16. Replacement fund.—In order that the needed capital may be on hand when it is necessary to pro vide for replacements, a fund may be provided by setting aside out of cash an amount equivalent to the annual charge for depreciation. If this fund is in vested in safe interest-bearing securities the neces sary cash will be provided from which to purchase new equipment without the need of additional financing or without crippling the working capital of the busi ness. The objection to this plan is that the busi ness can earn very much more profit from the em ployment of capital in production, than it can in in , terest from money invested in this manner; further more, as the replacements will probably be made gradually, they can be provided for from the general cash funds of the business without interfering with the business in any way. The replacement fund or depreciation fund is very seldom found in ordinary manufacturing organizations.
17. The advantages of a plant lectger.—Much of the difficulty that surrounds this general question will be dissipated if the organization maintains a plant or equipment ledger wherein each article or unit of equip ment is given a separate account in which is shown the original cost, the cost of annual repairs and renewals, the amount of depreciation provided an nually, and the residual or book value at the end of each year. In large undertakings the use of such a ledger is almost an absolute necessity if anything re sembling accuracy is desired in the plant account. As an illustration of the difficulties that are encountered in handling the property accounts on the books and in arriving at the approximate life of machinery, the following case which came within the experience of the writer, may prove of interest: A manufacturing corporation desiring to instal a new stationary engine, removed the one in use and set up another in its place; the old engine was shipped to a subsidiary com pany having a smaller capacity than the parent com pany, and was charged to the subsidiary company at its book value on the books of the parent com pany. The engine continued to give good service for a number of years and only ordinary repairs and re newals were necessary. Owing to a flaw which had remained undetected for a number of years, the crank shaft broke and the plant manager, giving the engine number, wired the engine builders for a new shaft. The manager found to his dismay that the engine builders had destroyed all patterns of this type of en gine because of their belief that such an old style was no longer in existence. This being the case, it was necessary for the builders to send mechanics to the plant in order to get the measurements necessary to make a new crank shaft.
18. Moving and altering a may be neces sary to move a plant or to rearrange the machinery within it. • Undoubtedly this expense would not be undertaken by a business concern unless it was felt that a saving thru operating efficiency, or other economies in management would result. This raises the question as to whether or not such expense is properly capitalized. It is probably inexpedient to capitalize such expense but a better plan is to charge it off against the revenue account in the year in which the expense was incurred. If, however, it is felt by the management that a distinct benefit will be real ized, it may be proper to spread the expense over several years, carrying it in the balance sheet as a de ferred charge to future operations. This would be the advisable course if the expense was considerable and if it was reasonably certain that economies in management expense would result from the change.
19. Improvements made upon leased property.— In connection with improvements made upon leased property and permanent machinery and fixtures pur chased, the provisions of the lease must always be given consideration. If the lease provides that the machinery and equipment cannot be removed at the expiration of the lease, it is evident that the life of the asset is coterminous with the life of the lease, and that the value thereof must be written away against profits during the number of years that the lease has to run.
20. Transfers of equipment from one station unit to another.—In the electric light industry the ques tion of the transfers of equipment from one station unit to another frequently raises interesting questions; thus, if a certain type of generator becomes inade quate and it is considered desirable to instal a larger type and remove the old generator to a new station where it will adequately serve the purpose, the ques tion will be raised as to what value should be used in charging the old generator to the new station unit. It is urged by some that the book value should be taken; others hold that the market value of the equip ment should be employed. The market value of sec ond-hand electrical equipment is very low and usually under its actual value. Furthermore, no one can tell the market value of the equipment because it has not been offered for sale. It would seem better to trans fer such equipment at its book value provided that proper depreciation charges have been made during prior years based upon the estimated operating life of the equipment. The expense of the second instal lation should not, however, be capitalized.