Question

Royal Company purchased a dump truck at the beginning of 2014 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, 2016, the company made major repairs of $20,000 to the truck that extended the life 1 year. Thus, starting with 2016, the truck has a remaining life of 5 years and a new salvage value of $8,000. Royal uses the straight-line depreciation method. What amount should be recorded as depreciation expense each year starting in 2016?

a. $6,000
b. $13,600
c. $12,000
d. $14,400

Answer 1

The depreciation expense each year starting in 2016 for the dump truck should be $3,200.

Step-by-step explanation:

The amount to be recorded as depreciation expense each year starting in 2016 can be calculated using the straight-line depreciation method. The annual depreciation expense is determined by subtracting the residual value from the initial cost and dividing it by the remaining life of the truck.

For the dump truck purchased in 2014, the initial cost is $60,000, the estimated life is 6 years, and the estimated residual value is $24,000. The major repairs made in 2016 extended the life of the truck by 1 year and updated the salvage value to $8,000.

1. Calculate the depreciable cost: initial cost - residual value = $60,000 - $24,000 = $36,000
2. Calculate the remaining depreciable cost: depreciable cost - major repairs = $36,000 - $20,000 = $16,000
3. Calculate the annual depreciation expense: remaining depreciable cost / remaining life = $16,000 / 5 = $3,200

Therefore, the amount that should be recorded as depreciation expense each year starting in 2016 is $3,200.