CFA Practice Question

CFA Practice Question

Which of the following is (are) true?
A. If a firm is leveraged, capitalization of interest is required even if the debt is not directly related to the construction project.
B. Capitalization of interest costs is limited to assets under construction for the firm's own use.
C. A firm cannot capitalize imputed interest costs if it is not leveraged.
Explanation: This is based on SFAS 34.

User Contributed Comments 9

User Comment
humphrey have question on A: SFAS 34 stated 'interest is capitalized for certain assets and then only if the firm is leveraged.' it is not required capitalization. when the debt is not directly related to construction project, are we still 'required' to capitalize the interest?
murli I think even A is true, because if a firm is leverage, we do take the cost of average debt for capitalization!
johnsk First, it is for certain assets only. Second, the amount of capitalization is limited. Third, the purpose of the asset is for the firm's own use. Four, it is not required. Therefore, A is false.
mtcfa A is not necessarily true because the construction project in question must be leveraged (i.e. debt used to construct the asset).
steved333 Whenever it benefits the company, you can (most of the time) be sure that it is not REQUIRED, just ALLOWED.
escempep B is false because I can see on my notes that : "in a situation where an asset is being constructed for future sale rather than internal use, the capitalized interest would be classified as inventory on the balance sheet, with the amount expense as part of COGS when the asset is sold"
prajacti absolutely agree with escempep. look up in V3 FSA text book, pg 338. B is not true
pepper option B "limited' gives it away.
bidisha Good point steved
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