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Capitalized interest vs expense for self-constructed assets

Case 7-1, Expensing Interest Now or Later is a scenario from Johnson and Johnson & Subsidiaries, Consolidated Statements of Earnings for 2001, 2000 and 1999.

The first three questions relate to expensing and capitalizing interest , plus identifying it in the financial statements. The fourth question asks when capitalized interest is recognized as an expense. The fifth question asks about the income statement effect for interest which is capitalized.

See attached file for full problem description.


Solution Preview

a. Gross interest expense for 2001, 2000 and 1999 will be the total of interest that was expensed plus interest that was capitalized. Picking up the only amounts we have available in the problem, 2001 would be $153 + 95 = $248M. Same calculation for the other two years.

b. Interest reported on the income statement is clearly labeled as $153, 204 and 255 respectively for 2001, 2000 and 1999.

c. The amount capitalized, or ...

Solution Summary

The solution explains where capitalized interest is on the balance sheet, when it will come off the balance sheet, and the effect to the income statement in both cases.