Introduction to depreciation methods The Tivoli Company has just opened a pizza restaurant in Copenhagen. The restaurant contains a new pizza oven which cost 110,000 to buy and install. The oven has an expected life of ten years. The expected residual value is minimal and can be ignored.

You have been asked to illustrate the effect of different methods of depreciating the pizza oven on the company’s income statement and balance sheet.

Required Calculate the depreciation charge on the oven and its end-year carrying amount for years 1, 2 and 5 under the following methods of depreciation:

(a) the straight-line (SL) method;

(b) the declining-balance (DB) method. (The DB rate is assumed to be 150% of the SL rate);

(c)* the sum-of-years’ digits (SoYD) method. (A formula for finding the denominator of the SoYD rate quickly is: [n(n + 1)/2], where n is the initial expected life (in years) of the asset);

(d)*the units-of-production (UoP) method. (Total expected output of the oven over ten years is 600,000 standard-size pizzas. Forecast output in each of years 1 to 5 is: 30,000; 48,000; 66,000;

78,000; and 84,000 pizzas respectively.)

*

(c) and

(d) are based on material in Appendix 8.1.

AppenedixLO1