Question

describe what interest capitalization means. That is, what account is debited when interest is capitalized?

explain how capitalized interest should be disclosed in the financial statements.

Answer 1

A. Interest capitalization is the cost of borrowing required to construct or acquire a long term asset. Capitalized interest is the interest which has been included as part of the cost of acquiring an asset in the balance sheet instead of being treated as an interest expense in the income statement.At the time of recording the journal entry for interest capitalization the qualifying asset account should be debited and the interest expense account should be credited.

Assets qualify for interest capitalization

1. Assets that are constructed or otherwise produced for an enterprise’s own use.

2. Assets intended for sale or lease that are constructed or otherwise produced as discrete projects.

B. Disclosure requirement in financial statements:

The following information with respect to interest cost shall be disclosed in the financial statements or related notes:

1. For an accounting period in which no interest cost is capitalized, the amount of interest cost incurred and charged to expense during theperiod.

2. For an accounting period in which some interest cost is capitalized, the total amount of interest cost incurred during the period and the amount thereof that has been capitalized.