Under normal circumstances I would want to return the bike and let the shop make things right. But some of the problems you describe are obvious signs of incompetance. If I had the experience you describe I certainly would not want to give the shop a chance to screw up more stuff.

Very poor form not to make good on the promise to refund the labor charges. If the owner questioned your claim, he should have requested to inspect the bike first or simply refused your request. But not to honor his end of an agreed settlement is inexcusable. Complete and unrecoverable loss of credibility.