Two quick questions: Capitalized interest adds the amount to the asset in question. What is the exact matching balance sheet entry for this? I’m assuming its some kind of liability. When you have a capital lease which requires the first payment NOW…is the first payment all principal paid out or is it the split out between interest/principal? I’ve seen it both ways and don’t know which way is the right way.
I suppose there are two matching entries: a) The remainder of the lease liability in the long-term liabilities and b) The current portion of the lease payment due in the current period Regarding the payments my working assumption is that there is the lease payment and the lease expense (those are two different things). The lease payment would include interest + principal, but the total lease expense is the the lease payment + depreciation expense. The lease payment would, in my opinion, always include both interest and principal, even if paid NOW. But I have honestly not seen such a problem yet. Can you identify the question more precisely? I am hopping I got that right now, had me confused for some time now…
" Capitalized interest adds the amount to the asset in question. What is the exact matching balance sheet entry for this? I’m assuming its some kind of liability. " Not a liability. Capitalizing expenses doesn’t effect debt. The balancing side is an increase in equity (since lower expenses with capitalizing).
Ha, I knew I missed something there. Thanks Isura.
Thanks…but at the time of the accounting for the cap interest…you increase the asset by the amount of cap interest…what is the offsetting entry (from an accounting point of view)?..the NI is higher due to no interest expense over time…but what is the account adjusted on the L+E side to make it balance out?
Capitalized leases DO have a matching liability. It’s as if you were purchasing an item on credit. On the Liab section of the BS there would be a current portion of the liability and a long term portion.
Right, now it’s all messed up 
So, checking Schweser Secret Sauce p 113 (I refuse to open anything else at this point), second bullet point I clearly, too, read about a liability and an asset portion for capital lease. On the same page you would find that a capital lease does also have a current liability impact from the next lease payment. In addition (and I think that’s what is possibly confusing us): CFO is HIGER with capital lease leading to HIGHER operating income. However, because of the depreciation and interest expense together net income will be LOWER, leading to potentially LOWER equity fro lower retained earnings. Objections?