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.