Problem
Use the Codification to answer the following questions (be sure to include the Codification references for your answers).
• Locate the Master Glossary in the FASB Codification, and answer the following questions:
• What is the formal definition in the glossary of the term "Activities" as it relates to Property, Plant & Equipment?
• PFW Company is constructing a specialized machine for use in manufacturing its product. Construction had been ongoing for several months when, on April 1, one of its suppliers experienced a labor strike. The materials purchased from this supplier at a cost of $50,000 were critical to the manufacture of the machine. In order to keep construction on schedule PWF opted to pay $100,000 to purchase the same materials on a rush order from another supplier. Based on the definition above, should PFW capitalize the full $100,000 of material cost to the machine, or should it capitalize only $50,000 and report the remaining $50,000 as an unusual loss?
• What are the Codification topic and subtopic numbers for Capitalization of Interest?
According to the objectives for this subtopic:
• What is the effect on earnings if a company fails to capitalize the interest cost associated with acquiring an asset? (Provide the Codification reference for your answer)
• Does that mean that income would be too high (overstated) or too low (understated) in the year that the interest expense was incurred?
• What is an example of an asset for which Interest shall not be capitalized? (Provide the Codification reference for your answer)
• Companies often elect not to capitalize interest costs for the construction of Property, Plant & Equipment if those amounts are under a certain minimum threshold level (the amounts are deemed immaterial). GAAP specifically permits that treatment for minor items in inventory and individual items of property, plant & equipment on what grounds? (Provide the Codification reference for your answer)