How to Calculate Capitalized Interest

Companies can capitalize interest for construction costs.

Companies can capitalize interest only on construction projects for internal use, external real estate use and land improvements. The company can only capitalize interest on money it actually spent, not on the total amount borrowed. Capitalizing interest takes the interest as an expense over time instead of expensing the interest right away. For example, a company borrows $50,000 at 10 percent interest then spends $30,000 of the borrowed money.

Instructions

1. Calculate the actual interest cost incurred. In our example, 10 percent times $50,000 equals $5,000.

2. Determine the avoidable interest. In our example, 10 percent times $30,000 equals $3,000.

3. Use the smaller amount between the actual interest and avoidable interest. Expense any actual interest above the capitalized interest. In our example, you would use $3,000 as it is the lesser figure. Then $5,000 minus $3,000 equals $2,000. The company must expense this $2,000.

References

• Accounting Coach: What Is Capitalized Interest?
• Accounting Financial Tax: Steps to Take To Capitalize Interest