Godfrey Company constructed a new, highly automated chemical plant in Year 1, which began production on January 1, Year 2. The cost to construct the plant was $5,000,000: $1,500,000 for the building and $3,500,000 for machinery and equipment. The useful life of the plant (both building and machinery) is estimated to be 20 years. Local environmental laws require the machinery and equipment to be inspected by engineers after every five years of operation. The inspectors could require Godfrey to overhaul equipment at that time to be able to continue to operate the plant. Godfrey estimates that the costs of the inspection and any required overhaul to take place in five years to be $200,000. Environmental laws also require Godfrey to dismantle and remove the plant assets at the end of their useful life. The company estimates that the net cost, after deducting any salvage value, for removal of the equipment will be $100,000, and the net cost for dismantling and removal of the building, after deducting any salvage value, will be $1,500,000. Godfrey has determined that the straight-line method of depreciation will best reflect the pattern in which the plant's future economic benefits will be received by the company. The company uses the cost model to account for its property, plant, and equipment. The company uses a discount rate of 10 percent in determining present values.
Required:
Determine the cost of the plant assets at January 1, Year 2. Determine the amount of depreciation expense that should be recognized related to the plant assets in Year 2.