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.
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
E)None of the above

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.
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 
E)None of the above

Quizplus · Accepted Answer

To determine the gain to be recognized, subtract the adjusted basis of the machine from the sales price. The adjusted basis of the machine is calculated as follows:

Cost basis of the machine = $40,000
Less: Cost recovery allowed:
Year 1: $13,333
Year 2: $22,223
Year 3: $4,444
Total cost recovery allowed: $40,000
Adjusted basis: $0

Since the adjusted basis is $0, the entire sales price of $15,000 will be recognized as a gain. Therefore, the gain to be recognized is $15,000. Subtracting the cost basis of the machine ($40,000) from the sales price ($15,000) would result in a loss, which is not possible.

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