Whirlwind Cycles is owned 100% by Daniel, a single taxpayer. Both Whirlwind Cyclesand Daniel use the cash method of accounting for tax purposes. Whirl Cycles isorganized as a C Corporation and the corporation pays all of its after-tax cash flows toDaniel as a dividend.The business incurred the following itemsCash SalesInterest received from City of Flint Bonds(this is a municipal bond)Cost of Goods Sold (assume cashpaid in Year 2)Cash payments for Year 2 utilitiesCash payments for Year 2 rentTax depreciationCash contribution to the Democratic partyincome and expense in Year 2:(not deductible for tax purposes)$225,0003,00045,0003,50018,00040,0001,000On 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.(a) How much interest income does Whirlwind cycles need to recognize from the zerocoupon bond in Year 2?(b) What is the taxable income of Whirlwind Cycles in Year 2?(c) What is the after-tax cash flow of Whirlwind Cycles in Year 2?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.Hint: This is a dividend payment. So consider what tax rate Daniel needs to pay on thecash payment.

There are four sub-parts in the question and our guideline is to solve the first three sub-parts for…

(a) How much interest income does Whirlwind cycles need to recognize from the zero coupon bond in Year 2? (b) What is the taxable income of Whirlwind Cycles in Year 2? (c) What is the after-tax cash flow of Whirlwind Cycles in Year 2?

(a) How much interest income does Whirlwind cycles need to recognize from the zero coupon bond in Year 2? (b) What is the taxable income of Whirlwind Cycles in Year 2? (c) What is the after-tax cash flow of Whirlwind Cycles in Year 2?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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