Capital Company built two similar buildings. Each building took one year to build and required $45,000,000 in construction costs. Capital had limited internal financial resources, so it could fund only Building A internally and financed Building B by borrowing the $45,000,000 evenly over the year (i.e., zero at the beginning and increasing to $45,000,000 by the end of the year). The interest rate on the loan is 6%. Both projects were finished on December 31, 2012 and were ready for occupancy immediately. The buildings are estimated to have a useful life of 20 years and no residual value. Capital uses the straight-line method for depreciation.
Required:
a. How much interest cost can be capitalized on Building B?
b. What will be the annual depreciation expense for each of the two buildings?
c. ASPE allows interest capitalization, IFRS recommends capitalization of interest on construction-specific loans, and U.S. GAAP does not permit capitalization. Ignoring the complexities of how to determine how much interest to capitalize, which treatment of interest costs is conceptually more correct? Explain your conclusion.
d. Why do you think U.S. GAAP does not permit the capitalization of interest costs?
e. Why can interest costs not continue to be capitalized after the self-construction period is completed?