Question

Class, what is capitalized interest? Are we ever required to record capitalized interest? Do you believe capitalized interest is a proper accounting treatment? Support your opinion. Your post should be more than a single sentence.

Answer 1

Capitalised Interest :- It is the cost of borrowing to acquire or construct the long term asset,Unlike an interest expense incurred for any other purpose, capitalized interest is not expensed immediately on the income statement of a company's financial statements. Instead, firms capitalize it, meaning the interest paid increases the cost basis of the related long-term asset on the balance sheet. 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.

According to the IAS 23, Borrowing Costs requires that borrowing costs directly attributable to the acquisition, construction or production of a 'qualifying asset' (one that necessarily takes a substantial period of time to get ready for its intended use or sale) are included in the cost of the asset, substaintial period of time not defined in the IAS-23, but in general parlance its More than one accounting year i.e. 12 months.

According to me and best of knowledge and belief, capitalised interest is proper accounting treatment, because by capitalising the interest to the cost of the long term asset, we get the true cost of purchasing or constructing the long term asset, and further we can get the proper allocation of the interest expense, which were incurred from the general fund, that which was incurred for operating the bussiness and which was for the asset construction or purchase purpose.