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

depreciation on the equality of the distribution of the charge. Another method, used in plants where a very accurate determination of the costs of production is desired, has as an outstanding feature a preliminary estimate, made at the time of installation, of the expected amount of repairs needed during the entire life of the asset. Periodically this estimate, or proportional share thereof, is brought on the books as a charge to Repairs and credit to Reserve for Repairs and so is spread evenly over the service life of the asset. As repairs are actually made, the cost of these is not charged against operation but against the reserve created for that very purpose. At a given time, the status of the reserve account shows: (1) if the equipment has just been placed in a normal state of repair, the under-or over-estimate of the amount of actual repairs needed, or (2) if the equipment is not in repair, the reserve account gives an index of the probable amount of deferred maintenance. Both items of information are of value in the proper management of properties. It is to be expected, of course, that during the early years of the life of an asset there will be a fairly large credit balance in the reserve because repair charges are light. The credit balance so accumulated will be needed during the later years when the costs of maintenance become heavier. The third method, which is a variation of the second, has as its characteristic feature the inclusion of the repairs cost with the depreciation charge. This likewise necessitates a preliminary estimate of the amount of expected repairs during the life of the asset. Instead of being handled separately, it is added to the depreciation rate and in this way charged against the product. This method has been prescribed in the case of some utilities in England but is not much used here. Under this method two depreciation estimates of probable life are necessary, viz.: (1) maximum life brought about by an inclusion of repairs, renewals, etc., and (2) minimum life without such repairs. By this it is not meant that other methods of calculating the depreciation rates fail to take cognizance of the repairs factor, but that this method specifically calls attention to it and includes it in the charge made. It seems best for regulatory boards to make a separate book record of repairs and depreciation, thus insuring against any oversight of the factors of depreciation and also insuring the correctness of a statement of condition.