A company is constructing an asset for its own use. Construction began in 2017. The asset is being financed entirely with a specific new borrowing. Construction expenditures were made in 2017 and 2018 at the end of each quarter. The total amount of interest cost capitalized in 2018 should be determined by applying the interest rate on the specific new borrowing to the:a. total accumulated expenditures for the asset in 2017 and 2018.b. weighted-average accumulated expenditures for the asset in 2017 and 2018.c. weighted-average expenditures for the asset in 2018.d. total expenditures for the asset in 2018.

The total amount of interest cost capitalized in 2018 should be determined by applying the interest rate on the specific new borrowing to the weighted-average accumulated expenditures for the asset in 2017 and 2018

Explanation:

Interest cost is the increasing value of interest a borrower pays on a debt obligation over the duration of the borrowing. In other words, you pay interest when you borrow and you earn interest when you lend or deposit funds in bank accounts.

Given that construction began in 2017 and expenditures were made in 2017 and 2018; to get the total amount of interest cost capitalized in 2018; we must first get the total accumulated expenditures for assets in 2017 and 2018; after which that weighted average is calculated.

This is so because the weighted-average accumulated expenditures one of the amounts used in determining the amount of interest to be capitalized when a company self-constructs certain long-term assets.

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