Orleans County monitor. [volume] (Barton, Vt.) 1872-1953, 1908-05-25
MUNICIPAL ELECTRIC LIGHTING.
Methods of Handling Depreciation.
PART II

There are In common use two meChOdS
for calculating the amount OF regular,
long run, reduced-to- rule depreciation,
for which allowance should be made
each year by any conservatlvely man
aged business enterprise. These are the
fixed proportion" method, so called.
and the fixed percentage" method.
By either of these methods it is an
estimate as to the engineering Facts
ESPECIALLY so in the case OF electric
lighting), which serves as the basis
for what the accountant does.
Under the fixed proportion method
of allowing for depreciation definite,
Interchangeable amount is reckoned each
year on the original, unreduced cost OF
the plant. This amount is obtained
by an average per cent estimated by
the engineer. Under the ''fixed per-
centage" method a definite per cent
is calculated on the reduced value
of the plant each year as written down
(for the purpose of this calculation)
the year before.
Obviously, this last method yields
a different amount from the other
method-an amount which grows less
wear by year. The distinction be-
tween the two methods is somewhat
confused by the fact that a fixed per
cent is used in both cases yet one is
specifically called the fixed percent
of cIro w ND
illustrate numerically.
The problem, let US say, is to- reduce
a piece of new construction, costing
81 900 to 500 residual junk value in 10
years. (Having solved the problem by
the two methods for $1,000, the re-
suits can be easily applied, of course,
to cost of plant item~of any number
of thousands.} By the ''fiXed proper
ton" method this is accomplished by
means of 10 annual "level payment =,
premiums (still following the analogy
of insurance., of $50 each. These
amounts leach eQualling 10 per cent on
the original value Of the asset are
deducted each year from the earnings,
and being added to the reserve item
in the balance sheet, sum up In $40
wears to 5000. That 5000 with the
proceeds of the sale for junk. 500,
make the 81 900 necessary to replace
the asset, supposing prices have
neither gone up nor down meanwhile.
The annual insurance ipremiums. OF
800, under this plan, may be deducted
from "total income" in the income
account each year, or they may be
added to the Operating expenses"
and so, being deducted from 'gross
income from operation, reduce met
income from operation. This last is
considered the better usage. (See the
current report of the Interstate Com
merce commission, PIP. 141 and 1907
By the second ''fxed pecentage'
method the result desired will be
accomplished if the diminishing value
of the asset is multiplied each year by
2O.57 per cent. Obviously the absolute
annual allowance will be taperlng
one instead of constant, as under the
first method. Thus the first year the
amount charged to depreciation account
will be S205.70; the second year
S163. SO: the ninth year $50. SO; and
the tenth year $25.87. The sum of this
series of payments is 5000, the same
as the sum of the series by the other
method. For a very obvious reason,
Z especially applicable in the case Of an
electric lighting enterprise, the second
of these two methods is the better OF
the two The outgo for repairs anc
renewals gets increasingly heavy the
older the plant becomes, and 1t the
charge for depreciation is heavier
during the first years and lighter during
the last years, the total cost Of ssoper
alton will be more evenly distributed
wear by year over the whole period
The maintenance account (repairs anc
renewals) of our municipal plant in
creased last year just about 81, OO(
over the year before.
Whether the charge for depreciation
is reckoned by the first method or by
the second method, in either cease ii
the amount carried each year to tn
item reserve for depreciation in tn
balance sheet is invested in fund t.
draw compound interest for the full
reduction period, then the element o
annual cost-this sort of book outgo-
will be reduced What the fund earn
by way of interest will be so nue.
burden taken off the shoulders of tn
plant. Thus to go back to our 81, 90
10 year problem and illustrate. B.
this last course of procedure, worke
on the basis of the fixed proportion
method, ST.. 55 placed each year III tn
fund will be sufficient with five pc
cent interest earned by the fund.- t
h.