A:

When a company capitalizes accrued interest, it adds up the total amount of interest owed since the last debt payment made and adds the amount to the cost of the long-term asset or loan balance.

There are two components to capitalizing accrued interest:

Accrued interest represents the amount of interest a company owes on a loan or long-term asset, based on the effective annual interest rate and how much time has passed since the company's last loan or debt payment. It's possible for a company to calculate accrued interest by dividing its stated annual interest rate by 365 and multiplying it by the total loan balance and the number of days since the company's last payment.

Capitalized Interest

Capitalized interest is an accounting practice required under the accrual basis of accounting. Capitalized interest is interest that is added to the total cost of a long-term asset or loan balance. This makes it so the interest is not recognized in the current period as an interest expense. Instead, capitalized interest is treated as part of the fixed asset or loan balance and is included in the depreciation of the long-term asset or loan repayment. Capitalized interest appears on the balance sheet rather than the income statement.

When a company capitalizes accrued interest, it takes the total amount of interest it owes on a long-term asset or loan balance since the last payment, and capitalizes it by adding the total interest owed to the total cost of the long-term asset or loan balance.

This is most common for student loans in deferment. While a student is still in school, interest accrues on the student loan balance, and the total amount of owed interest is added to the principle of the loan, effectively increasing the monthly interest owed.

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