tarunajwani

The only thing i can think of is that it is the full amount of the capitalization vs. Expensing it in that given year

But yes again as you say, even so it affects the interest expense line.

That's it im not sleeping tonight

- Guille

Uranus08

Has to be errata, has to be

- Guille

sameeragarwal

Agreed. EBIT is the same at time 0 and would be lower by depreciation amount (interest portion) in following periods.

defour44

I figured out how they screwed up the answer key. The correct answer is absolutely C.

The reason why the answer key is wrong is because they mislabeled the figures in the original question and the answer key person got confused. Follow me here:

If you look at the Income Statement all values are denoted in thousands.

This means 3,510 in reported expenses is 3 million, 510k in expenses.

Now go to the footnotes.

The footnotes say Interest Costs (in *MILLIONS*)

What CFA is NOW saying here is now that the interest expense is 3 billion 510 million a year. It makes 0 sense. How does a company doing 1.1 B in revenues have 3.5 billion in interest costs. Whatever, let's go with it 30 K in capitalized interest expenses is now a huge 30 million.


Then you go to the answer key and what should have been the $4.0 M in software capitalization expense being greater than the 30,000 in interest cost is now LESS than the 30 million in interest costs, so they picked interest costs as the answer.

If they had properly labeled the figures, it would have come out to software development capitalization increasing EBIT the most, not interest costs.


I sat for 5 mins looking at these figures going.. WTF... ??? wtf ??? how are they booking 3.5 billion in interest costs on a $1.1 B topline business. these guys are Enron^2.