Enter the weighted-average accumulated expenditures up to the principal balance of specific borrowing, the interest rate on the specific borrowing, the weighted-average accumulated expenditures in excess of specific borrowing, and the weighted-average interest rate to determine the capitalized interest.
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Capitalized Interest Formula
The following formula is used to calculate a capitalized interest.
CI = WAAE * IRB + WAAEe * WAIR
- Where CI is the capitalized interest ($)
- WAAE is the weighted-average accumulated expenditures up to the principal of specific borrowing ($)
- IRB is the interest rate on the specific borrowing (%)
- WAAEe is the weighted-average accumulated expenditures in excess of the borrowing ($)
- WAIR is the weighted-average interest rate (%)
Capitalized Interest Definition
What is capitalized interest? A capitalized interest is an amount of unpaid interest that get’s added to a loan. In other words, if loan interest is not paid on time, a lender may capitalize that interest and add it to the principal.
How to calculate capitalized interest?
- First, determine the weighted-average accumulated expenditures up to the principal.
For this example, this is $20,000.00.
- Next, determine the interest rate of the borrowing.
For this problem, the borrowing interest rate is 5%.
- Next, determine the accumulated expenditures in excess of the principal.
In this case, the excess expenditures is $10,000.00
- Next, determine the weighted average interest rate.
The average interest rate is 4.5%.
- Finally, calculate the capitalized interest.
Using the formula, the capitalized interest is found to be: 20,000*.05 + 10,000*.045 = $1,450.00.