- CFA Exams
- CFA Level I Exam
- Topic 4. Financial Statement Analysis
- Learning Module 2. Analyzing Income Statements
- Subject 3. Expense Recognition - Long-Lived Assets
CFA Practice Question
The amount of interest that may be capitalized under GAAP is ______.
B. the lower of actual interest and avoidable interest
C. imputed interest
A. actual interest
B. the lower of actual interest and avoidable interest
C. imputed interest
Correct Answer: B
Avoidable interest is computed even if the firm used financing other than debt for the project. The rationale is that if the firm had not engaged in the project, it would have used the non-debt financing to pay down debt. GAAP limits the capitalization of interest to the avoidable amount if it is less than the actual costs incurred.
User Contributed Comments 3
| User | Comment |
|---|---|
| kalps | The amount of ineterest capitalised under GAAp is lower of actual interest or avoidable intresedt. |
| viannie | avoidable interest = weight average interests x the amount involved in the construction of the assets |
| quanttrader | under gaap - can capitalize the lower of avoidable or actual interest |