On June 1 of the Current Year, Tab Converted a Machine

question 32

Multiple Choice

On June 1 of the current year, Tab converted a machine from personal use to rental property.At the time of the conversion, the machine was worth $90,000.Five years ago, Tab purchased the machine for $120,000.The machine is still encumbered by a $50,000 mortgage.What is the basis of the machine for cost recovery?

• A)$70,000
• B)$90,000
• C)$120,000
• D)$140,000
• E)None of these.

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Definitions:

Guaranteed Residual Value

This is the estimated value of an asset at the end of its lease term or useful life, as guaranteed by the lessee or a third party.

Unearned Interest

Interest that has been collected on a loan by the lending institution but not yet earned because the principal amount of the loan has not been fully disbursed.

Cost of Goods Sold

The direct costs attributable to the production of the goods sold in a company, including materials and labor.

Sales-Type Lease

A lease arrangement where the lessor recognizes profits from both the sale of the leased asset and the interest on the lease payments.