost, not a product cost.

Coffee-Bean Company Built Two Similar Buildings

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