Calculate annual straight-line depreciation for a fixed asset costing 12,000, residual value 2,000, useful life 5 years.

• A. 1,200
• B. 2,400
• C. 2,000
• D. 1,800

Answer: (C)

Straight-line depreciation spreads the amount that can be depreciated evenly over the asset’s life. The amount that can be depreciated is cost minus residual value. So here, 12,000 minus 2,000 equals 10,000. Dividing by the useful life of 5 years gives 10,000 / 5 = 2,000 per year.

If you skip subtracting the residual value and just do cost divided by life, you’d get 12,000 / 5 = 2,400. Misinterpreting salvage or the basis could lead to 1,800 or 1,200, but the correct method is to subtract the residual value first and then divide by the useful life, yielding 2,000 annually.