Tony Garcia opened a small dryer repair shop, Garcia Repair Shop, on January 2, 2010. The shop…

Tony Garcia opened a small dryer repair shop, Garcia Repair Shop, on January 2, 2010. The shop also sells a limited number of dryer parts. In January 2011, Garcia 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 chequebook, cancelled checks, deposit slips, suppliers’ invoices, a notice of annual property taxes of $2,310 due to the city, and a promissory note to his father-in-law for $2,500. He wants you to determine what his business owes the government and other parties.

You analyse all his records and determine the following as of December 31, 2010

You learn that the company has deducted $476 from the two employees’ salaries for federal income taxes owed to the government. The current Social Security tax is 6.2 per cent on maximum earnings of $102,000 for each employee, and the current Medicare tax is 1.45 per cent (no maximum earnings). The FUTA tax is 5.4 per cent to the state and .8 per cent to the federal government on the first $7,000 earned by each employee, and each employee earned more than $7,000. Garcia has not filed a sales tax report to the state (5 per cent of sales).

Required:

1.       Given these limited facts, determine Garcia Repair Shop’s current liabilities as of December 31, 2010.

2.       What additional information would you want from Garcia to satisfy yourself that all current liabilities have been identified?

3.       Evaluate Garcia’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.)

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