3. Jensen Corp. purchased a container load of antiques for resale at an invoice

Question

3. Jensen Corp. purchased a container load of antiques for resale at an invoice cost of $950,000. The goods were paid for when they were shipped in early January. The container arrived in Canada at the end of June, and then at Jensen’s location, by rail, at the end of August. Jensen had to refurbish some of them which took the month of September. The refurbishing costs incurred were $100,000, which were also financed. The goods were then available for sale. Transportation costs of $98,000 were paid in October. Jensen has recorded $155,000 of total interest expense from $2,600,000 of general borrowing over the year.

Required: Compute the amount of interest that can be capitalized by Jensen related to the above

Explanation / Answer

The interest expense cab be capitalized only if the borrwoing is for aquiring or constructing a long term asset, because many of the companies finance the construction of long term asset with debt. The GAAP (Generally Accepted Accounting Principle) allow the firms to avoind expensing interest on such debt and include it on their balance sheet as part of historical cost of long term asset.

Example: A company construct its on buliding using loan, the interest of this loan can be capitalized.

Hence Jensen Corp. cannot capitalize any interest, becase the borrowing wasn't for constructing a long term asset.

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