Essay about Capitalization

692 Words Dec 10th, 2012 3 Pages
TThe basic rules for interest capitalization are set forth in
Statement of Financial Accounting Standards (SFAS) No. 34,
Capitalization of Interest Cost. Under this statement, interest incurred throughout the construction period of a project should be included as part of the cost of the asset under construction rather than reported as an expense of the period. The construction period extends from the initial preconstruction activities
(e.g., obtaining necessary permits) until an asset is ready to be placed into service.

Capitalizing interest is not optional. Generally accepted accounting principles require the capitalization of interest given the proper circumstances.
Addressing the three questions of 1) does the asset qualify,
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If this entire expense is accounted in the acquisition period of the asset, it would greatly reduce the reported earnings of the company for that period and increase earnings for the later periods. In order to delay the recoginition Yet, through the accounting provisions stated in the FASB codification, some of these interest expenses can be capitalized. The purpose of capitalization of these interest costs is to through loans. construction of a new manufacturing facility construction of a new manufacturing facility entail many expenditures. Financing expenditure most The d construct of a new manufacturing facility inLong-lived assets are those that provide the company with a future economic benefit beyond the current year or operating period. It may be helpful to remember that most (but not all) long-lived assets start as some sort of purchase by the companyof
The construction of the manufacturing facility which is a part of the expansion process, qualifies as an asset for which interest must be capitalized. According to the requirements, the manufacturing plant will be ready for its intended use after a period of time. Also it is being constructed for the company’s internal use. expansion process which includes the construction of a manufacturing facility entails expenditure which requires borrowing. and construction of the manufacturing facility and
In order to qualify as an asset for which interest must be capitalized,

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