Which of the Following Statements Is Correct Concerning Interest Expenditures

question 5

Multiple Choice

Which of the following statements is correct concerning interest expenditures incurred during the period of construction of capital projects?

• A) Interest expenditures may not be capitalized as part of the cost of general capital assets reported in governmental activities.
• B) Interest expenditures may be capitalized as part of the cost of general capital assets reported in the governmental activities accounts at the government-wide level.
• C) Interest expenditures must be capitalized as part of the cost of general capital assets reported in the capital projects fund.
• D) The capitalization of interest expenditures as part of the cost of general capital assets reported in the capital projects fund is optional.

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Definitions:

Financial Leverage

The use of borrowed funds to increase the potential return of an investment, amplifying both the potential gains and losses.

Unlevered Cost

The cost of investment or project financing without taking into account the impact of leveraging or borrowing.

Capital Structure

The mix of debt and equity financing used by a company to fund its operations and growth.

Interest Tax Shield

Deducting interest expenses on debt from taxable income leads to a reduction in income tax liability.