Accounting theory and practice, Volume 2 (of 3) : a textbook for colleges and…

3. Fixed equipment including boilers and piping

854 words | Chapter 50

(a) Excessive and irregular strains (b) Interior causes of decay (c) Chemical action —all these being of greater or less effect, according to the time of daily usage and lack of periods of rest.”[29] [29] R. P. Bolton in “Power for Profit.” Policies as to Repairs Without doubt the most important single factor in the determination of the depreciation rate is the normal policy as to repairs and maintenance. Physical deterioration is constantly at work. If this is counteracted by a liberal maintenance policy, not only is more efficient service secured but a longer service life is thereby insured. As soon as repairs are needed, although the efficiency of the asset may not be immediately impaired, the _rate_ of deterioration is much accelerated unless the condition is corrected. Deterioration takes place day by day, but repairs obviously cannot be made at such short intervals—both because of the difficulty of detection and also because such a policy would not be economically practical. Every concern must consider its own peculiar problems and determine from these what shall constitute its normal repairs policy, and so far as possible this should be adhered to. The charges for repairs are bound to be of a more or less irregular character. Their handling is discussed on page 147. Regardless of what the established policy as to repairs may be, conditions are sure to arise which make strict adherence to it impossible. There may occasionally be lack of funds at the time repairs are customarily attended to; it may be impossible to get the expert labor needed or the parts to replace worn-out units; or, and of oftenest occurrence, the need of repairs may coincide with a period of intense activity when the plant is being worked to its limit and in consequence there is no opportunity for making repairs. It is clear that rates based on one shift and the normal use of equipment during eight hours would be inadequate for three shifts and twenty-four hours of use; for in addition to a threefold intensity of operation this makes impossible adherence to the normal repairs policy based on an eight-hour schedule. Depreciation Rate an Engineering Problem From the above discussion it is apparent that the determination of rates is essentially an engineering problem. The accountant, however, needs a knowledge of the fundamental considerations and requirements of fixing depreciation rates and an appreciation of the difficulties of the problem. As Henry Floy[30] says: “What engineer is able to foretell the misuse and neglect or care and high degree of maintenance that any given apparatus or ... property as a whole will receive, even during the next five or ten years, with vicissitudes of climate, load conditions, changes of management, and requirements of the public?” On the other hand, in the opinion of another prominent engineer, “Consideration of these matters (misuse, neglect, etc.) may eventually form the basis for a systematic appraisal of the probabilities of life, or average of the risks, which would provide a method for the insurance of the life of machinery.” [30] In “Value for Rate-Making.” The author does not attempt to discuss the relative merits of the two contentions other than to point out the fact that engineers are not discouraged in spite of the many contingencies and uncertainties inherent in the problem. They are constantly gathering data from which conclusions as to rates are being formed, the use of which is being compelled by regulating bodies. It is possible that the problem will ultimately be worked out on some kind of an insurance basis. Attitude of Regulatory Bodies At the present time the attitude of most regulatory bodies—public service boards, federal commissions, and tax officials—is well expressed by a regulation of the Public Utility Commission of New Jersey which says that, “Until otherwise prescribed, the amount estimated to be necessary to cover such wear and tear and obsolescence and inadequacy as have accrued during any month shall be based on a rule to be determined by the accounting corporation; such rule may be derived from a consideration of the said corporation’s history and experience. A general statement of the rule in use by each company, together with the general information upon which it is based, is to be filed with the Board of Public Utility Commissioners.” The trend at the present time is towards a more thorough supervision of depreciation rates on the part of many public service boards, and the future will undoubtedly see interesting developments. Methods of Handling Repairs Three distinct practices are met with in handling repairs and renewals on the books. The most general method is dictated by ease of application and rests on the theory of averages, viz.: that the amount of repairs annually recurring for depreciating equipment in all degrees of deterioration and all stages of decay and age is a fairly constant figure which secures an equitable distribution over the product of the different years. The larger the plant and the greater the variety of the equipment used, the more nearly does this work out as expected. Further consideration will be given to this point in the discussion in

Chapters

1. Chapter 1 2. Introduction of System 3. 1. PROPORTIONAL METHODS 4. 2. VARIABLE PERCENTAGE METHODS 5. 3. COMPOUND INTEREST METHODS 6. 4. MISCELLANEOUS METHODS 7. 1. PROPORTIONAL METHODS 8. 2. VARIABLE PERCENTAGE METHODS 9. 3. COMPOUND INTEREST METHODS 10. 4. MISCELLANEOUS METHODS 11. Introduction 12. Introduction 13. CHAPTER I 14. 5. Debenture 15. CHAPTER II 16. Introduction of System 17. Chapter XXXVI, a cash discount is usually treated as a financial 18. 6. Indexing vouchers. 19. 4. It localizes responsibility by showing authority for 20. 5. It secures a receipted bill for all disbursements of cash. 21. 1. Clumsy provision for returns and allowances, partial 22. 3. The giving out of information about the business 23. CHAPTER III 24. CHAPTER IV 25. 2. Deferred Charges to | 2. Deferred Income 26. 5. Fixed Assets | 27. 4. For publication or report to regulating or 28. 6. For advertising purposes to float new issues 29. CHAPTER V 30. 12. Liquidation or forced-sale value, etc. 31. 1. For the current assets, the principle of valuation may be stated 32. 2. The principle of valuation involved in deferred charges to operation 33. 3. For the fixed assets, the principle of valuation generally 34. CHAPTER VI 35. 2. The managerial policy as to repairs, maintenance, 36. 3. The past performance and expected future performance 37. 4. All other factors locally present which may affect 38. Chapter XIII.) 39. CHAPTER VII 40. 5. Crystallization[25] 41. CHAPTER VIII 42. 2. Rates of depreciation and their relation to repairs, 43. 5. Financing depreciation and some related problems. 44. Chapter IX. 45. 4. Normal climatic conditions. 46. 5. Probable misuse and neglect brought about by the 47. 6. Probable change in ownership and consequent 48. 7. Probable change in the requirements of the market, 49. 2. Installed operating and generating machinery 50. 3. Fixed equipment including boilers and piping 51. Chapter X of the effect of the various methods used for calculating 52. CHAPTER IX 53. 4. Miscellaneous Methods 54. 4. Under some methods, an arbitrary interest rate 55. 1. PROPORTIONAL METHODS 56. 2. VARIABLE PERCENTAGE METHODS 57. 3. COMPOUND INTEREST METHODS 58. 4. MISCELLANEOUS METHODS 59. CHAPTER X 60. 2. Inadequacy, which is lack of capacity to do the 61. 3. Obsolescence, which represents the inability to 62. 1. PROPORTIONAL METHODS 63. 2. VARIABLE PERCENTAGE METHODS 64. 3. COMPOUND INTEREST METHODS 65. 4. MISCELLANEOUS METHODS 66. Chapter XI. 67. CHAPTER XI 68. 2. Estimate of life in periods, working hours, service 69. 5. Periodic appraisal value. 70. 3. Profits of the past may be reserved in the business 71. CHAPTER XII 72. Introduction 73. 4. Bank 74. 1. Cash deposited to cover breakage or damage to 75. 2. Moneys advanced to subsidiaries, salesmen, and other 76. 3. Claims against creditors for returned or damaged 77. 4. Prepayments on purchase or expense contracts, as 78. 5. Unpaid calls or instalments on stock subscription 79. 6. Claims against absconding officers for property 80. 1. In the case of a new concern where there is no past 81. 2. In the case of an outsider—a professional auditor 82. 3. Periodically, in any business, as a check on the 83. 1. The amount of outstanding trade debt at the time 84. 2. The amount of sales on credit made during the 85. 3. The total sales, both cash and credit, for the present 86. CHAPTER XIII 87. 1. Carry the market valuation, whether more or less 88. 2. In case market value is less than cost, set up a reserve 89. 3. Carry in an inner column in the body of the balance 90. Chapter XXVI of this book, where a full presentation of the case for 91. CHAPTER XIV 92. CHAPTER XV 93. 1. By practically full ownership of the subsidiary 94. 3. Through the agency of advances, particularly when, 95. CHAPTER XVI 96. Chapter IX, is the one most widely employed. It is to be preferred to 97. CHAPTER XVII 98. 1. If the building is purchased outright for cash, whatever costs 99. 2. If the building is bought by the issue of stocks or bonds, the 100. 3. When buildings are put up by the concern itself, full cost may 101. Chapter XVI, any increase or decrease in the value of the land cannot 102. CHAPTER XVIII 103. 1. _Time Lapse._ There is no such thing as wear and tear on a patent 104. 2. _Supersession._ If no other causes than time lapse were operative, 105. 3. _Obsolescence._ Akin to the element of supersession is that of 106. 1. Lump sum payments to the state or some division 107. 2. The full purchase price paid another company for 108. 3. Legal and other fees in connection with securing 109. 4. Any other legitimate expenses, such as the cost of 110. CHAPTER XIX 111. 6. Merchandise Inventory 112. Chapter XX, in the discussion of the liability, bonds. 113. CHAPTER XX 114. 1. The character of the issuing corporation under 115. 2. The security of the bonds under which come: 116. 3. The purpose of the issue, as: 117. 4. The conditions incident upon payment of principal 118. 4. A bond sold at par to be redeemed at a premium on maturity. 119. CHAPTER XXI 120. CHAPTER XXII 121. 2. Profits realized on sales of fixed assets should be first applied 122. 3. A sufficient surplus should be accumulated (in addition to the 123. CHAPTER XXIII 124. Chapter XXII, have their proper place of record direct into some margin 125. Chapter XXV on sinking funds for a full discussion of the merits and 126. 2. Reserves created to provide an additional capital 127. 3. Reserves created to provide for equalizing dividends 128. 1. Valuation Reserves 129. 5. Market Fluctuations Reserves, etc. 130. 2. Proprietorship Reserves 131. 3. Reserves for Working Capital, etc. 132. CHAPTER XXIV 133. Introduction 134. CHAPTER XXV 135. 1. The sinking fund, then, under suitable title, may appear only among 136. 2. The balance sheet may record the sinking fund status among the 137. 3. There may appear on the balance sheet as the only evidence of a 138. 4. There may be no record of the sinking fund transactions shown on 139. 1. Those dealing with the original and subsequent 140. 2. Those required to book the trustee’s periodic 141. 3. Those to show the redemption of the debt and the final 142. CHAPTER XXVI 143. 1. The difficulty of determining the rate at which 144. 2. Inasmuch as the amount of investment in current 145. 3. If interest is to be charged, how shall the offsetting 146. 4. The introduction in production costs of a more or 147. 5. As the business world is accustomed to consider 148. CHAPTER XXVII 149. Chapter XXIII on “Reserves and Surplus.” There the illegitimate use of 150. CHAPTER XXVIII 151. 1. To convey, transfer, conceal, or remove, or to permit 152. 2. To transfer while insolvent any portion of the property 153. 3. To make a general assignment for the benefit of 154. 4. For the debtor to admit in writing his inability to 155. 5. To suffer or permit, while insolvent, any creditor to 156. 1898. The courts of the Federal Government have jurisdiction in these 157. CHAPTER XXIX 158. 1. Agreement by the directors of the various companies 159. 2. Assent of the stockholders of each company to the 160. 3. Filing of certified copies of the agreement, with the 161. 4. The exchange and issuance of new stock for the 162. 1. A uniform accounting system for all the companies 163. 2. The reserves for depreciation should be based on 164. 3. Costs should be determined in the same way if the 165. 4. The apportionment of labor, factory expense, and 166. 5. Only real items of cost should be included under the 167. 6. The same methods of inventory-taking, both of 168. 7. The amount of orders on hand should be considered. 169. CHAPTER XXX 170. 2. A proper rate of turnover on the merchandise 171. 3. Economical management. 172. 3. Facilities for centralizing and comparing such

Reading Tips

Use arrow keys to navigate

Press 'N' for next chapter

Press 'P' for previous chapter