I am looking at the first practice problem for reading 36. Here is one column of information given: 1995 Interest Expense 401 Pretax Income 1789 Net Income 930 Capitalized Int 141 Amortization of Capitalized Int 47 So, first question is pretty straightforward, compute earnings coverage ratio for each year (1995 in this case). EBIT/Interest Expense = 1789+401/401 = 5.46 Second part Bi asks, assuming that interest had always been expensed as incurred recompute the earnings coverage ratio. So, per the answer key, numerator (EBIT) = 1789+401+47 = 2237 denominator is 401+141 = 542 = 4.13 My question is why does only the 47 get added back to EBIT in the numerator? Seems like the 141 should also be added given that you are now assuming that interest previously capitalized is now expensed. My first inclination was also that the 47 should be added back to interest expense as well… Clearly I am having trouble with the relationship between capitalized interest, net capitalized interest (96) and amortization of capitalized interest as well as its relationship to income. Any insight?

EBIT is income before Interest expense… Amortization of interest was subtracted from EBIT… So you add it back to EBIT if you expense the interest rather than capitalize… If we expense the capitalized interest of 141, it wont affect EBIT. but your interest expense would be higher…