Capitalized interest: qualifying assets, timing, and the avoidable-interest cap
Calculate weighted-average construction expenditures, avoidable interest, and the actual-interest cap with a sourced FAR example.
The decision that earns the point
Classify the item before measuring it
Capitalize interest only for a qualifying asset during the period when expenditures are being made, activities needed to prepare the asset are in progress, and interest cost is being incurred. The amount capitalized is the avoidable interest attributable to accumulated expenditures, limited to actual interest cost incurred.
Exam use
FAR can require you to identify a qualifying asset, start or suspend the capitalization period, weight staged expenditures, apply specific and general borrowing rates, and enforce the actual-interest ceiling.
Your scratch-paper plan
Solve it in three moves
- 1
Confirm the asset and capitalization period
Use only assets that require time and activities to become ready for intended use or sale, and capitalize only while all three period conditions are present.
FASB ASC 835-20: Capitalization of Interest - 2
Weight accumulated expenditures
Weight each qualifying expenditure by the fraction of the capitalization period it remains outstanding, then apply the appropriate borrowing rates.
FASB ASC 835-20: Capitalization of Interest - 3
Apply the lower-of ceiling
Capitalize the lower of calculated avoidable interest and actual interest cost incurred for the period.
FASB ASC 835-20: Capitalization of Interest
Worked problem
Work the facts before choosing the answer
A qualifying construction project begins January 1. Expenditures are $400,000 on January 1, $300,000 on April 1, and $200,000 on October 1. A $500,000 specific construction loan bears 6%, other borrowings average 8%, and actual annual interest cost is $50,000. Construction activities continue all year.
CPAPass exam analysis using the stated assumptions
Show the work
Weighted-average accumulated expenditures are $675,000: $400,000 x 12/12 + $300,000 x 9/12 + $200,000 x 3/12. Avoidable interest is $44,000: $500,000 x 6% + $175,000 x 8%.
Rule source: FASB ASC 835-20: Capitalization of InterestAnswer
Capitalize $44,000 because avoidable interest is below the $50,000 actual-interest ceiling. Expense the remaining $6,000 of actual interest under the stated facts.
Rule source: FASB ASC 835-20: Capitalization of InterestDo it now
Test the same decision with a fresh question
Start with free FAR practice. Create an account only when you want the 5-day no-card CPAPass trial and continued section practice.
Try the changed facts
Two capitalized interest practice questions
Original CPAPass questions using U.S. GAAP. Work them here without an account. For offline practice, request the free FAR MCQ and TBS PDFs by email.
MCQ and TBS practice PDFs. Email required.
When actual interest sets the limit
A qualifying factory project is active all year. Its weighted-average accumulated expenditures are $900,000. The entity has no specific construction borrowing and uses an 8% general borrowing rate. Its only debt is $500,000 outstanding all year at 8%, so actual interest incurred is $40,000. There are no other qualifying projects or interest adjustments.
Worked solution and journal entry
Answer: B. $40,000
- Avoidable interest: $900,000 x 8% = $72,000.
- Actual interest: $500,000 x 8% = $40,000.
- Capitalize min($72,000, $40,000) = $40,000. The remaining interest expense is $0.
Journal entry
Adjustment assuming the full $40,000 was initially recorded as interest expense.
- Construction in progress
- Debit
$40,000Credit
- - Interest expense
- Debit
-Credit
$40,000
| Account | Debit | Credit |
|---|---|---|
| Construction in progress | $40,000 | - |
| Interest expense | - | $40,000 |
Statement effect: The adjustment adds $40,000 to construction in progress and removes $40,000 from current interest expense. It does not create another cash payment.
Rule reference: ASC 835-20-30-6: actual-interest ceilingStop the schedule when the asset is ready
A qualifying project starts January 1 and is substantially complete and ready for use on September 30. The entity pays $300,000 on January 1 and $120,000 on April 1. Activities continue until completion. There is no specific construction loan; general debt is $1,000,000 at 6% for the entire year. Use whole-month weights and ignore all other projects and adjustments.
Worked solution and journal entry
Answer: C. $17,100
- January expenditure: $300,000 x 9/12 = $225,000.
- April expenditure: $120,000 x 6/12 = $60,000. Total annual-weighted expenditures = $285,000.
- Avoidable interest: $285,000 x 6% = $17,100, below $60,000 of actual annual interest. Do not apply another 9/12 factor.
Swipe the schedule to see every column.
| Expenditure date | Cash paid | Eligible months | Annual-weighted amount |
|---|---|---|---|
| January 1 | $300,000 | 9/12 | $225,000 |
| April 1 | $120,000 | 6/12 | $60,000 |
| Total | $420,000 | $285,000 |
Journal entry
Capitalization adjustment assuming interest was initially expensed. Transfer the completed asset separately.
- Construction in progress
- Debit
$17,100Credit
- - Interest expense
- Debit
-Credit
$17,100
| Account | Debit | Credit |
|---|---|---|
| Construction in progress | $17,100 | - |
| Interest expense | - | $17,100 |
Statement effect: The completed asset includes $437,100: $420,000 of construction spending plus $17,100 of interest. Annual interest expense is $42,900. Depreciation after readiness is outside this question.
Rule reference: ASC 835-20-25-5 and 30-3: completion and weightingThe trap and the repair
Common trap
Applying one debt rate to total project cost ignores both expenditure timing and the split between the specific construction borrowing and other borrowings.
Repair
Build the dated expenditure schedule first, calculate avoidable interest second, and compare it with actual interest only at the end.
Authority and scope boundary
FASB ASC 835-20 controls qualifying assets, the capitalization period, the avoidable-interest calculation, and the ceiling. This route does not own debt-issuance-cost presentation or the carrying amount of completed PP&E.
2026 Uniform CPA Examination Blueprints and FASB ASC 835-20: Capitalization of Interest were reviewed on 2026-08-14. Check a newer authority when the effective date or facts change.
Interest capitalization schedule
Move from dated expenditures to the capitalized amount
Each row resolves a separate gate, so a rate shortcut cannot hide a nonqualifying asset or an inactive construction period.
| Decision | Fact to apply | Accounting result | Authority |
|---|---|---|---|
| Qualifying asset | The project requires a period of preparation before intended use | Continue to the capitalization-period test | FASB ASC 835-20: Capitalization of Interest |
| Capitalization period | Expenditures, preparation activities, and interest cost are all present | Include only the eligible time window | FASB ASC 835-20: Capitalization of Interest |
| Avoidable interest | $500,000 at 6% plus $175,000 at 8% | $44,000 before the ceiling | FASB ASC 835-20: Capitalization of Interest |
| Actual-interest cap | $44,000 avoidable compared with $50,000 actual | Capitalize $44,000 and expense $6,000 | FASB ASC 835-20: Capitalization of Interest |
After a miss
Repair a capitalized-interest calculation miss
- 1
Draw a dated expenditure line and mark the months each amount qualifies before applying any interest rate.
- 2
Recalculate once after suspending construction for three months, then identify which weighted expenditures change.
- 3
Answer a fresh FAR question and record whether the miss came from asset scope, timing, rate selection, or the actual-interest cap.
Your exam workflow
- Step 1Identify the requirementUse only assets that require time and activities to become ready for intended use or sale, and capitalize only while all three period conditions are present.FASB ASC 835-20: Capitalization of Interest
- Step 2Classify the factsWeight each qualifying expenditure by the fraction of the capitalization period it remains outstanding, then apply the appropriate borrowing rates.FASB ASC 835-20: Capitalization of Interest
- Step 3Apply the authorityCapitalize the lower of calculated avoidable interest and actual interest cost incurred for the period.FASB ASC 835-20: Capitalization of Interest
- Step 4Check the outputCapitalize $44,000 because avoidable interest is below the $50,000 actual-interest ceiling. Expense the remaining $6,000 of actual interest under the stated facts.FASB ASC 835-20: Capitalization of Interest
Keep the next step narrow
Quick questions
What is the key rule?
Capitalize interest only for a qualifying asset during the period when expenditures are being made, activities needed to prepare the asset are in progress, and interest cost is being incurred. The amount capitalized is the avoidable interest attributable to accumulated expenditures, limited to actual interest cost incurred.
How can this topic be tested on the CPA Exam?
FAR can require you to identify a qualifying asset, start or suspend the capitalization period, weight staged expenditures, apply specific and general borrowing rates, and enforce the actual-interest ceiling.
What mistake most often changes the result?
Applying one debt rate to total project cost ignores both expenditure timing and the split between the specific construction borrowing and other borrowings. Build the dated expenditure schedule first, calculate avoidable interest second, and compare it with actual interest only at the end.
Where should I practice the decision?
After the worked example, open the FAR free-practice link and work a fresh question that tests the same decision. If the miss depends on Net fixed assets, review that handoff before trying another set.