Answer:
$218,400.
Explanation:
Depreciation is a method that is used by companies to allocate the cost of property, plant, and equipment over its useful life. The amount of depreciation is charged to P&L statements and is expensed out. The purpose of depreciation is incorporate the loss in the value of asset over time, also it is used for taxation purposes. There are two methods of depreciation:
1) Straight-line: The cost is allocated evenly over its useful life.
2) Reducing/Declining: Higher depreciation expense is charged in the initial years.
In this case, the company used the straight line method for first 3 years, that is from January 1, 2016 to December 31, 2018, and then switched to double declining method.
Calculation
Under straight line method, the depreciation expense is calculated as follows:
Depreciation Expense = (Cost - Residual value) / Useful Life
⇒ Annual depreciation expense = (1,560,000 - 0) / 10 = $156,000 OR 10%.
This amount will be charged to P&L statement each year. Since, the company has used straight-line method for three years, so the book value at the end of third year will be $1,092,000 [1,560,000 - (156,000 * 3)].
<u>Switching to Double-Declining Method</u>
The formula to be used for double-declining method is given below;
Depreciation = Book value period start * Straight-line depreciation rate * 2
⇒ Depreciation = 1,092,000 * .1 * 2 = $218,400.
