"Now I'm really confused, " confessed Michael, your study partner, staring blank at the Enchanted Kingdom (EK) Company statement of financial position that your professor handed out last week. "I thought that interest is always expensed in the income statement. Now I see that EK is capitalizing interest. I'm not even sure what capitalize means! If you hadn't miss class today, we wouldn't be having this conversation. Let's take a look at the EK financial statements and the disclosure note on capitalized interest and I'll try to explain it all to you."

Borrowings (in part):

The company capitalizes interest on assets constructed for its theme parks, resort, and other property. In 20X3, 20X2 and 20X1, total interest capitalized was P110 million, P73 million and P77 million, respectively.

Questions

By the time you finish Lesson 5 of this module, you should be able to respond appropriately to the questions posed in this engagement case.

Describe to Michael what it means to capitalize an expenditure. What is the general rule for determining which costs are capitalized when property, plant and equipment is acquired?

Which costs might be included in the initial cost of equipment?

In what situations is interest capitalized rather than expensed?

What is the three-step process used to determine the amount of interest capitalized?