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29 January, 06:00

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

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  1. 29 January, 06:11
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    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.
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