long lived assets


I am wondering why the depreciation from previous year’s capitalization of interest costs are added instead of subtracted from EBIT.

Reading 21, Example 3.

$475 depreciation is added to EBIT to calculate the interest coverage ratio.When the depreciation is present, EBIT should be reduced. Can’t understand this.

Thanks for your help.

If the Capitalization had not happened - depreciation would have been 475 less?

So you actual EBIT would have been 475 higher

and Interest expense would have been higher as well…

So true Int Cov Ratio = EBIT / Int --> will now be properly reflected after making the above adjustments. This will also make two companies one that capitalized interest vs. another one that did not - now comparable.

Thanks CP. I misunderstood the question.

From the answer, " …including an adjustment to EBIT for depreciation of previously capitalised interest", I misinterpreted it as with capitalization.