Expensing Interest Now and Later
Johnson & Johnson reported the following in its 1998 annual report:
Consolidated Statement of Earnings
|
(Dollars in Millions Except Per Share Figures) (Note 1) |
1998 |
1997 |
1996 |
|
Sales to customers |
$23,657 |
$22,629 |
$21,620 |
|
Cost of products sold (1998 includes $60 of inventory |
|||
|
write offs for restructuring) |
7,496 |
7,152 |
7,018 |
|
Gross profit |
16,161 |
15,477 |
14,602 |
|
Selling, marketing and administrative expenses |
8,907 |
8,715 |
8,394 |
|
Research expense |
2,269 |
2,140 |
1,905 |
|
Purchased in process research and development |
|||
|
(Notes 15 and 17) |
164 |
— |
— |
|
Interest income |
(262) |
(203) |
(139) |
|
Interest expense, net of portion capitalized (Note 3) |
110 |
120 |
125 |
|
Other expense, net |
151 |
129 |
284 |
|
Restructuring charge (Note 15) |
553 |
— |
— |
|
11,892 |
10,901 |
10,569 |
|
|
Earnings before provision for taxes on income |
4,269 |
4,576 |
4,033 |
|
Provision for taxes on income (Note 6) |
1,210 |
1,273 |
1,146 |
|
Net earnings |
$ 3,059 |
$3,303 |
$ 2,887 |
|
Basic net earnings per share (Notes 1 and 19) |
$ 2.27 |
2.47 |
2.17 |
|
Diluted net earnings per share (Notes 1 and 19) |
$ 2.23 |
2.41 |
2.12 |
Notes to consolidated financial statements (In Part)
The Company capitalizes interest expense as part of the cost of construction of facilities and equipment. Interest expense capitalized in 1998, 1997, and 1996 was $71, $40, and $55 million, respectively.
Required a. What is the amount of gross interest expense for 1998, 1997, and 1996?
b. What is the interest reported on the income statement for 1998, 1997, and 1996?
c. What was the interest added to the cost of property, plant, and equipment during 1998, 1997, and 1996?
d. When is capitalized interest recognized as an expense? Describe.
e. What was the effect on income from capitalizing interest? Describe.