Royal Company purchased a dump truck at the beginning of 2015 at a cost of $60,000.The truck had an estimated life of six years and an estimated residual value of $24,000.On January 1,2017,the company made major repairs of $20,000 to the truck that extended the life one year.Thus,starting with 2017,the truck has a remaining life of five years and a new salvage value of $8,000.Royal uses the straight-line depreciation method.When calculating depreciation for 2017,Royal should

Question

Quizplus · Accepted Answer

When major repairs are made to an asset, and the repairs extend the life of the asset beyond its original estimated useful life, the book value of the asset should be adjusted. The amount of the adjustment is the cost of the repairs divided by the remaining useful life of the asset. In this case, the adjustment would be $20,000/5 years = $4,000. The book value at December 31, 2016 would be $60,000 - (2 years x $10,000 depreciation per year) + $4,000 = $54,000. This adjusted basis would then be allocated over the remaining useful life of the asset, which is now 5 years (2017-2021). Therefore, the depreciation expense for 2017 would be $54,000/5 years = $10,800.

Royal Company Purchased a Dump Truck at the Beginning of 2015