CFA Practice Question

There are 90 practice questions for this study session.

CFA Practice Question

The type of interest that may be capitalized under GAAP is ______.

A. actual interest
B. the lower of actual interest and avoidable interest
C. internal 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 actual costs incurred.

User Contributed Comments 4

User Comment
poomie83 So if a company uses debt to fund a new project is that classified as avoidable interest? And it cant be less than interest from other activities?
moneyguy I think Avoidable Interest = Mkt Interest Rate. Not sure, though. :)
robbiecow The amount of interest that an organization would have avoided if it had not made the expenditures for an asset.

Great illustration: http://www.wiley.com/college/kieso/trans/ch10.pdf
carlo_it to be reviewed
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