Cash Flow from Investing when capitalize interest expense

[the_tank]

When you capitalize construction interest expense, you increase the
asset, then depreciate it over the years. From a journal entry point
of view, A = L + E. Do you increase Equity, or reduce another
Asset(cash in this case)?
The reason I am asking is to figure out if C.I. will cause cash flow
from investing to reduce by the same amount of C.I.?

 

[cpk123]

capitalized interest is built into the asset and depreciated over the asset’s life. (part of the depreciation expense).

 

[the_tank]

Fair enough. I guess my question is when you capitalize interest expense, You add asset, what else? The accounts are not balanced.

 

[mohammad.belaal]

You pay that interest in cash but it is classified as CFI not CFO. One asset increases and the other decreases.

 

[Steely Dan]

Agree with Mohammad. I think in the period you buy the asset and capitalize it, PPE (or whatever the assset is) will increase and cash will decrease assuming it’s paid for in cash. In subsequent periods, depreciation will reduce the asset and and also reduce equity because depreciation lowers net income.