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.

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.

Example

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.