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

Depreciation Expense for December 31, 2016 = $12000

Explanation:

1st normal Depreciation in order get book value on January 1st, 2016

Depreciation Expense = (Cost - Salvage value) / Estimated useful life

Depreciation Expense = ($60000-$24000) / 6

Depreciation Expense = $6000

As it straight line method depreciation will remain same So value of Truck will reduce by $12000. Hence, book value of Truck will be ($60000 - $12000) = $48000

Now get new book value by adding current book value of Truck and repairs on truck. ($48000 + $20000) = $68000 and new salvage value is $8000.

New Depreciation expense:

Depreciation Expense = (Cost - Salvage value) / Estimated useful life

Depreciation Expense = ($68000-$8000) / 5

Depreciation Expense = $12000