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 as follows: 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 as follows:  If Tara sells the machine after three years for $15,000,how much gain should she recognize?

Quizplus · Accepted Answer

To determine the gain, we need to compare the amount received from the sale of the machine ($15,000) to the adjusted basis of the machine, which is the original cost ($40,000) minus the accumulated cost recovery ($14,160).

Adjusted basis = $40,000 - $14,160 = $25,840

Gain = Amount realized - Adjusted basis
Gain = $15,000 - $25,840
Gain = -$10,840

Since the result is negative, there is no gain to recognize. Instead, Tara would recognize a loss of $10,840. However, since none of the answer choices include a loss, the closest option is D, which represents the total cost recovery allowed and allowable for the three years.

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