Tara purchased a machine for $40,000 to be used in her business.The cost recovery allowed and allowable for the three years the machine was used are computed as follows. $$\begin{array} { l c c }
& \begin{array} { c }
\text { Cost Recovery Allow ed Cost } \
\text { Recovery Allow able }
\end{array} \
\text { Year 1 } & \$ 16,000 & \$ 8,000 \
\text { Year 2 } & 9,600 & 12,800 \
\text { Year 3 } & 5,760 & 7,680
\end{array}$$ If Tara sells the machine after three years for $15,000, how much gain should she recognize?
A)$3,480
B)$6,360
C)$9,240
D)$11,480

Question

Tara purchased a machine for $40,000 to be used in her business.The cost recovery allowed and allowable for the three years the machine was used are computed as follows. $$\begin{array} { l c c } 
& \begin{array} { c } 
\text { Cost Recovery Allow ed Cost } \
\text { Recovery Allow able }
\end{array} \
\text { Year 1 } & \$ 16,000 & \$ 8,000 \
\text { Year 2 } & 9,600 & 12,800 \
\text { Year 3 } & 5,760 & 7,680
\end{array}$$ If Tara sells the machine after three years for $15,000, how much gain should she recognize?
A)$3,480
B)$6,360
C)$9,240
D)$11,480

Quizplus · Accepted Answer

To calculate the gain/loss from the sale of an asset, we need to compare the selling price with the adjusted basis of the asset. The adjusted basis is the original cost minus the cost recovery allowed and allowable. 
Adjusted basis = original cost - cost recovery allowed and allowable
Adjusted basis = $40,000 - $21,520 
Adjusted basis = $18,480 
Since the selling price of $15,000 is less than the adjusted basis of $18,480, Tara will recognize a loss. 
Loss = Adjusted basis - Selling price 
Loss = $18,480 - $15,000 
Loss = $3,480 
However, the question asks for the gain, not the loss. So, we flip the sign to get the gain. 
Gain = -$3,480 (flip the sign) 
Gain = $3,480 
Therefore, the answer is D) $11,480.

Tara Purchased a Machine for $40,000 to Be Used in Her