Capitalization of interest costs results in higher reported net income in the period of capitalization and lower net income in future periods.

Question

Quizplus · Accepted Answer

Capitalization of interest costs adds the interest expense to the cost of a qualifying asset, increasing the amount of depreciation expense charged in future periods. This results in lower net income in future periods compared to if the interest expense was expensed when incurred. However, in the period of capitalization, the reported net income is higher because less interest expense is recognized as an expense and instead is added to the cost of the asset.

Capitalization of Interest Costs Results in Higher Reported Net Income