Question

When calculating the amount of interest to capitalize on a self-constructed asset, the critical inputs used are an interest rate and?

1) weighted average accumulated expenditures
2) long-term debt outstanding at year-end
3) total amount paid to construct the asset
4) historical cost of the building

Answer 1

When calculating interest to capitalize on a self-constructed asset, the critical inputs are an interest rate and the weighted average accumulated expenditures, which determine the capitalization amount.

Step-by-step explanation:

When calculating the amount of interest to capitalize on a self-constructed asset, the critical inputs used are an interest rate and the weighted average accumulated expenditures. These expenditures represent the average amount of money spent on the construction of the asset over a specific time period, which is leveraged for the calculation of interest capitalization. The interest rate applied in the calculation is typically the cost of financial capital, which may be reduced if the firm can capture a return to society, effectively adjusting the rate of return on the investment.