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Capitalization means that an piece is registered being an asset rather than an cost. Capitalized interest is the interest on the borrowing -- for example, a deposit loan -- used to finance the construction of a fixed asset, such as a manufacturing facility or an office building. The borrowing could be directly attributable to the construction, or it could be part of other corporate debts or it could be both. The interest expenses are added to the fixed asset costs and depreciated or decreased around thems valuable existence.

Difficulty: Tolerably Challenging

Instructions

1 Capitalize the directly attributable interest expenses. To example, if your firm takes out any $1 million loan -- at one 8 percent interest rate -- to build some new manufacturing facility, then capitalize the immediately attributable annual interest expenses regarding $80,000 ($1,000,000 x 0.08).

2 Calculate the weighted average interest rate of the additional borrowings. Companies may well need operating lines of credit and credits arranged increase with its banks. If they are at different interest rates, later the interest cost on costs borrowed from these sources are capitalized at the weighted common interest rate. Within the example, if your corporation has two operating loans specify increase -- one with $5 million at 9 percent and the additional with $10 million at 11 percent -- then the weighted average interest rate is about 10.3 percent:100 x ($5,000,000 x 0.09 + $10,000,000 x 0.11) / ($10,000,000 + $5,000,000).

3 Capitalize the interest expenses to the other debts: Multiply the amount borrowed by the weighted average interest rate. From the instance, if you draw $1.5 million from your company's running allowances to complete the facility, later capitalize additional borrowing interest expenses regarding $154,500 ($1,500,000 x 0.103).

4 Add the direct and other borrowing interest expenses to get the complete capitalized interest expenses. To conclude the illustration, the overall capitalized interest expenses are $234,500 ($80,000 + $154,500).

Tips & Warnings

References

Accounting Tools: What is Capitalized Interest? CPAClass: Capitalization of Interest Cost Accounting Tools: What Does Capitalize Mean?

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