Jose Hernandez opened a small motorcycle repair shop, Hernandez Cycle Repair, on January 2, 20x6. The shop
Question:
Jose Hernandez opened a small motorcycle repair shop, Hernandez Cycle Repair, on January 2, 20x6. The shop also sells a limited number of motorcycle parts. In January 20x7, Hernandez realized he had never filed any tax reports for his business and therefore probably owes a considerable amount of taxes. Since he has limited experience in running a business, he has brought you all his 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 his father-in-law for
$5,000. He wants you to determine what his business owes the government and other parties.
You analyze all his records and determine the following as of December 31, 20x6:
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 $90,000 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 .8 percent to the federal government on the first $7,000 earned by each employee, and each employee earned more than $7,000. Hernandez has not filed a sales tax report to the state (5 percent of sales).
Required 1. Given these limited facts, determine Hernandez Cycle Repair’s current liabilities as of December 31, 20x6.
2. User Insight: What additional information would you want from Hernandez to satisfy yourself that all current liabilities have been identified?
3. User Insight: Evaluate Hernandez’s liquidity by calculating working capital, payables turnover, and days’ payable. Comment on the results.
(Assume average accounts payable were the same as year-end accounts payable.)
Applications of Time Value of Money
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