book 3 page 377 Question 1 part B iii what is amortization capitalized interest? and why is it there? and net capitalized interest? how did they calculate the net income after adjustment (expensing interest instead of capitalizing interest)…I cannot figure out…I can get the Pretax income right though 1695…but if I apply the tax rate1-35%, I didn’t get the answer 869
When debt is taken out to fund certain long term projects, the interest expense that will be incurred over the life should be capitalized in order to satisfy the accounting “matching” principle, which basically says to match revenues with expenses. Since you are going to be deriving revenue from a long-lived asset for quite some time (hopefully), you should capitalize the interest costs and amortize them while the building is in use, rather than just expensing them up front. Net capitalized interest is the total amount of capitalized interest remaining on the books. (beginning cap. int - amortization of interest = net cap. int) To arrive at the 869 - Net capitalized interest (141-47=94)*(1-T)=61 = Net effect of capitalizing interest on NI, so subtract that from the initial 930 to arrive at 869.
Thank you, hoffmag2 …
so the net capitalized interest is the net effect to net income… but why only the amortization is the effect to EBIT? since in this question, only the amortization amount was added back to get the adjusted EBIT…