Royal Company Purchased a Dump Truck at the Beginning of 2014

question 58

Multiple Choice

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.When calculating depreciation for 2016, Royal should

• A) add the $20,000 to the book value at December 31, 2015 and then allocate the revised basis over the remaining adjusted useful life of 5 years.
• B) report the effect of the change in life as an expense on the income statement in 2015.
• C) ignore the change in life on the original cost of $60,000 and depreciate the additional $20,000 cost separately over its useful life.
• D) expense the $20,000 and depreciate the original cost of $60,000 over its revised estimated total live of 7 years.

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Definitions:

Purchase Returns

Goods returned by the buyer to the supplier usually due to defects or quality issues, sometimes leading to a refund or credit.

Sales Salary Expense

The total amount of salary and wages paid to employees involved in the sales process, reflected as an expense on the income statement.

Departmental Gross Profit

The gross profit of a specific department within a store or company, calculated by subtracting the cost of goods sold in that department from its sales revenue.

Assets

Properties (resources) of value owned by a business (cash, supplies, equipment, land).