What is capitalized interest?

The capitalized interest is the lower of the avoidable interest (17,141) and the actual interest (44,750) incurred by the business during the year (see Step #1). In this example the amount to be capitalized as part of the cost of the asset is therefore the avoidable interest of 17,141.

When does interest capitalization begin?

Generally, interest capitalization begins when expenditures for the asset are being incurred, activities necessary to prepare the asset for its intended use are in progress, and interest costs are being incurred. The capitalization period continues until the asset is substantially complete and ready for use.

Why is capitalizing interest important?

Capitalizing interest helps a user of financial statements, from the perspective of accrual accounting, to better allocate costs to earnings in the periods when an acquired asset is being used and obtain an accurate measure of the acquisition cost of an asset.