Inco Limited, headquartered in Toronto, is one of the world’s premier mining and metals companies. Its 1994 annual report contains the following note:

Depreciation and Depletion Depreciation is calculated using the straight-line method and, for the nickel operations in Indonesia, the units-of-production method, based on the estimated economic lives of property, plant, and equipment. Such lives are generally limited to a maximum of 20 years and are subject to annual review. Depletion is calculated by a method that allocates mine development costs ratably to the tons of ore mined.

Upon further study, you learn that the units-of-production depreciation method is very similar to the methods described in this chapter to determine depletion allowances.

Required

a. Identify and discuss each unusual term in this note.

b. Why would a company want to use more than one depreciation method?

c. Does the 20-year limitation on useful lives result in more conservative, or less conservative, measures of net income? What other information would you need to better assess this issue?

d. What choices does Inco Limited have during its annual review of useful lives?

What would be the most likely balance sheet and income statement effects of such a review? Why?