For companies in an expansion phase, capitalizing interest may result in higher earnings over an extended period of time, compared to expensing interest.

Question

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Capitalizing interest means adding it to the cost of a long-term asset instead of immediately expensing it. This results in a higher value for the asset and lower expenses in the current period, which can lead to higher earnings over an extended period of time. However, it is important to note that this practice can also inflate earnings in the short-term, and may not be sustainable if the underlying asset does not generate sufficient income to cover the higher interest expense in future periods.

For Companies in an Expansion Phase, Capitalizing Interest May Result