Accounting Principles in Practice

What principle is consistent with capitalizing interest on a self-constructed asset?

1) conservatism

2) faithful representation

3) the historical cost principle

4) predictive value

Answer:

The historical cost principle

The historical cost principle is the accounting principle that is consistent with capitalizing interest on a self-constructed asset. This principle dictates that assets should be recorded at their original cost, which includes all costs necessary to make the asset usable.

When a company capitalizes interest on a self-constructed asset, it aligns with the historical cost principle by ensuring that all costs incurred in the process of getting the asset ready for its intended use are included in the asset's value. This helps provide a faithful representation of the costs associated with acquiring and preparing the asset for use.

By following the historical cost principle and capitalizing interest on self-constructed assets, companies can maintain accurate financial records that reflect the true costs involved in asset acquisition and development.