Below are items that affected the 2011 accounting records for Darwin Adaptions Inc. The annual accounting period ended December 31, 2011. No adjusting entries were made during the year.
Required:
In proper form, prepare any necessary adjusting journal necessary at December 31, 2011. Only answers appearing on page 4 will be graded. If no entry is required write "no entry required"
a) Darwin's attorney has provided the following summaries of three lawsuits against Darwin at December 31, 2011:
•Lawsuit A: The loss is probable and the estimated loss is $50,000.
•Lawsuit B: The loss is probable, but the loss cannot be reasonably estimated.
•Lawsuit C: The loss is reasonably possible and the estimated loss is $15,000.
b) On January 1, 2010 Darwin purchased a patent for $420,000 from an inventor who had developed a new manufacturing process. At the time of the purchase, the patent had a remaining useful life of 10 years. On December 31, 2011, Darwin concluded that the estimated future cash flows from the patent were $250,000. The patent's estimated fair value on December 31, 2011 was $200,000.
c) The following information relates to the five major inventory items at December 31, 2011:
Item Quantity Unit Cost Replacement Cost
A 100 $40 $35
B 150 $50 $52
C 25 $60 $62
D 200 $15 $12
Darwin applies the lower of cost or market rule to individual items.
d) Darwin had unpaid wages of $35,000 on December 31, 2011. The FICA tax rate was 7.65% and the no employees had reached the maximum.
e) On 6/30/10 Darwinborrowed $36,730. The note specified four equal annual payments of $10,000 beginning 6/30/11. The interest rate on the note was 6%.
f) Darwin's 2011 net income before tax was $180,000 after all adjustments. The income tax return included additional depreciation of $20,000. The 2011 tax rate was 35%.
Balance Sheet
December 31, 2011 and 2010
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Assets
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2011
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2010
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Current assets
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Cash
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$566,579
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$783,275
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Accounts receivable, less allowance of 2011 $20,282; 2010 $16,463
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731,163
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655,059
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Inventory
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1,605,563
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1,578,118
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Prepaid expenses
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260,893
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166,542
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Total current assets
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3,164,198
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3,182,994
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Noncurrent assets
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Buildings and Equipment, less accumulated depreciation 2011
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$5,191,984; 2010 $3,246,789
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18,254,292
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17,131,938
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Land
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156,000
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156,000
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Investment
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527,132
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500,000
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Intangible assets
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251,600
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222,845
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Total assets
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$22,353,222
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$21,193,777
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Liabilities
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Current liabilities
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Trade accounts payable
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1,118,690
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942,158
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Accrued expenses
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775,473
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655,142
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Interest payable
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299,678
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232,516
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Deferred revenue
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359,058
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337,286
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Total current liabilities
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2,552,899
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2,167,102
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Noncurrent liabilities
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Bonds payable
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8,850,760
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8,750,704
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Total liabilities
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11,403,659
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10,917,806
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Stockholders' Equity
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Common stock ($1 par value)
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210,000
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200,000
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Additional paid-in-capital
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9,239,423
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9,109,423
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Retained earnings
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1,500,140
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966,548
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Total liabilities and stockholder's equity
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$22,353,222
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$21,193,777
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