Question

You are comparing two companies in the same industry. You have determined that Foothill Corp. depreciates its plant assets over a 40-year life, whereas DeAnza Corp. depreciates its plant assets over a 20-year life.

Discuss the implications this has for comparing the results of the two companies.

Answer 1

On the basis of the depreciation and lift period of the plant assets, following comparison can be made:
BASIS	Foothill Corp	DeAnza Corp.
Operating shifts	The company is operating on single shift	The company is operating on double shifts.
Repair & Maintenance	Higher repair and maintenance costs due to longer plant life.	Less Repair and Maintenance expenses due to shorter plant life
Factory-wise machine security	Less safety is undertaken for the plant breakdown	Higher safety measures against plant breaddown as shorter plant life.
Interest expenses	Less interest expense as financing of plant assets spread for 40 years.	Higher Interest incidence as short term financing.
Non-cash expense	Lower non-cash expense on Income Statement every year	Higher non-cash expense on Income statement being shorter plant life.
Income	Higher net income due to lower depreciation expenses.	Lower net income being higher depreciation expense
Income distribution	More dividend is distributed to shareholders	Lesser dividend is distributed to shareholders being low income.