Final answer:
The interest capitalized on a self-constructed asset is limited to the actual interest incurred, even if the calculated amount for capitalization is higher. This accounting practice ensures that the asset's book value reflects real financial costs and maintains accuracy in financial statements.
Step-by-step explanation:
If the amount of interest calculated to be capitalized on a self-constructed asset is greater than the amount actually incurred, then the interest capitalized is limited to the actual interest incurred. This principle ensures that the capitalization of interest costs does not exceed the real financial expenses associated with the construction of the asset.
In business accounting, interest capitalization involves adding the cost of borrowing to the cost base of an asset during the asset's construction period. According to accounting standards such as the International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP), interest capitalization should reflect actual costs. Therefore, if a company calculates a higher interest amount to be capitalized than what was truly spent, it must cap the interest capitalized at the actual interest incurred. This is to avoid inflating the asset's book value and potentially misleading financial statement users.