In CFAI FRA book page 63 example 3 question 1 I get that you add back the 475 to EBIT because it is interest expense that went through depreciation. What I dont understand is why you only add 2200 of capitalized interest to interest expense. It seems that once you add the expensed interest back to EBIT then it should rightfully increase capitalized interest by the 475. That is to say, I would think that capitalized interest was reduced by the amount that was expensed so if you are going to reverse the expense you should put it back to capitalized interest. Any thoughts?
Just read this yesterday and I believe the 2200 amount for 2007 reprsents the increase to capitalised interest recorded during the year. The 475 depreciation expense is related to existing capitalised interest and not this years increase.
I see, they are saying that 2200 was capitalised during the year rather than being part of interest expense. Thats why you add it back to interest expense. But if you back the 475 out of EBIT shouldn’t it then go to interest expense along with the 2200?
I looked at this problem in the Schweser notes and they treat this the same way. I think the way to view this is the 2200 is the total (gross) amount of capitalised interest recorded during the year, so it would be inclusive of the 475 depreciation expense. If you added the 475 again you would be double counting