Interest Capitalization Limits

Question 1

T/F: Interest Capitalized is not limited to the construction debt (i.e. you would take into consideration other debt that is not intended for the construction)

Answer 1

True– you have to take into consideration of all outstanding debt (note payable)

Question 2

When determining interest rates, what is the specific method?

Answer 2

The specific method is when you allocate the AAE first to the construction loan.

Question 3

When AAE > Interest bearing debt, all the interest expense will be capitalized?

Answer 3

True!

Question 4

If AAE < Interest Bearing Debt

Answer 4

The interest expense is the difference between the total interest cost and the interest capitalized

Question 5

How do you calculate interest when there is more than one interest-bearing debt?

Answer 5

1) Specific method- Use the specific construction loans first and then apply average interest rate on remaining debt
2) Average method- treat all debt the same and apply the average interest rate on all debt