Interest Capitalization

Question 1

When can interest be capitalized?

Answer 1

Interest can be capitalized when an entity constructs plant assets for sale, lease, or for their own use. They do not need to be doing the construction themselves.

At the end of the year, it will credit interest expense and capitalize the asset value.

Question 2

When can interest be capitalized?

Answer 2

1) Interest has be incurred
2) Construction activities are taking place
3) Construction expenditures are actually occurring.

Question 3

How much interest can be capitalized?

Answer 3

Lesser of the actual interest incurred or the amount of interest that could have been avoidable.

Avoidable interest is the amount would have been avoided during the construction.

Question 4

How is avoidable interest determined?

Answer 4

AVERAGE INTEREST RATE OF ALL DEBT X Average accumulated expenditures for the qualifying assets during the period)

Question 5

How do you calculate Average Accumulated Expenditures?

Answer 5

Total expenditures during the construction period; and therefore the debt could have been avoided.

AAE is determined by using the weighted average of the actual expenditures during the year or simple average of beginning and ending AAE.

Question 6

Weighted average and simple average example

Answer 6

Example:
- Assuming two payments for construction of $40,000 on January 1 and July 1 (40000* 12/12) + 40,000 (6/12)= 60,000

• Assume small payments are made evenly through the year for a total of 180,000 (0+180,000/2)=90,000. When it is evenly throughout the year, use this method!!