Question

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4. Assignments - 202160 ACCA20 AC Take Test: Assignment 1 - 202110 ACC - 2005 ACCARD.ac. Get Homework Help With Chege Stud https//b.edubocwebpl Problem 2 is po 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. (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)

Answer 1

a) Interest on zero coupon bond inYear 2

Cost of acquistion of zero coupon bond in year 1/1 = $15670

Interest for the first year = 5% of $15670 = $15670 * 5% = $ 784

Principal for Year 2 =$15670 + $784 = $16454

Ineterst on above(as compounded yearly)   = $16454 * 5% = $ 823

b)Taxable income of Whirlwind Cycles in Year 2

Status : single tax payer

Calculation of business income:

cash sales $225000

Less:cost of goods sold $45000

Gross profit $180000

Less: cash payment $ 3500

rent $18000

depreciation (26 US code 167) $ 40000   $61500

Net profit $118500

Business income (from above) $118500

taxable income before business income is considered(given) $100000

contribution to political party $1000

interest on zero coupon bond (from above) $ 823

TAXABLE INCOME FOR YEAR 2 $ 220323

  

c)cah flow from whirl wind cycles

cash sales $225000

Less:cost of goods sold $45000

interst from municipal bond $3000   

$273000   

Less: cash payment $ 3500

rent $18000

contribution to political party $1000

income taxpaid $25058 $47558

NET CASH INFLOW $225442

d) cash flow of Daniel for year 2

cash flow from whirlwind cycle $225442

cash flow from other source $100000

total cash flow $325442

  

d)

  

Business income (from above) $118500

taxable income before business income is considered(given) $100000

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