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The entity took out
a loan from a bank to finance the purchase. Under IFRS,
what is the proper accounting treatment for the freight and
interest costs related to the machinery purchase?
a. The freight and interest costs should be
immediately expensed.
b. The freight and interest costs should be
capitalized as part of property, plant and
equipment.
c. The interest cost should be capitalized as part of
property, plant and equipment, and the freight
cost should be immediately expensed.
d. The freight cost should be capitalized as part of
property, plant and equipment, and the interest
cost should be immediately expensed.
The freight cost should be capitalized as part of
property, plant and equipment, and the interest
cost should be immediately expensed.
as per IAS16, freight cost will be capitalized and as per IAS23 " borrowing cost" , interest cost can be capitalized but only on qualifying assets, (that takes substantial period of time to get ready for its intended use or sales).
The Answer is D. Here The asset has been purchased hence there cannot be an interest on the value of the asset.
Answer is D. The freight is capitalized and the interest cost is expensed out.
With reference to IAS16, Machinery should be recognized at cost. Cost includes all costs incurred necessary to bring the machinery to working condition for intended use. So, accordingly, freight charges will be capitalized however interest cost will be expense out. So, the answer is option D.
