2. Capitalized Interest Your client is in the planning phase for a major plant expansion, which will involve the construction of a new warehouse. The assistant controller does not believe that interest cost can be included in the cost of the warehouse, because it is a financing expense. Others on the client's staff believe that some interest cost can be included in the cost of the warehouse, but no one could identify the specific authoritative guidance for this issue. (a) Is it permissible to capitalize interest into the cost of assets? Provide authoritative support for your answer. (b) What are the objectives for capitalizing interest? (c) Discuss which assets qualify for interest capitalization. (d) Is there a limit to the amount of interest that may be capitalized in a period? (e) If interest capitalization is allowed, what disclosures are required? 3. Leases Daniel Hardware Co. is considering alternative financing arrangements for equipment used in its warehouses. Besides purchasing the equipment outright, Daniel is also considering a lease. Accounting for the outright purchase is fairly straightforward, but because Daniel has not used equipment leases in the past, the accounting staff is less informed about the specific accounting rules for leases. The staff is aware of some lease rules related to a "90 percent of fair value," "75 percent of useful life," and "residual value deficiencies," but they are unsure about the meanings of these terms in lease accounting. Daniel has asked you to conduct some research on these items related to lease capitalization criteria. (a) Identify the primary authoritative guidance that addresses the accounting for leases. (b) What is the objective of lease classification criteria? (c) An important element of evaluating leases is determining whether substantially all of the risks and rewards of ownership are transferred in the lease. How is "substantially all" defined in the authoritative literature? (d) Besides the noncancelable term of the lease, name at least three other considerations in determining the "lease term."