Reference no: EM132623315

Yummy Treats Inc. (Yummy) is a publicly traded commercial bakery. Yummy recently opened a coffee shop to sell gourmet coffee and baked goods to local customers.

Yummy purchased a professional coffee machine (which cost $20,000) for the new coffee shop. According to the manufacturer, the coffee machine can process 60,000 kilograms of coffee over its useful life, and the useful life will vary depending on usage as follows:

Yearly usage (percentage of maximum)     Estimated maximum useful life

81% - 100%                                                 10 years

51% - 80%                                                 15 years

25% - 50%                                                  18 years

Additional information:

• Yummy estimates that it will process 3,650 kilograms of coffee in the first year and usage will increase by 5% annually as the coffee shop grows in popularity.
• The coffee machine comes with a five-year warranty. After the warranty period, Yummy will likely upgrade to a new machine, as repairs on older machines are very expensive.
• The coffee machine is expected to have NO residual value at the end of its useful life.
• Yummy currently uses the straight-line method to depreciate all of its commercial bakery equipment.
• Trung Phong, Yummy's bookkeeper, prefers using the straight-line method of depreciation due to its simplicity. Trung has heard that most coffee shops use the units of production method to depreciate similar coffee machines, although some use the straight-line method or the declining balance method (which is two times the rate of the straight-line method).
• Yummy normally adopts accounting policies that maximize its short-term profitability and would like to continue using this strategy given that sales for the coffee shop will be lowest in the first year.
• Yummy uses the cost model to subsequently measure all its property, plant and equipment.

Required:

Problem a) Discuss one advantage and one disadvantage for each of the three depreciation methods that Yummy could adopt for its new coffee machine. Use the case facts to support your responses.

Problem b) Based on your discussion in part (a), recommend which depreciation method that Yummy should adopt for the new coffee machine, and explain why.