Chocolate Express, Inc. makes chocolate syrup. They reported the following activ

Question

Chocolate Express, Inc. makes chocolate syrup. They reported the following activities causing differences between pretax financial income and taxable income during its first full year of operations:

Chocolate Express, Inc. purchased equipment in 2013 costing $440,000. This equipment had a useful life of 4 years and no salvage value. They will use straight-line depreciation for financial reporting purposes but an accelerated method for tax purposes. Using the accelerated method, the depreciation in the first year will be $200,000 and $80,000 in the following three years (i.e. 2014-2016).

On December 31, 2013, Chocolate Express, Inc. collected $70,000 for future delivery of 3,500 cases of its Delectable Mocha Chocolate syrup. It will deliver 2,100 cases in 2014 and the remainder in 2013. (Note: This is revenue collected in advance of services performed).

Chocolate Express, Inc. reported $8,000 of interest income in 2013 from U.S. Government securities since it wanted to earn tax-free interest.

Chocolate Express, Inc. is a very customer-oriented company so they made this promise to its customers: “We will give you a full refund if you become sick and are hospitalized after using our Delectable Mocha Chocolate syrup.” Based on its past experience, it estimates that this warranty will cost them 10% of their sales. They sold $100,000 worth of syrup in 2013 so they recorded accrued warranty expense of $10,000. This warranty expires in one year.

The president of Chocolate Express, Inc. is Bradford E. Lightweight. Chocolate Express, Inc. took out an insurance policy on Mr. Lightweight for which the premiums are $5,000. The company is the beneficiary.

Chocolate Express, Inc. has a tax rate of 40% and reported pretax financial income of $500,000.

Explanation / Answer

Reported pretax financial income of $500,000

Calculation of taxable income of Chocolate express Inc.

Sales $100000

Revenue collected in advance $70000

Interest received $8000

Less: Depreciation $200000

Less: Insurance premiums paid $5000

Taxable income -$27000

The tax would not be calculated as there is a loss.

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