Royal Company purchased a dump truck at the beginning of 2012 at a cost of $60,000.The truck had an estimated life of 6 years and an estimated residual value of $24,000.On January 1, 2014, the company made major repairs of $20,000 to the truck that extended the life 1 year.Thus, starting with 2014, the truck has a remaining life of 5 years and a new salvage value of $8,000.Royal uses the straight-line depreciation method.When calculating depreciation for 2014, Royal should

Question

Quizplus · Accepted Answer

The correct way to account for the major repair is to add it to the book value of the asset at the end of 2013 and then to allocate the revised basis over the remaining adjusted useful life of 5 years. This will result in a higher depreciation expense in 2014 compared to the previous years, reflecting the increased useful life of the asset due to the repair. Option B is incorrect because the effect of the change in life should not be reported as an expense on the income statement in 2013. Option C is incorrect because the additional cost should be added to the original cost and depreciated over the remaining life of the asset. Option D is incorrect because the revised estimated total life of 7 years is incorrect - it should be 6 years (original life) + 1 year (extension due to repair) = 7 years.

Royal Company Purchased a Dump Truck at the Beginning of 2012