# What is capitalized interest?

## Definition of Capitalized Interest

Capitalized interest is the interest on debt that was used to finance a self-constructed, long-term asset.

The capitalized interest for the company's self-constructed asset involves the following:

• The cumulative amount of expenditures during the asset's construction
• The interest on the debt related to the asset's construction
• Adding the capitalized interest to the asset's cost instead of reporting it as interest expense of the current accounting period
• The capitalized interest will be depreciated over the asset's useful life as part of the asset's cost

## Example of Capitalized Interest

Assume that a company is constructing an addition to its present manufacturing building. Its bank is lending the company \$320,000 at an annual interest rate of 6% to cover 80% of the building addition's cost. The remaining 20% will be paid from the company's present cash balance. Also assume that the company's building materials, labor and overhead will amount to \$400,000 during the three months of construction.

The capitalized interest is based on the 6% loan of \$320,000 and the accumulated construction expenditures during the three-month construction period. The maximum amount of capitalized interest will be \$320,000 X 6% X 3/12 = \$4,800. If this ends up being the amount of capitalized interest, the asset's cost will be \$404,800 which will be depreciated over the building's remaining useful life. ### Free Financial Statements Cheat Sheet

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