> > > >

1948-49 Theatre Catalog, 7th Edition, Page 520 (505)

1948-49 Theatre Catalog, 7th Edition
1948-49 Theatre Catalog
1948-49 Theatre Catalog, 7th Edition, Page 520
Page 520

1948-49 Theatre Catalog, 7th Edition, Page 520

pervises the accounting and tax returns of more than 100 theatres and accordingly was consulted regarding the above, has pointed out what they consider to be one of the most important modern developments affecting the theatre business. This development is the growing Treasury Department interest in salvage value.

In the first place, replacement prices on nearly everything have soared far beyond original purchase prices so that business men are complaining that their current depreciation rates are inadequate. To counter this, Treasury agents point to the fact that prices of second hand equipment and even scrap merchandise are soaring so that much used assets today are worth more in the open market than their original purchase price so that there should be little or no depreciation. Agents therefore are now carefully checking salvage values used in depreciation. And some agents are not only trying to cut down depreciation allowances in the year the asset is sold at the inflated price; but are insisting that depreciation deductions be reduced in all open years.

An Illustration

How devastating this could be, is easy to illustrate.

In 1930, John Jones bought complete new theatre seating at a cost of $10,000, and has very legally been charging off its depreciation on a 20-year basis with no salvage value. With only two more years of life expectancy, the $500 he charged to depreciation during 1948, or 18 years later, brings the remaining book value to $1000. However, the value of these seats in the open market today, i. e. salvage value, is $3000. No further deductions would be allowed until the

salvage value dropped below the depreciation book value.

And some agents might even insist that he go back through the open years since he reached a corresponding $3000 depreciated book value, and pay up on the $500 of additional profit each year therefore claimed.

The Tax Court has now indicated that it will back up the Treasury . . . A corporation owned about 45 pieces of automotive equipment which it depreciated at the rate of 25% per year. No salvage value was taken into account. The Commissioner approved the 25% depreciation rate, but held that a salvage value of 20% of the cost must be set up. The Tax Court agreed. It said that while the salvage value may have been negligible in pre-war years, the wartime shortage has boosted the value of used auto equipment. (W. H. Norris Lumber Company, Inc., T.C. Memo Dkt. No. 16314, 10/12/48).

Here is a subject to be considered by all theatre owners, and to be discussed with their tax consultants. It may very well be that a new Scheduling of depreciation rates is in order.

Possible Fu'l'ure Procedure

From an accounting standpoint, and from the angle of good business practice, it may be that higher rates of depreciation than the current Treasury Department minimum standards should be set up regardless of whether the Tax Commissioner allows them or not; and an adequate fund set aside to take care of replacement. Otherwise, the theatre owner will be kidding himself with a completely inadequate replacement budget.

Prices today of most replacement items are nearly double those of the

same items in 1938, so it can be readily seen that if replacement reserves have been set up on 1938 or prior prices, any business will find, its fund woefully in< adequate for' replacement needs at todayls level. This factor is being stressed in all current annual reports of companies listed on the New York and Curb Stock Exchanges. To quote from the December 1, 1948, quarterly memo to stockholders by The Borden Company:

ttDepreciation rates are based largely on original costs that are far below current replacement costs. The capital expenditure budget for 1949, together with authorizations of previous years yet to be spent, will exceed, to a material extent, estimated depreciation accruals for 1949. Until depreciation accruals are based upon values approximating present costs, or unless prevailing prices for replacements decline, our accruals will be insufficient to cover normal replacement costs for some years yet to comef'

In the 28th Annual Report to stockholders under date of March 10, 1948, president F. J. Emmerich, of the Allied Chemical and Dye Corporation, also stated:

HCosts of construction and replacements were at a new high level. While it is not possible to forecast future price levels, in order to provide for excessive construction and replacement costs and other costs applicable to the year, $10,000,000 was set aside out of 1947 income as an addition to the general contingency reserve."

So this is not a condition as local to the theatre industry as a series of bad pictures or television. It is a reflection of the times. But a successful businessman must keep in tune with developments and in close touch with a qualified accountant.


Unless the inflationary spiral is checked and the high cost of living reduced, the nation is likely to experience a wave of arson by new home owners, it was forecast recently.

The speaker was Chief Fire Marshal Thomas P. Brophy of the New York Fire Department, who imparted his gloomy prediction to the final session of the fifty-fifth annual conference of the International Association of Chiefs of Police

at the Pennsylvania Hotel.

Pointing out that the arson rate now was up slightly for the country as a whole, Marshal Brophy suggested that it would rise even more sharply if prices did not come down and if only a "slightll depression should occur.


"There is a strong possibility of an increase in arson in the near future unless the high cost of living and other inflationary trends are halted," he declared.

"Many persons have purchased homes at exorbitant rates


and unwarranted prices and in the event of even a slight depression, some can be expected to resort to arson to collect fire insurance rather than lose whatever money they have

Speaking for the associations committee on arson, of which he is chairman, Marshal Brophy pointed out that arsonists

are responsible for more lives lost and more property destroyed than is generally realized. To offset this fact, he called for increased training of fire investigators so that blazes of

dubious origin might be more readily recognized.
1948-49 Theatre Catalog, 7th Edition, Page 520