[stephw4763]

I just do not understand this at all. I know you are supposed to the take the lesser of the interest incurred/avoidable interest, but what does avoidable interest even mean?

Thanks!

B- 82
A- 84
R- 67, 72, 78
F- 83

[I love numbers!]

Avoidable interest is the amount of interest that could have been avoided had the project not taken place. So, if a company has a construction project in progress, and they obtain a loan to fund the project, and the project is still in progress, then any of the interest that is being paid on the loan related to the project is “avoidable” and should be capitalized as cost of asset. At least that is how I am reading it!

B - 71, 83
A - 85
R - 80
F - 80

[MRSJLeon917]

I think (from my limited understanding and an incorrect question on it yesterday) is that you take the average expenditures of the project for the year and multiply this times the interest rate used for any outstanding loans. This tells you your “avoidable interest”. You then compare this avoidable interest to actual interest expense for the year and the lesser of the 2 is the capitalized interest.

Essentially, if the avoidable interest is greater than the actual interest expense incurred, the assumption is that you used excess cash for some of the costs of the project. You can not capitalize more interest than actually incurred.

However, if avoidable interest is less than interest expense, the assumption is that the loans (since some loans are not always specific construction loans) are used for other operations of your business.

Does this make sense?

AUD (5/25/2012): 91
FAR (10/22/2012): 89
REG (11/28/2012): 89
BEC (01/05/2013): 82
Ethics Exam: 90

IL Licensed CPA - 7/15/2013

A long journey, officially DONE!

[stephw4763]

Thanks guys, it makes more sense now 🙂

B- 82
A- 84
R- 67, 72, 78
F- 83

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