capitalized interest

capitalized interest - Misconceptions about Capitalized...

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Misconceptions about Capitalized Interest Many people in the real estate development industry know that in certain circumstances interest may be capitalized as part of the cost of a development project. For example, assume Company X intends to purchase land upon which to build a hotel. Company X gets a loan from the bank to fund this project and purchases the land. As construction of the hotel progresses, Company X capitalizes the related interest on the loan as part of this project’s cost. “Pretty straight forward”, you say? Not so fast! There are a number of pitfalls to watch out for. Consider the following questions: Does the asset qualify? - In order to qualify as an asset for which interest must be capitalized, the asset must require a period of time to get ready for its intended use. It must be an asset constructed or otherwise produced for a company’s own use, or intended for sale or lease that is constructed or is an otherwise discrete project (e.g. ships or real estate developments). Assets already completed for their intended use or that are not in the process of being readied for their intended use do not qualify. Assets that are routinely manufactured or otherwise produced in large quantities should also be excluded. i Some examples include cars, refrigerators and equipment. What is the beginning and ending of the capitalization period? - Three conditions must all be met for the capitalization of the interest to commence: 1. Expenditures for the asset must have been made 2.
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capitalized interest - Misconceptions about Capitalized...

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