1. **Problem Statement:** Calculate the depreciation for equipment costing P85,000 with a residual value of P25,000 over 5 years using the reducing balance method at 10% for the first three years. 2. **Formula and Explanation:** The reducing balance depreciation method calculates depreciation as a fixed percentage of the book value at the beginning of each year. The formula is: $$\text{Depreciation} = \text{Book Value at Beginning of Year} \times \text{Depreciation Rate}$$ Important: The book value decreases each year by the depreciation charged. 3. **Calculations:** - Initial cost = P85,000 - Depreciation rate = 10% per year **Year 1:** $$\text{Depreciation}_1 = 85,000 \times 0.10 = 8,500$$ $$\text{Book Value}_1 = 85,000 - 8,500 = 76,500$$ **Year 2:** $$\text{Depreciation}_2 = 76,500 \times 0.10 = 7,650$$ $$\text{Book Value}_2 = 76,500 - 7,650 = 68,850$$ **Year 3:** $$\text{Depreciation}_3 = 68,850 \times 0.10 = 6,885$$ $$\text{Book Value}_3 = 68,850 - 6,885 = 61,965$$ 4. **Summary:** - Year 1 depreciation: P8,500 - Year 2 depreciation: P7,650 - Year 3 depreciation: P6,885 The reducing balance method results in decreasing depreciation charges each year as the book value reduces. **Final Answer:** Depreciation for the first three years are P8,500, P7,650, and P6,885 respectively.