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:

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?

Answer 1

The answer is "$11,480".

Step-by-step explanation:

Calculate the benefit as illustrated below:

Recovery of costs approved Recovery costs approved

Year-1 $16,000 $8,000

Year-2 $9,600 $12,800

Year-3 $5,760 $7,680

Total cost $40,000

Making a reference to: Cause great costs allowed or permitted

Year-1 $16,000

Year-2 $12,800

Year-3 $7,680 $36,480

Adjusted basis $3,520

Formula:

Recognized Gain = Residual value - Adjusted basis

`= \$ \ 15,000 - \$ \ 3,520 \\\\ = \$ \ 11,480`