Whether capitalized interest should belong to Times Interest Earned? 100 words clearly explain.

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Expert Solution

Interest capitalized: -

This term means interest amount paid on borrowed money during the period of construction of an asset.

Some assets sometimes called qualifying assets take substantial time to complete to be ready for intended use.

For capitalization of interest following condition are required to be fulfilled:-

Asset which is created should be of capital nature.
Specific or General borrowing should be used for creation of such asset.

Times interest earned:-

It commonly used as interest coverage ratio, formula of which is as under

= Earning before interest and tax or Earning before interest tax depreciation and amortisation

Interest expense

This formula shows that whether company is able to pay its interest liability or not. If the ratio is less than 1 it means company is not able to generate sufficient cash to repay its interest liability.

jeff jeffy answered 1 year ago

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