Problem $1(20$ points total$)$

Whirlwind Cycles is owned $100\%$ by Daniel, a single taxpayer. Both Whirlwind Cycles and Daniel use the cash method of accounting for tax purposes. Whirl Cycles is organized as a C Corporation and the corporation pays all of its after$-$tax cash flows to Daniel as a dividend.

The business incurred the following items of income and expense in Year $2$:

Cash Sales

Interest received from City of Flint Bonds $($this is a municipal bond$)$

Cost of Goods Sold $($assume cash paid in Year $2)$

Cash payments for Year $2$ utilities

Cash payments for Year $2$ rent Tax depreciation

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.

$($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$)$

Hint: This is a dividend payment. So consider what tax rate Daniel needs to pay on the cash payment.