EOC 2012, Reading 21, page 112, #8 Interest Coverage ratio - capitalized or expensed interests

P

Pitmaster1

New member
Joined
Jun 18, 2026
Messages
0
Reaction score
0
Hi, I have not found the awnser on the forum.
The question is if capitalization of interests instead of expensing results in lower, higher or unchanged Interest Coverage Ratio …
The awnser according to CFAI is that IntCov rario is unchanged.
I hoped that the awnser is that it will be higher…
Maybe there is special context but I am not able to find it…
Anybody please could explain me why is unchanged.
 
This is very interesting.
I know Interest expense is not the same under both method. to prove my point you can look at page 89 and see that you dont have interest cost under a operating lease.
looking at the answer, CFAi says that you have to adjust your interest expenditure and both the expensed portion and capitalized portion should be used. so even if it’s not reported as a interest expense on the operating lease, you should adjust for it.
hope this help
 
Look into solutions, they write that this ratio is based on interest payments not interest expenses, that’s why there is no changes. Formula 32 on page 4 - interest coverage=EBIT/Interest payments.
 
wouldn’t capitalising affect EBIT though? because of the depreciation? or do you adjust for that….
 
even i have the same question as kiakaha , coz as far as i know capitalizing interest would change the EBIT but not the interest cost…..coz in the years interest is capitalized its a allocated to Income statement thru deprecation and would also result in lower int exp which would increase the interest coverage ratio??? correct me if m wrong ?
 
Marymay wrote:
Look into solutions, they write that this ratio is based on interest payments not interest expenses, that’s why there is no changes. Formula 32 on page 4 - interest coverage=EBIT/Interest payments.
Click to expand...
If we analyse payments, there is no change …but
The point is that we know this after look at the awnser ….. I will not see the awnser during the exam.
So the regular interest coverage is based on interests payments or expenses ?
 
You must log in or register to reply here.
Back
Top