You are doing the audit of Halvorson Fine Foods, Inc., for the year ended December 31, 2001. The client has prepared the following schedule for the PPE and related allowance for depreciation accounts. You have compared the opening balances with your prior-year audit working papers. The following information is found during your audit.

1. All equipment is depreciated on a straight-line basis (no salvage value taken into consideration) based on the following estimated lives: buildings, 25 years; all other items, 10 years. The corporation’s policy is to take one-half year’s depreciation on all asset acquisitions and disposals during the year.

On April 1, the corporation entered into a 10-year lease contract for a die-casting machine with annual rentals of $\$5,000,$ payable in advance every April 1. The lease is cancelable by either party (60 days’ written notice is required), and there is no option to renew the lease or buy the equipment at the end of the lease. The estimated useful life of the machine is 10 years with no salvage value. The corporation recorded the die-casting machine in the Machinery and Equipment account at $\$40,400,$ the present value at the date of the lease, and $\$2,020,$ applicable to the machine, has been included in depreciation expense for the year.

3. The corporation completed the construction of a wing on the plant building on June 30. The useful life of the building was not extended by this addition. The lowest construction bid received was $\$17,500,$ the amount recorded in the Buildings account. Company personnel were used to construct the addition at a cost of

$\$16,000$ (materials, $\$7,500;$ labor, $\$5,500;$ and overhead, \($3,000).

4.\) On August 18, Halvorson paid $\$5,000$ for paving and fencing a portion of land owned by the corporation for use as a parking lot for employees. The expenditure was charged to the Land account.

5. The amount shown in the Retirements column for the machinery and equipment asset represents cash received on September 5, on disposal of a machine purchased in July 1995 for $\$48,000.$ The bookkeeper recorded depreciation expense of $\$3,500$ on this machine in 2001.

6. Crux City donated land and building appraised at $\$10,000$ and $\$40,000,$ respectively, to Halvorson for a plant. On September 1, the corporation began operating the plant. Because no costs were involved, the bookkeeper made no entry for the no foregoing tranSaction.

Required:

a. In addition to inquiring of the client, explain how you found each of the given six items during the audit.

b. Prepare the adjusting journal entries with supporting computations that you would suggest at December 31, 2004, to adjust the accounts for the listed transactions.
Disregard income tax implications.