Final answer:
The specific interest method attributes the interest cost to the specific debt incurred for an asset, while the weighted-average method applies a weighted interest rate based on all debt to the costs of the asset.
Step-by-step explanation:
The difference between the specific interest method and the weighted-average method in determining the amount of interest to be capitalized lies in how the interest cost is attributed to the asset being constructed. The specific interest method directly associates the interest cost with the specific debt incurred for financing the asset. Under this method, if a company takes out a loan specifically for the construction of an asset, the interest cost from that debt would be the interest capitalized.
On the other hand, the weighted-average method incorporates a broader range of debt. When using this method, interest expense is capitalized based on the weighted-average of the interest rates on all outstanding debt, regardless of its purpose, applied to the expenditures on the asset under construction. This tend to spread out the interest costs among different assets more evenly compared to the specific interest method which attributes the interest cost to the specific asset linked to the debt.
In the context of sensitivity to interest rates, changing interest rates can significantly affect the calculated interest to be capitalized. If a company uses the weighted-average method and interest rates fluctuate, the capitalized interest will vary in tandem with these changes to the average interest rate. Similarly, with the specific interest method, if the loan associated with the asset has a variable interest rate, the capitalized interest will also change in response to interest rate movements.