How is construction interest expense capitalized?

For example, construction interest expense that is incurred during the period up until the time the asset begins to produce revenue is capitalized by adding it to the cost basis of the asset. Construction interest expense is treated differently than other types of business-related interest due to the nature of the business of construction.

What is construction period interest capitalization?

Construction period interest capitalization represents the cost of financing the building of a long-term asset, such as a rental building. Construction interest expense is also called capitalized interest. Unlike other forms of industry-related interest, construction interest expense is handled differently, because its interest cannot be deducted.

How does capitalizing interest work?

By capitalizing interest, companies better match the costs of long-term assets with the revenues those assets generate. The process involves identifying the qualifying interest costs, calculating capitalized interest, recording journal entries during the construction period, and transitioning to depreciation once the asset is complete.