An analyst makes adjustments for capitalized interest. Which of the following is
ID: 2787324 • Letter: A
Question
An analyst makes adjustments for capitalized interest. Which of the following is an adjustment that should be made? A) Cash from Operating Activities is increased by interest capitalized B) Interest capitalized on the balance sheet is increased by interest expense C) Retained earnings is decreased by the amount of interest capitalized on the balance sheet Which of the following expenses related to the purchase of a machine by a manufacturing company would MOST likely be capitalized into the value of that machine? A) Money paid to train staff on maintaining the machine B) Money paid for testing costs required to make the machine usable C) Money paid to replace the roof of the building that will hold the new machine A firm has elected to use the revaluation model for a long-lived asset. The asset was originally reflected in the finançal statements at 100,000. It was subsequently written down in value to 90,000. During the current fiscal year, the firm concludes economy has improved such that the fair value is 110,000 so the firm writes the value of the asset up to 110,000. Which of the following is most accurate? A) The firm must be reporting under US GAAP B) The firm must be reporting under IFRS C) The firm could be reporting under either IFRS or US GAAPExplanation / Answer
Choice "A) Cash from operating activities is increased by interest capitalised" is correct This interest is added to the cost of the long-term asset, so that the interest is not recognized in the current period as interest expense. Instead, it is now a fixed asset, and is included in the depreciation of the long-term asset Choice "B) Money Paid for testing costs required to make machine usable" is correct Testing of assets is necessary in bringing them into usable condition and therefore any associated costs incurred must be capitalized. However, proceeds from sale of any items produced during the test phase must be deducted from the amount to be capitalized as per IAS 16. Choice "B)The Firm must be reporting under IFRS" is correct Long lived assets under IFRS can be carried at historical cost or revalued amount less accumulated depreciation & impairment however under US GAAP it must be carried at historical cost less accumulated depreciation