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

[25] A. S. C. E., Vol. 31, page 220, article by R. Montfort. A. S. C. E., Vol. 40, page 178, article by C. H. Snow. Association Engineering Societies, Vol. 31, page 49, by F. W. Hodgson. U. S. Gov’t, Bureau of Entomology Bulletin #94, Pt. 1, by T.E. Snyder. U. S. Gov’t, Bureau of Plant Industry Bulletin #64, by G.T. More and K.F. Kellerman. U. S. Gov’t, Bureau of Plant Industry Bulletin #76, by G.T. More and K.F. Kellerman. U. S. Gov’t., Dep’t of Agriculture, Forest Service, Circular #128 by C. S. Smith. Losses and deterioration from these causes are quite appreciable in some enterprises. Telephone poles are subject to attack by borers and woodpeckers. “More than 50% of the weight of the wood may be removed ... without being greatly manifested upon the surface.” “At least 10% of the chestnut poles reset or replaced are injured by insects.” Railroad trestles, bridges, docks, piers, wooden shipping, and structures of all sorts are more or less subject to this kind of depreciation. Minute vegetable growths known as algae may cause a marked depreciation in a water utility. Other forms of vegetable and animal organisms sometimes cause growths in water-pipes, resulting in a partial shutting off of the capacity. Similarly, mineral growths may produce like effects. Iron oxide (common rust) and lime deposits or scale are frequent causes. _Electrolysis._ Depreciation caused by electrolysis is a highly technical subject, discussion of which will not be attempted here. “Electrolysis is a chemical decomposition produced by an electric current. As applied to utilities, electrolysis is the disintegration of metal structure caused by the electrolytic action produced by stray electric currents, generally from the return circuits of single trolley electric railways.” The damage, both direct as above stated, and indirect as in the leaking of water, gas, etc., or in the flooding of adjacent premises or injury through gas explosions, is recognized by the courts, but the satisfaction granted is limited to enjoining a continuance of the injury. _Molecular Change._ In some kinds of machinery subject to heavy strain and shock when in use, a disintegration of the structure itself takes place whereby its resisting power and therefore its efficiency are greatly impaired. This condition is known as a crystallization of the molecules. _Depletion._ Finally depreciation due to contingent causes may be brought about by a diminution in the supply. This is more in the nature of a depletion charge and will be fully considered in connection with that subject treated on page 117. Terminable Rights The intangible property subject to depreciation consists of terminable or limited rights. Rights given or held for a definite period of time expire or waste away through the lapse of time. Decrepitude is the controlling factor here, and because of the definiteness of the length of time, the depreciation charge is easily calculated. Therefore provision must be made for it. Various methods, resulting in quite different charges to each period, are sometimes employed. These methods will be discussed in Chapters IX and X. Rights which are not terminable or limited—and even limited rights—may, however, be given up or abandoned. This is a situation which cannot usually be foreseen and therefore cannot be provided against except by means of a general reserve. Effective Depreciation One final point in connection with the causes of depreciation needs consideration. Though _all_ of these various causes or kinds of depreciation are seldom found operative on a given asset, frequently several of them are so operative. Where this is the case their effect is not cumulative. One or the other will prove a controlling factor in determining the service life of the asset and thus the amount of its periodic depreciation. There is a close relation between the operation of the chief factors in depreciation and the scrap value of the asset. Thus, if it is estimated that physical depreciation will be complete in 8 years, obsolescence in 10 years, and inadequacy in 12 years, scrap value would be slight. If, however, inadequacy is the controlling factor, becoming operative in 8 years, with obsolescence in 10 years, and physical depreciation in 12 years, clearly scrap value might be quite appreciable. Whichever factor is the controlling one, that factor is said in a given case to constitute the _effective_ depreciation for that asset. Thus, in the first case mentioned, physical depreciation constitutes effective depreciation and would form the basis for the estimated charge, while in the second case inadequacy is the effective factor.