Identification and evaluation of Current Liabilities

p4. Stan Styka opened a small dryer repair shop, Styka Repair Shop, on January 2, 2014. The shop also sells a limited number of dryer parts. In January 2015, Styka realized he had never filed any tax reports for his business and therefore probably owes a consid- erable 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 $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 (but not employees).

You analyze all his records and determine the following as of December 31, 2014:

 

 

Unpaid invoices for dryer parts	$  9,000
Parts sales (excluding sales tax)	44,270
Cost of parts sold	31,125
Workers’ salaries	18,200
Repair revenues	60,300
Current assets	16,300
Dryer parts inventory	11,750

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 $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 .8 percent to the federal government on the first $7,000 earned by each employee, and each employee earned more than $7,000. Styka has not filed a sales tax report to the state (5 percent of sales).

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reQUIreD

1.    Determine Styka Repair Shop’s current liabilities as of December 31, 2014.

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

3.    business appLiCation ▶ Evaluate Styka’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.)

q182

Applications of present Value

p5. Austin Corporation’s management took the following actions, which went into effect on January 2, 2014. Each action involved an application of present value.

a.     Austin Corporation enters into a purchase agreement that calls for a payment of

$250,000 three years from now.

b.     Bought out the contract of a member of top management for a payment of $25,000 per year for four years beginning January 2, 2015.

reQUIreD

1.    Assuming an annual interest rate of 10 percent and using Tables 1 and 2 in Appen- dix C, answer the following questions:

a.     In action a, what is the present value of the liability for the purchase agreement?

b.     In action b, what is the cost (present value) of the buyout?

2.    aCCounting ConneCtion ▶ Many businesses analyze present value extensively when making decisions about investing in long-term assets. Why is this type of anal- ysis particularly appropriate for such decisions?