Capitalized interest. Granite Construction. Business & Marketing Essay (Essay Sample)

Granite Construction
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Capitalized Interest
Capitalized interest is the interest charged when acquiring assets. It is usually the compound interest on a loan taken to purchase or construct long-term assets. It is part of the historical cost of acquiring assets that require a period to be set up for their intended use, and thus forms part of the value of an asset. This interest is part of long-term debt.
Instances When Interest is Capitalized
In accrual accounting, capitalized interest is used to obtain the acquisition cost of an asset (He & Pages, 1993). Many companies finance their long-term assets through debt. Business leaders looking at significant capital investments for the long-term growth strategy of their company must consider how capitalized interest affects both short-term working capital and long-term liabilities (Bikker & Vervliet, 2018). In this regard, the maintenance of sound financial records gains a lot of importance.
Companies seeking capital investment must have substantial financial books showing good credit, sufficient revenue, and reasonable working capital. Business managers and directors generally seek the services of a certified accountant to help with the preparation of these financial records. If the financial reports and statements fail to show the parameters as mentioned above, the business plan must have a strong case. Otherwise, the company will have to take efforts to cut costs and stabilize revenues and profits (He & Pages, 1993). These measures will ultimately support the procurement of capital investment.
The Generally Acceptable Accounting Principles (GAAP) permits companies to avoid incurring interest for such debt and instead include it on balance as part of the costs of long-term assets. The amount of capitalized interest is the accrued interest on the compound interest owed; an accumulated amount, in this case, refers to the amount of interest that has remained unpaid since the previous payment. By compounding interest, the acquisition cost of a loan increases over time since future-owed interest is considered as charged interest as well (He & Pages, 1993). Examples for which capitalized interest is allowed include real estate, production buildings, facilities, operating equipment, a new fleet of delivery vehicles, and cruise ships.