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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? (b) What is the taxable income of Whirlwind Cycles in Year 2?

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