Question
Copperbeech Developments is building a logistics hub for its own use — a qualifying asset. On January 1, 2026 it borrowed $2,400,000 at 8% specifically to fund the construction. Interest for the year is paid on December 31.
- On January 1 it spent $1,500,000 on the project and invested the remaining $900,000 at 5% until it was spent on July 1. The investment earned $22,500, received on June 30.
- Work stopped for all of August and September while a planning dispute with the local authority was resolved. This was not a delay that is a normal part of construction.
- Construction continued for the rest of the year and was still in progress at December 31.
Required:
- Amount Capitalised — borrowing costs capitalised into the hub for 2026, net of investment income.
- Journal Entries — the June 30 investment income and the December 31 interest payment. Use Construction in Progress, Interest Expense and Cash.
- Statement Impact — the effect of the December 31 entry.
Statements in this challenge
- Amount CapitalisedNumeric Answer
- Journal EntriesJournal Entry
- Statement ImpactStatement Impact
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