Reference no: EM131002066

Expensing interest now and later

	2006		2005		2004
Sales to customers	$53,324		$50,514		$47,348
Cost  of  products sold	15,057		14,010		13,474
Gross profit	38,267		36,504		33,874
Selling, marketing and administrative expenses	17,433		17,211		16,174
Research expense	7,125		6,462		5,344
Purchased in-process research and
development (Note 17)	559		362		18
Interest income	(829)		(487)		(195)
Interest expense, net of portion
capitalized (Note 3)	63		54		187
Other (income) expense, net	(671)		(214)		15
	23,680		23,388		21,543
Earnings before provision for taxes on  income	14,587		13,116		12,331
Provision for taxes on income (Note   8)	3,534		3,056		4,151
Net earnings	$11,053		$10,060		$  8,180
Basic net earnings per share (Notes 1 and  19)	$    3.76		$    3.38		$    2.76
Diluted net earnings per share (Notes 1 and  19)	$    3.73		$    3.35		$    2.74

3.  Property, Plant and Equipment

At the end of 2006 and 2005, property, plant and equipment at cost and accumulated depre- ciation were:

Dollars in Millions

	2006		2005
Land and land improvements	$       611		$        502
Buildings and building equipment	7,347		5,875
Machinery  and equipment	13,108		10,835
Construction in progress	2,962		2,504
	24,028		19,716
Less accumulated depreciation	10,984		8,886
	$13,044		$10,830

 The company capitalizes interest expense as part of the cost of construction of facilities and equipment. Interest expense capitalized in 2006, 2005 and 2004 was $118 million, $111 million and $316 million, respectively.

Depreciation expense, including the amortization of capitalized interest in 2006, 2005 and 2004 was $1.6 billion, $1.5 billion and $1.5 billion, respectively.

Upon retirement or other disposal of property, plant and equipment, the cost and related amount of accumulated depreciation or amortization are eliminated from the asset and accumulated depreciation accounts, respectively. The difference, if any, between the net asset value and the proceeds is recorded in  earnings.

Required:

a. What is the amount of gross interest expense for 2006, 2005, and 2004?

b. What is the interest reported on the income statement for 2006, 2005, and 2004?

c. What was the interest added to cost of property, plant and equipment during 2006, 2005, and 2004?

d. When is capitalized interest recognized as an expense? Describe.

e. What was the effect on income from capitalizing interest? Describe.

f. Compute times interest earned for 2006, 2005, and 2004. Comment on the absolute amounts and the trend.