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 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).

Daniel’s 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 Daniel’s Year 2 after-tax cash flows from the Whirlwind Cycles. (5 pts)

Answer 1

Consolidated Income	Amount $
Cash Sales	$          225,000
Cost of good sold	$          (45,000)
Interest received	$              3,000
Utilities	$            (3,500)
Rent	$          (18,000)
Depreciation	$          (40,000)
Political exp	$            (1,000)
Consolidated Income before tax	$          120,500	(A)
Daniel Income before tax	$       (100,000)	(B) This is given in the question
Whirldwind income before taxes	$            20,500	C= (A-B)
a) How much interest income does Whirlwind cycles need to recognize from the zero coupon bond in Year 2?
Maturity of the Bond	$            20,000	(A)
Cost of the Bond	$            15,670	(B)
Discount at Face value	$              4,330	C= (A-B)
Yearly Interest	$              1,000	(20000*5%pa)
(b) What is the taxable income of Whirlwind Cycles in Year 2? (5 pts)
Total Income	$          120,500	(A)
Daniel Income	$          100,000	(B)
Whirlwind Income	$            20,500	C= (A-B)
c) What is the after-tax cash flow of Whirlwind Cycles in Year 2? (5 pts)
(d) Calculate Daniel’s Year 2 after-tax cash flows from the Whirlwind Cycles. (5 pts)
Total Income	$              4,330	(A)
Daniel Income	$          100,000	(B)
Whirlwind Income	$          (95,670)	C= (A-B)