Question
Stonebrook Builders is constructing a warehouse for its own use. Construction ran for all of 2026 and the building was still in progress at year end. Expenditures on the project were:
| Date | Expenditure |
|---|
| January 1 | $400,000 |
| July 1 | 600,000 |
| October 1 | 400,000 |
Debt outstanding throughout 2026:
- A $500,000, 8% construction loan taken out specifically for the warehouse on January 1.
- A $1,000,000, 10% long-term note — Stonebrook's only other interest-bearing debt.
Because only $400,000 of the construction loan was spent on January 1, the other $100,000 was invested at 6% until July 1, earning $3,000 of interest.
Required: Under US GAAP (ASC 835-20):
- Record the payment of 2026 interest on December 31 as one entry, debiting Construction in Progress for the interest to be capitalized and Interest Expense for the rest.
- Record the $3,000 of investment income received on December 31, using Interest Revenue.
Scoring
- 40% Account naming / line matching
- 40% Amount correctness
- 20% Structure / section placement
IAS 16 — Property, Plant and Equipment
Initial cost captures everything needed to bring the asset to its location and working condition — purchase price, import duties, site preparation, installation and testing. After recognition, subsequent expenditure is capitalised only if it improves the asset beyond its original standard; otherwise it is repairs.
Common mistakes
- Expensing delivery, installation or testing costs that form part of initial cost.
- Capitalising routine maintenance, or expensing an upgrade that genuinely extends useful life.
- Including recoverable input tax or abnormal wastage in the cost of the asset.
IFRS vs US GAAP: IFRS permits the revaluation model for a whole class of assets; US GAAP requires historical cost.
Further readingIAS 16: initial cost and depreciation