There was a question on the 06 exam about capitalizing interest. I remember discussing this before but never got a clear answer. The answer was that capitalizing interest costs increase both NI and CFO. My question is: are the effects of capitalizing interest costs entirely different from capitalizing leases? I understand the CFO part.
yes
So CFO increases (interest is not fully expensed) and does the rest go to CFF which decreases it? With leases the sum of interest and depreciation depresses NI initially? Is this correct florinpop?
with capital leases vs operating difference is that operating payment= operating expense and capital expense= depreciation expense + interest expense with interest you have 1. expense it all = that means all amount is expensed infirst year 2. capitalize it= that means that interest is ‘depreciated’ - expensed over several years because of 1,2 the net income will be higher when capitalized with leases capitalizing results in lower net income because depreciation is higer in first years and lower after vs operating expense is the same in all years
Hi, The answer was that capitalizing interest costs increase both NI and CFO. My question is: are the effects of capitalizing interest costs entirely different from capitalizing leases? With capitalizing leases…lease rent on IS replaced by depreciation on lease asset and int cost ( initial years depre+int cost is more than lease rent …NI down) with capitalizing interest( a part of int will be charged to NI …therefore NI up)
Ok, so it’s not shifted anywhere but just part of it is expensed. How is this shown on the B/S?
I am not sure but I think capitalized interest is a financing source in liabilities and in assets the asset increases with the value of interest then yearly portion of capitalized interest and asset value is reduced capitalized interest might be a correcting asset as well I am not sure about this though
Thanks for the help florinpop. Now I know to separate the two when I think about capitalizing. It makes clear sense now and I should have figured it out when I really think about whats going on.
Niblita75 Wrote: ------------------------------------------------------- > Ok, so it’s not shifted anywhere but just part of > it is expensed. How is this shown on the B/S? I think increase NI increses Equity which matches with capitalized int on asset side.