Interest Capitalization 2

Question 1

Where should the amount of interest paid be disclosed?

Answer 1

In the statement of cash flows, as either part of the statement, as a supplemental schedule or in a footnote.

Question 2

If Average Accumulated Expenditures (AAE) > total interest-bearing debt, why is there no interest expense?

Answer 2

All debt could have been avoided if construction had not taken place.

Question 3

If Average Accumulated Expenditures (AAE)

Answer 3

The difference between total interest cost and the amount of interest capitalized.

Question 4

How is capitalized interest compounded?

Answer 4

The interest capitalized for year 1 will be the base of the AAE for year 2. EX. Payments of 200,000 in year 1 plus 7,000 capitalized interest. The calculation of AAE will begin with 207,000 for year 2

Question 5

When can interest be capitalized on land?

Answer 5

1. ) For land used as a building site, the cost of the land is included in AAE for the building, and interest is capitalized to the building.
2. )For land developed for sale, interest capitalized to the land
3. ) For land held for speculation, no interest is capitalized because the land is in its condition of intended use, and there is no asset under construction

Question 6

If the proceeds from a specific construction loan are not fully used for financing construction until well into the construction phase, how is the interest handled?

Answer 6

The interest revenue is reported separately with no effect on interest capitalized. (Interest revenue is earned on the funds sitting on bank account etc)