Any insurance, either fire, employer's liability or general liability, paid during the period of construc tion is a proper charge to the construction account.
It is sometimes necessary to demolish a structure for the purpose of erecting a new one. There are two theories about the tteatment of the loss occasioned by the demolition of the existing structure. One is that the loss is a necessary and incidental expense in the erection of the new structure, and therefore should be capitalized in the cost of the construction. The other theory has supporting it the economic doctrine of the place value of land. It would, of course, be an un wise proceeding for a concern to purchase land and pay for an existing structure only to demolish it to make way for a new establishment. In fact, a busi ness undertaking would not be likely to do this unless it were distinctly profitable for it to have its plant lo cated, or the new structure erected, upon this particu lar parcel of land.
12. Repairs, renewals, additions, betterments and considerations of the subject of the valuation of building necessarily must deal with these items. They have been so fully discussed in the volume on "Accounting Practice," however, that it is necessary here only to call attention to the fact that the valuation of assets in the balance sheet must al ways be considered with the qualifications that the business has made the proper differentiation between capital and revenue expenditure.
13. Importance of segregating the investment in equipment account will include the expenditure for building equipment and power-plant equipment, such as boilers, dynamos, engines, heat ing plant, ventilating system, and water connec tion.
It is not our purpose here to discuss at length an ideal classification equipment, even if such a classi fication could be prepared. It will be sufficient to ob serve the general principles upon which equipment may be classified. One of these is according to the life of the equipment, that is, classifying all units with the same relative period of utility in special accounts, so as to enable the provision for depreciation to be as certained more readily. It may also be classified ac
cording to kind. In this division under the account, "boilers and accessories," would be included all of the boilers and boiler apparatus and accessories that were being used in the production of steam. These would include the valves, main steam line, grates and flues, smokestacks and chimneys, and foundations and set tings, together with mechanical stokers and ash re movers, etc., etc. The entire investment in this class of equipment might appropriately be carried in one account. Still a third method of classifying equip ment might be according to the manufacturing units. All property investments would be classified in the general ledger by operating units or plants, and a sub sidiary record for each unit, setting forth classes or kinds of equipment, would be provided. Whichever method is used, it must be remembered that certain kinds of equipment which are installed in leased prop erty may become part of the realty and may not be removed. Consideration must be given to this factor when any of the property of an undertaking is occu pied under lease.
14. Machinery and fixed tools.—Ordinarily the general ledger would show a machinery and fixed tools account, and if the investment is at all large, a subsidiary record should be provided for equipment of this class. The reader will recall that in the volume on "Accounting Practice" certain principles concern ing the valuation of machinery and equipment were discussed, especially the treatment to be given to equipment manufactured by the organization itself. Tools and equipment having a period of utility of less than one year, should not be charged to this account. Because of the necessity of replacing them immedi ately, it is better to charge such tools and equipment direct to the income account. If this practice is fol lowed, the original outlay for short-life equipment / can be capitalized and it would then represent the total sum necessary properly to equip the organiza tion with these short-life assets. This procedure would avoid the unsatisfactory and time-consuming method of providing annually for depreciation on equipment of this type.