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