A consumer electronics company was formed to sell a portable handset system. The

Question

A consumer electronics company was formed to sell a portable handset system. The company purchased a warehouse and converted it into a manufacturing plant for $2,000,000 (including the purchase price of the warehouse). It completed installation of assembly equipment worth $1,500,000 on December 31. The plant began operation on January 1. The company had a gross income of $2,500,000 for the calendar year. Manufacturing costs and all operating expenses, excluding the capital expenditures were $1,280,000. The depreciation expenses for capital expenditures amounted to $128,000.

(a) Compute the taxable income of this company.

(b) How much will the company pay in federal income taxes for the year?

Explanation / Answer

a) Taxable income = Gross income - Costs and Expenses - Depreciation of Assets = 2,500,000 - 1,280,000 - 128,000

= $1,092,000

b) The amount company will pay = tax rate*1,092,000

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