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. $$\begin{array} { c c c }
& \text { Cost Recovery Allowed } & \text { Cost Recovery Allowable } \
\text { Year 1 } & \$ 16,000 & \$ 8,000 \
\text { Year 2 } & 9,600 & 12,800 \
\text { Year 3 } & 5,760 & 7,680
\end{array}$$ If Tara sells the machine after three years for $15,000, how much gain should she recognize?

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. $$\begin{array} { c c c } 
& \text { Cost Recovery Allowed } & \text { Cost Recovery Allowable } \
\text { Year 1 } & \$ 16,000 & \$ 8,000 \
\text { Year 2 } & 9,600 & 12,800 \
\text { Year 3 } & 5,760 & 7,680
\end{array}$$ If Tara sells the machine after three years for $15,000, how much gain should she recognize?

Quizplus · Accepted Answer

The gain recognized is calculated by subtracting the adjusted basis of the machine from the sale price. The adjusted basis is the original cost minus the total cost recovery allowed. The total cost recovery allowed over three years is $16,000 + $9,600 + $5,760 = $31,360. The adjusted basis is $40,000 - $31,360 = $8,640. The sale price is $15,000, so the gain recognized is $15,000 - $8,640 = $6,360. However, the correct calculation should account for the cost recovery allowable, not just the cost recovery allowed. The correct total cost recovery allowable is $8,000 + $12,800 + $7,680 = $28,480. Thus, the adjusted basis should be $40,000 - $28,480 = $11,520. Selling the machine for $15,000 results in a gain of $15,000 - $11,520 = $3,480. The error in the explanation indicates a mistake in the calculation process, leading to the incorrect conclusion. The correct gain should be calculated based on the cost recovery allowable, not the cost recovery allowed, which would likely lead to a different answer choice being correct.

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