#93 Interest Capitalization Basics

Question 1

What are the two steps involved in computing capitalized interest?

Answer 1

1. Compute Average Accumulated Expenditures

2. Apply the appropriate Interest Rate

Question 2

Average Accumulated Expenditures =

Answer 2

Average cash investment in the project during the period (the amount of debt that could have been retired during the period)

Question 3

What are the two methods that can be used to compute interest to be capitalized?

Answer 3

1. Weighted Average Method

2. Specific Method

Question 4

Describe the weighted average method of computing interest to be capitalized

Answer 4

Capitalizes the interest using the weighted average rate on all interest bearing debt. (Annual interest / Principal)

Question 5

Describe the specific method of computed interest to be capitalized

Answer 5

Capitalizes interest on specific construction loans first. If needed, capitalize interest on all other debt based on average interest rate for that debt.