In: Finance
Whether capitalized interest should belong to Times Interest Earned? 100 words clearly explain.
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:-
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.