Question
Whirlwind Cycles is owned 100% by Daniel, a single taxpayer. Both Whirlwind Cycles and Daniel use the cash method of accounting for tax purposes. The
Whirlwind Cycles is owned 100% by Daniel, a single taxpayer. Both Whirlwind Cycles
and Daniel use the cash method of accounting for tax purposes. The business incurred the
following items of income and expense in Year 2:
Cash Sales $225,000
Interest received from City of Flint Bonds
(this is a municipal bond) 3,000
Cost of Goods Sold (assume cash
paid in Year 2) 45,000
Cash payments for Year 2 utilities 3,500
Cash payments for Year 2 rent 18,000
Tax depreciation 40,000
Cash contribution to the Democratic party
(not deductible for tax purposes) 1,000
On 1/1, Year 1, Whirlwind Cycles purchased a 60-month zero coupon bond with a 5%
yield and a $20,000 maturity value for $15,670 (compounded annually).
Daniels taxable income is $100,000 before any profits from the business are considered.
Daniel files as a single tax payer.
Whirl Cycles is organized as a C Corporation and the corporation pays all of its after-tax
cash flows to Daniel as a dividend.
(a) How much interest income does Whirlwind cycles need to recognize from the zero
coupon bond in Year 2? (5 pts)
(b) What is the taxable income of Whirlwind Cycles in Year 2? (5 pts)
(c) What is the after-tax cash flow of Whirlwind Cycles in Year 2? (5 pts)
Hint: the total tax due in Year 2 of Whirlwind Cycles is 25,058.
(d) Calculate Daniels Year 2 after-tax cash flows from the Whirlwind Cycles. (5 pts)
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