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. Cost Recovery Allowed Cost Recovery Allowable Year 1 $16,000 $ 8,000 Year 2 9,600 12,800 Year 3 5,760 7,680 If Tara sells the machine after three years for $15,000, how much gain should she recognize? a.$9,240 b.$6,360 c.$11,480 d.$3,480

c. $11,480

Explanation:

Given that

Cost recovery allowed Cost recovery allowable

Year 1 $16,000 $8,000

Year 2 $9,600 $12,800

Year 3 $5,760 $7,680

The computation of gain should Tara recognize is shown below:-

Cost $40,000

Less:

Greater cost of recovery

allowable or allowed

Year 1 $16,000

Year 2 $12,800

Year 3 $7,680 $36,480

Adjusted basis $3,520

Gain to be recognized = Residual value - Adjusted basis

= $15,000 - $3,520

= $11,480

So, for computing the gain to be recognized we simply deduct the adjust basis from residual value.