Interest Capitalization 1 Flashcards
List the conditions that must exist to capitalize interest.
- )Qualifying expenditures have been made;
- )Construction is proceeding;
- )Interest cost is being incurred - Imputed interest cannot be capitalized
List the interest capitalization formula
Interest Rate x Average Accumulated Expenditures
What is “Average Accumulated Expenditures” as it relates to Capitalized Interest?
Measure of the amount of debt, on an annual basis, that could have been avoided. Also the average cash or other qualifying expenditure invested in the project during the period. Amount of debt that could have been retired during the period
Define “qualifying assets” for interest capitalization.
Assets constructed for an enterprise’s own use or assets intended for sale or lease that are constructed as discrete projects
What are the two allowed methods to compute total interest to be capitalized?
Weighted Average method and Specific method.
Define “avoidable interest” as it relates to Capitalized Interest
The amount of interest that would have been avoided had the construction not taken place.
What interest rates should be used to determine capitalized interest?
Average interest rate during period or specific interest rate applicable to construction debt
List the two-step process involved in computing capitalized interest.
(1) Compute average accumulated expenditure; and (2) Apply the appropriate interest rate(s)
What is the weighted average method of Capitalizing Interest?
Way to get the Interest rate used in calculating interest expense. Take the interest expense for all loans and divide interest expense by total loan amount. This amount multiplied by the AAE will get capitalized interest
How much interest can be capitalized in relation to self constructed assets?
The lessor of 1.) the actual interest paid during the period or 2.) avoidable interest
