Interest Capitalization Flashcards
When should interest be capitalized?
When a company constructs a fixed asset, the interest cost incurred during the construction period is considered a get ready cost and is, therefore, capitalized.
How long is interest capitalized?
Interest cost is capitalized only during the construction period.
What fixed assets qualify for interest capitalization?
Capitalization of interest applies only to the construction of qualifying assets, such as assets constructed for an enterprise’s own use or assets intended for sale or lease that are constructed as discrete projects (ships, real estate developments, etc.)
When conditions must be met for interest to be capitalized?
- Qualifying expentidures have been made. (SHORT-term debt doesn’t count.)
- Construction is proceeding.
- Interest cost is being incurred.
What are the two steps required to compute capitalized interest?
- Compute average accumulated expenditures.
2. Appy appropriate interest rate.
How is average accumulated expenditures computed?
Multiply each expenditure by the remaining months of the fiscal year, then sum.
What are the two methods of applying interest rates to average accumulated expenditures?
- Weighted Average method
2. Specific method
How is weighted average method calculated?
Total annual interest payments on all debt/Total principal on all debt; This rate is then multiplied by the Average accumulated expenditures.
How is specific method calculated?
Capitalize the interest on specific construction first. Then, if needed, capitalize interest on all other debt based on average interest rate for that debt.
Multiply construction loan(s) by their specific rates. Then multiply the difference between the AAE and construction loans by the average of the non-construction loans’ rate. Interest to be capitalized is the sum of these numbers.
