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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.