When Computing the Amount of Interest Cost to Be Capitalized

question 40

Multiple Choice

When computing the amount of interest cost to be capitalized, the concept of "avoidable interest" refers to

• A)the total interest cost actually incurred.
• B)a cost of capital charge for stockholders' equity.
• C)that portion of total interest cost which would not have been incurred if expenditures for asset construction had not been made.
• D)that portion of average accumulated expenditures on which no interest cost was incurred.

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Definitions:

Depreciation Tax Shield

The reduction in income taxes that results from taking a deduction for depreciation on the company's tax return, effectively reducing taxable income.

Cash Outlays

Payments in cash for expenses or investments made by a business or individual.

Auto Leases

Contracts that allow a person to use a car for a set period of time in exchange for regular payments, without owning the vehicle.

Lessee

The party in a lease agreement that gains the right to use an asset in exchange for making payments to the lessor.