What is capitalized interest?
Capitalized interest is the interest added to the cost of a self-constructed, long-term asset. It involves the interest on debt used to finance the asset’s construction.
The details of capitalized interest are explained in the Financial Accounting Standards Board’s (FASB) Statement of Financial Accounting Standards No. 34, Capitalization of Interest Cost. You can find this accounting pronouncement at www.FASB.org/st.
In short, there must be debt involved (cash and common stock are not considered). The interest specified by the pronouncement is added to the cost of the project, instead of being expensed on the current period’s income statement. This capitalized interest will be part of the asset’s cost reported on the balance sheet, and will be part of the asset’s depreciation expense that will be reported in future income statements.
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9 Responses to “What is capitalized interest?”
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I would like to know aout the treatment of capitalised interest in the accounts. My dilema is that the interst accrued in the prior year is accrued but not paid and instead capitalised. Should it still be shown in the P & L? The capitalised interest is also not a cas item as there’s no fresh cash coming into the business as such capitalisation of such interest should not increase the cash!!
No, the capitalized interest should not be shown in the p&l since it was capitalized. depending on how the initial capitalization was recorded. For example if the initial interest capitalized was recorded as a debit to and asset and a credit to interest payable. In the following period, when the payment is made, you credit cash and debit interest payable. The reduction in interest payable will be reflected in your balance sheet.
Hope this helps
the only part of your capitalized interest that will be reflected in your income statement, is the depreciation of your asset.
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wat does the term capitalisation mean
Hello all) will appreciate to receive your advice:
1) As soon as the interests are capitalized, is there any int. practice for their repayment. i mean, repayment of the capitalized interests go the same way as a principal amount, other conditions are specified, or at the earliest possible?
2) Is there? any tenor specified, after which default interest are capitalized?
Thanks alot