Problem 5: Multiple Choice Theory

1. Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are

1. capitalized; other borrowing costs are expensed.
2. expensed; other borrowing costs are capitalized.
3. capitalized other borrowing costs are also capitalized.
4. expensed; other borrowing costs are also expense

2. Which of the following statements is true?

1. Borrowing costs are generally expensed except when they are avoidable and relate to the acquisition or construction of a qualifying asset.
2. Borrowing costs are generally capitalized except when they do not relate to the acquisition or construction of a qualifying asset
3. Borrowing costs may or may not be capitalized depending on the accounting policy chosen by an entity.
4. Exchange differences are ignored when determining borrowing costs

3. What is a qualifying asset?

1. A qualifying asset is an asset that is financed by borrowings.
2. A qualifying asset is a long-term asset that is specialized in nature that only the entity can use without any substantial modification.
3. A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale.

1. All of these

4. Which of the following is a qualifying asset?

1. A large vessel that can be purchased from a manufacturer.
2. Inventories that are mass produced on a routine basis.
3. A building classified as investment property that takes three years to complete and is measured under the fair value model.
4. A self-generated intangible asset that takes 2 years to complete.

5. Borrowing costs on borrowings obtained for the purpose of acquiring or constructing a qualifying asset are capitalized if the borrowing costs

1. are incurred regardless of whether the expenditure on the acquisition or construction of the qualifying asset had been made.
2. are avoidable.
3. are not eligible for recognition as expense.
4. a or b

6. The capitalization of borrowing costs starts when the entity

1. incurs expenditures for the asset.
2. incurs borrowing costs
3. necessary activities are being undertaken
4. on the date when all of the items listed above exist

7. In which of the following instances is the capitalization of borrowing costs suspended?

1. during periods of suspension where substantial technical and administrative work is being performed.
2. during extended periods of suspension of active development of a qualifying asset.
3. during periods of temporary delay which is a necessary part of the process of getting an asset ready for its intended use or sale.
4. any of these

8. The capitalizable borrowing cost on specific borrowing computed as

1. Interest expense less investment income
2. Investment income less interest expense
3. Average expenditure multiplied by capitalization rate.
4. a plus c, after deducting specific borrowing from average expenditure

9. The capitalizable borrowing cost on general borrowings s computed as

1. interest expense less investment income.
2. investment income less interest expense.
3. average expenditure multiplied by capitalization rate.
4. a plus c, after deducting specific borrowing from average expenditure

10. The capitalization rate is computed as

1. Total interest expense on general borrowings divided by Total general borrowings.
2. Average expenditure divided by 2.
3. a or b
4. Total general borrowings divided by Total interest expense on general borrowings