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.
CHAPTER VIII
DEPRECIATION—FACTORS OF
RATE DETERMINATION
Fundamental Purpose of Depreciation
Under the head of accounting for depreciation, which forms the subject of this and following chapters, will be considered:
1. The purpose of the depreciation charge.
2. Rates of depreciation and their relation to repairs, renewals, and replacements.