What is capitalized interest?

Capitalized interest is the cost of borrowing to obtain a long-term asset. Unlike typical interest expenses, capitalized interest is not expensed immediately on a company's income statement. Because many companies finance long-term assets with debt, companies are allowed to expense the assets over the long term.

How does a company capitalize interest?

The company capitalizes interest by recording a debit entry of $500,000 to a fixed asset account and an offsetting credit entry to cash. At the end of construction, the company's production facility has a book value of $5.5 million, consisting of $5 million in construction costs and $500,000 in capitalized interest.

How does capitalized interest show up on a company's income statement?

Capitalized interest shows up in installments on a company's income statement through periodic depreciation expense recorded on the associated long-term asset over its useful life. Capitalized interest is the cost of borrowing to obtain a long-term asset.