Assets and Interest Capitalization

C

Interest costs must be capitalized only for assets constructed for internal use, or for sale or lease as discrete projects.

The correct answer is option C: being constructed or otherwise being produced as discrete projects for an enterprise's own use.

When it comes to accounting for interest, the general rule is that interest expense should be recognized as an expense in the period it is incurred. However, there are certain situations where interest can be capitalized, meaning it is added to the cost of an asset rather than being recognized as an expense.

Interest is capitalized for assets that are being constructed or otherwise produced as discrete projects for an enterprise's own use. This typically refers to long-term assets such as buildings, machinery, or infrastructure that are being built or produced with the intention of being used in the normal operations of the business.

By capitalizing interest, the interest costs incurred during the construction or production phase are added to the cost of the asset, increasing its overall value on the balance sheet. This treatment aligns with the matching principle in accounting, which aims to match the costs of producing an asset with the revenues it generates over its useful life.

Option A states that interest must be capitalized for assets that are not being used in the earning activities of the enterprise and not undergoing the activities necessary to get them ready for use. This is incorrect because interest is not capitalized for assets that are not actively being constructed or produced.

Option B states that interest must be capitalized for routinely produced assets. This is incorrect because routine production of assets does not involve the construction or production phase where interest capitalization would be applicable.

Option E states that interest must be capitalized for assets in use or ready for their intended use in the earning activities of the enterprise. This is incorrect because interest is not capitalized for assets that are already in use or ready for use. Interest capitalization is specifically related to the construction or production phase of assets.

Therefore, the correct answer is option C: being constructed or otherwise being produced as discrete projects for an enterprise's own use.