ASC 520-10-25: Capitalization of Interest Costs & Journal Entries
Posted In | ASC Education | Gridlex AcademyWhen a company borrows funds for the purpose of acquiring or constructing a qualifying asset, it incurs interest costs. ASC 520-10-25, Borrowing Costs - Overall - Recognition, provides guidance on the capitalization of interest costs in a company's financial statements. This article explains the capitalization of interest costs transaction under ASC 520-10-25, along with illustrative journal entries.
Understanding Capitalization of Interest Costs
Interest costs incurred during the acquisition or construction of a qualifying asset are required to be capitalized, meaning they are added to the cost of the asset rather than expensed in the period incurred. A qualifying asset is an asset that requires a substantial period of time to get ready for its intended use or sale. Examples of qualifying assets include buildings, infrastructure projects, and customized manufacturing equipment.
Key Steps in Capitalizing Interest Costs under ASC 520-10-25
1. Determine the capitalization period, which is the time during which a qualifying asset is being acquired or constructed and interest costs are being incurred.
2. Calculate the weighted-average interest rate on the company's outstanding borrowings.
3. Multiply the weighted-average interest rate by the average accumulated expenditures on the qualifying asset during the capitalization period.
4. Record the capitalized interest as part of the cost of the qualifying asset.
Journal Entries for Capitalization of Interest Costs Transactions
To illustrate the journal entries for capitalization of interest costs, let's assume a company is constructing a building with a total cost of $10,000,000. The company borrows $8,000,000 at an interest rate of 6% to finance the construction. The capitalization period is 24 months, and the average accumulated expenditures on the qualifying asset during the capitalization period are $5,000,000.
1. Calculate the weighted-average interest rate:
($8,000,000 x 6%) / $8,000,000 = 6%
2. Calculate the capitalized interest:
$5,000,000 x 6% = $300,000
3. Record the capitalized interest as part of the cost of the qualifying asset:
Dr. Building (qualifying asset) $300,000
Cr. Interest Payable $300,000
ASC 520-10-25 provides guidance on the capitalization of interest costs in a company's financial statements. By understanding the key steps and journal entries involved in capitalizing interest costs, companies can accurately reflect the financial impact of these costs in their financial statements. Proper accounting for the capitalization of interest costs helps maintain transparent financial reporting and enables stakeholders to make informed decisions about a company's financial position and performance.