First of all, the conversation itself would throw red flags and I would be extremely leery of
requests such as the one in the scenario, and in the future. As the accountant, there are both
professional and ethical responsibilities that one must follow to produce work in an
appropriate manner. As far as interest during construction, there are three issues that GAAP
identifies:
1. “Does the asset quality for interest capitalization?” (Whalen, Jones, & Pagach,
2017)
2. “Over what period can interest be capitalized?” (Whalen, Jones, & Pagach, 2017)
3. “What amount of interest can be capitalized?” (Whalen, Jones, & Pagach, 2017)
In addition, and more importantly in regards to this scenario, the question becomes when
interest can be capitalized on. The three tests for when interest capitalization period begins
is, “(1) expenditures for the asset have begun, (2) activities that are necessary to get the asset
ready for its intended use are in progress, and (3) interest cost is being incurred” (Whalen,
Jones, & Pagach, 2017). Looking at the time frame with the construction beginning June of
2016, this alone would tell me that interest can not be doubled back to previous years, such as
2015, which I would convey as being both financially and ethically wrong.
In regards to the addition of “lots of overhead,” ethically I would be concerned and deny such
a request because of the fact that overhead costs must be “represented faithfully” that only
includes “the additional costs incurred to produce it” (Whalen, Jones, & Pagach, 2017).
While some time was spent on the project, naturally, the request to specifically increase the
profits by adding ½ of the salary is wrong financially and ethically. This specific request
would throw red flags and I would not be comfortable doing such.
Whalen, J. M., Jones, J. P., & Pagach, D. P. (2017).Intermediate accounting: Reporting and
analysis.Boston,MA:CengageLearning.
