Flashcards in Capitalization of interest Deck (13)
1. Average accumulated expenditure
2. Actual interest
3. Weighted average interest of other expenditures
4. Avoidable interest
5. Compare avoidable interest and actual interest
6. Take lower of the 2
Average accumulated expenditure formula
+ Ending CIP = total / 2
computation depends on the problem
watch out carefully for dates
if the problem asks for a monthly interest expense to be capitalized or yearly
Weighted interest rate of other borrowings - you need to compute this if there are 2 or more other borrowings aside from the main construction borrowing
Add interests on:
Total principal amounts of borrowings
= the Weighted average interest rate
What assets qualify for interest capitalization?
Only those that require a period of time to be prepared
Assets constructed for sale as discrete projects
Assets constructed for own use whether by the
entity or by outsider requiring progress
Interest on expenditures made to acquire land wherein a building is to be constructed - YES
interest - part of the cost of the building
Interest paid for borrowings with the proceeds used to acquire a building. Can this be capitalized?
But if it is constructed over a period of time, YES.
What should be capitalized?
Amount of interest which could have been avoided if the project not undertaken but not to exceed tha actual interest for the period.
Ave. accumulated expenditures x interest rate x construction period
What interest rate is used?
Rate on specific borrowings for the asset
Weighted average if specific is not available
Should be compounded
Computation of compounded interest
Include capitalized interest from previous periods in the calculation of the average accumulated expenditures for the current period/subsequent periods
COMPUTED MONTHLY, QUARTERLY, SEMI ANNUALLY, YEARLY
Interests income from borrowed funds which are temporarily invested
DO NOT OFFSET AGAINST THE INTEREST EXPENSE
What doesn't qualify for interest capitalization?
Routinely produced inventories
Assets ready for intended use when acquired
Assets not being used nor readied for use
Land unless developed then interest is part
of the cost of the building
When to capitalize?
All must be met:
1. expenditures for the asset have been made
2. activities intended to get asset ready are in
3. interest cost is being incurred