Capitalized interest, like all interest, is the cost of borrowing something. Unlike all interest, capitalized interest is kind of like a hidden phantom on the balance sheet. Instead of borrowing money to get some new equipment (or other long-term assets), putting that cost on their income statement, they “capitalize” it. Capitalizing it means the interest is on the income statement through depreciation of the asset over time.
Which makes sense, right? If you’re buying a new, fancy piece of equipment for your business, you might be hesitant to treat it as just another line item, because it’s expensive, and because it’s contributing to your business for the long haul. You don’t want to look back later and be like, "Why are expenses so high that month? Oh yeah…" Instead, you can break up the cost over time, so it increases expenses just a tiny bit every month, rather than just the month you got it, which also reflects the asset’s contribution to the company over time.
This has been going on a long time, so there are official rules for it in U.S. tax law, and in GAAP (Generally Accepted Accounting Principles).
Related or Semi-related Video
Finance: What is recapitalization?34 Views
finance a la shmoop what is recapitalisation all right people think
nee capitalization you know in Jersey like when you owe the mob money at least [thug breaks knee with bat]
that's what it feels like if you're a common equity stockholder of a company [businessman with common stock]
that has been recapped well usually recapitalisation is a very kindly loving
politically correct term for a pal you're bankrupt you borrowed money you
promised to pay back and you didn't so now you're out and the lenders now own
your company buh and buy so typical recap comes from a company that was very
early stage and had preferred stock upon preferred stock from venture capital
investors sitting above their common in the priority stack and eventually the
company burned through eighty seven million dollars and it has just a [dollars on fire]
million bucks left in the bank and it built something out of that eighty seven [company logo graveyard]
million not quite worth putting here yeah but it might be worthy of a new
investment of say yo thirty million or more dollars but the marketplace values [money going into company briefcase]
this zombie company yes that's what they're called at a [zombie briefcase walking at night]
value well less than the eighty seven million that has been raised previously
so everything is marked down usually with a common in total being worth [store during closing sale]
something like one percent of the new company and that's oh so sad for the
founders because it was a hundred percent of the company the day they
started so they were recapped and lest more mature companies feel left out well
recapitalisation happens in later stage companies as well and the radio industry
famously took on too much debt in the late 1990s and then people stop [radio knob getting changed]
listening to Drivetime radio as cell phones and satellite radio intruded I
bring radio borrowed five billion dollars at seven percent to oh three
hundred fifty million a year and then when cash earnings fell well below that
number while the company had to recap its five billion of debt such that those
debt holders now own essentially all of I brain radio and hope to someday milk
enough cash out of it to get their principal back knowing and it'll likely [goat getting milked]
be a very low interest rate or a low return on their and
if a positive one at all hopefully that all made sense you the first time though
because well we don't have time here in this video for a recap
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