Question # 1 : Distinguish between Depreciation, Depletion and Amortization.

Answer:
Depreciation:
Depreciation means the allocation of the initial cost of an asset over
its useful life. The annual expense of plant and equipment is matched against the
revenues that are being produced.
The word Depreciation comes from the Latin word Depretium.
Here De means deduction and pretium means the deduction of price.
So we can say, Depriciation is the permanent and continious
dimination in the quality, quantity or value of an asset.
Deplation:
The reserve of the natural resources in a coal, gas or mineral mine in
limited and fixed. So as many resources are removed from it, the amount of
reserve is reduces and afterwards it becomes zero. This is called Deplation. This
system is used mainly for natural resource.
Amortization:
Amortization refers to the process of writing-off or liquidating an
asset or loan periodically on an installment basis. Usually the amount of each
installment is same.

Question # 2 : Identyfy the factors that are relevant in determining the annual
depreciation charge and explain wheter these factors are determined objectively or
wheter they are based on judgement?

Answer:
Factors that are relevant in charging Depriciation
According to accounting point of view, there is no doubt of the necessity of
charging depriciation. But we face same practical problem in charging
depriciation. To avoid these problems, we should consider the following factors:
1) Cost of the asset:
Depriciation is charged on the cost price of the asset.
To determine the cost price, we should add the additional transport cost, import
tax, freight in etc. So, we can say that, the cost price of the asset is very important
in charging depreciation.
2) Probable working life of the asset:
Probable working life of the asset is another important
factor in charging depriciation. By working life, we mean the number of years that
we can use the asset to get profit for bussiness. In determining the working life we
need to consider the profitable use of the asset and the invention of new
technology.
3) Probable resedual value of asset:
After the working life has been finished if the asset is
saleable or if we think that we will get some money by selling the asset, this
amount is called Scrap value. Machinaries, Car, Truck etc. always have some
resedual value. To determine the depriciation of these assets, we should consider
the Scrap value of these assets.
Factors are based on judgement:
Depriciation is a very important factor
of accoutancy. There is no doubt of its necessity. But in practice, we face some
problems to determine the actual depreciation of the asset. Various factors are
relevant in chargeing depriciation against an asset for a particular year. For
example, the asset may become useless because of the invention of new
technology in 4/5 years later. But today we may know nothing about the
technology. For some other problems, the depriciation of an asset in a particular
year is determined based on judgement.