Daisy Luna opened a small motorcycle repair shop, Luna Cycle Repair, on January 2, 2014. The shop also sells a limited number of motorcycle parts. In January 2015, Luna realized she had never filed any tax reports for her business and therefore probably owes a considerable amount of taxes. Since she has limited experience in running a business, she has brought you all her business records, including a checkbook, canceled checks, deposit slips, suppliers’ invoices, a notice of annual property taxes of $4,620 due to the city, and a promissory note to her father-in-law for $5,000. She wants you to determine what her business owes the government and other parties (but not employees).
You analyze all her records and determine the following as of December 31, 2014:
Unpaid invoices for motorcycle parts ...... $ 18,000
Parts sales (excluding sales tax) ......... 88,540
Cost of parts sold ................ 62,250
Workers’ salaries ................ 20,400
Repair revenues ................ 120,600
Current assets ................ 32,600
Motorcycle parts inventory ........... 23,500
You learn that the company has deducted $952 from the two employees’ salaries for federal income taxes owed to the government. The current Social Security tax is 6.2 percent on maximum earnings of $110,100 for each employee, and the current Medicare tax is 1.45 percent (no maximum earnings). The FUTA tax is 5.4 percent to the state and 0.8 percent to the federal government on the first $7,000 earned by each employee, and each employee earned more than $7,000. Luna has not filed a sales tax report to the state (5 percent of sales).
1. Determine Luna Cycle Repair’s current liabilities as of December 31, 2014.
2. What additional information would you want from Luna to satisfy yourself that all current liabilities have been identified?
3. Evaluate Luna’s liquidity by calculating working capital, payables turnover, and days’ payable. (Round to one decimal place.) Comment on the results. (Assume average accounts payable were the same as year-end accounts payable.)