In general, what costs should be capitalized for a self-constructed asset? Discuss two alternatives for the inclusion of overhead costs in the cost of the equipment constructed by Chilton. Which alternative is generally accepted for financial reporting purposes?

Judgment Case 10-5 Self-constructed assets; interest capitalization LI L010-7

Chilton Peripherals manufactures printers, scanners, and other computer peripheral equipment. In the past, the company purchased equipment used in manufacturing from an outside vendor. In March 2024, Chilton decided to design and build equipment to replace some obsolete equipment. A section of the manufacturing plant was set aside to develop and produce the equipment. Additional personnel were hired for the project. The equipment was completed and ready for use in September.

Required:

I. In general, what costs should be capitalized for a self-constructed asset?

2. Discuss two alternatives for the inclusion of overhead costs in the cost of the equipment constructed by Chilton. Which alternative is generally accepted for financial reporting purposes?

3. Under what circumstance(s) would interest be included in the cost of the equipment?

4. Over what period should interest be capitalized?

5. Describe the three steps used to determine the amount of interest capitalized during a reporting period.