Capitalized Interest - added to Equity or LT Liabilities?

CFA Level II
#1

I thought that when an expense is capitalized that the amount is added to both LT Assets and LT Liabilities. Yet, in a q-bank question, the necessary adjustment for Capitalized Interest is to subtract the amount from LT Assets and **EQUITY**. Why from equity and not LT Liabilities?

#2

Correct me if I am wrong, but I think it is because when you adjust financial statements by removing capitalized interest you are effectively removing the interest from the b/s and putting it into the income statement, which would reduce earnings, thus reducing equity

#3

I think patkeenan is right. The thinking behind this is that the interest expense that was capitalized should have flown in to equity in the first place as a charge against income. Also, when an expense is capitalized, the entries are not to debit the asset and credit the liability; rather, it is a debit to the capitalized asset and usually a credit to cash or some other liquid asset on the b/s that was used to actually pay for the expense.

#4

jackoliver Wrote: ------------------------------------------------------- > I thought that when an expense is capitalized that > the amount is added to both LT Assets and LT > Liabilities. > i believe this is true for Operating leases (LT A and LT D). Please correct me if i am wrong

#5

If you capitalize an expense, it doesn’t touch the income statement at all. Dr Assets Cr Liabilities / Cash So to remove it from the balance sheet Dr expense (I/S) Cr Assets So net transaction after removal from balance sheet is: Dr Expense Cr Liabilities / Cash

#6

Dsylexic Wrote: ------------------------------------------------------- > jackoliver Wrote: > -------------------------------------------------- > ----- > > I thought that when an expense is capitalized > that > > the amount is added to both LT Assets and LT > > Liabilities. > > > > i believe this is true for Operating leases (LT A > and LT D). Please correct me if i am wrong I believe that operating leases are expensed. Capitalized leases, on the other hand, are not.

#7

^^ agreed. what i meant was that you add to LTD and LTA when you ‘adjust’ your fin statements to account for any operating leases