Wheeless Company operates a real estate abstract, title, and insurance company. Below are selected transactions and events that occurred during the years 2019 to 2022. Using those transactions and events, follow the instructions given.

INSTRUCTIONS

1. Give the adjusting entries on December 31, 2020, to record depreciation expense for the year on all assets.

2. a. Compute the amount of MACRS cost recovery for tax purposes on the furniture and fixtures in (1) 2020 and (2) 2021.

b. What is the MACRS recovery period for the building?

3. Should Wheeless’s management be concerned with the possibility of asset impairment at the end of 2022? Explain.

4. Do you agree with the company’s financial manager that depreciation should be reduced in 2022 because of the decline in business? Explain your answer.

TRANSACTIONS AND EVENTS 2019 AND 2020

The company purchased a building site for $450,000 on August 2, 2019. Preparation for construction began in October. Costs, other than land costs, incurred in 2019 and 2020 were:

a. grading and preparing the site, $20,000.

b. paving the sidewalks and parking lot, $37,500 (estimated life 25 years, no salvage value; straight-line depreciation to be used).

c. fencing back of the property, $8,000, erected in same week building was completed (estimated life, 15 years; no salvage value; straight-line depreciation to be used).

d. building construction contract costs $360,000, completed June 25, 2020 (estimated life, 35 years; salvage value, $10,000; straight-line depreciation to be used).
e. telephone system installed in the last week of June 2020, $20,000 (estimated life, six years; estimated salvage value, $2,000; sum-of-the-years’-digits depreciation method to be used).
f. furniture and fixtures purchased in late June 2020, $45,000 (estimated life, 10 years; estimated salvage value, $3,000; double-declining-balance method to be used).
The company opened for business in the new building on July 5, 2020. During the remainder of 2020, the business grew at about the pace anticipated by the company’s management when the project was planned.
2021 AND 2022
1. The business continued to grow at the anticipated pace in 2021.
2. In June 2022, a rumor was circulated that a hazardous waste deposit existed on the company’s property, but no evidence was presented to support the allegation. In November 2022, an investigative team from local, state, and federal health services arrived on the scene to conduct a detailed investigation of the property. In the third week of December, they reported having found what had once been a dump site. The investigators took many samples and sent these to laboratories, then left, stating they would return in the second week of January. They hope to have tentative laboratory reports at the time of their return. The company’s attorneys are concerned about the investigation because the company’s insurance does not cover losses from this problem and the state law places responsibility on the current owner to clean up the property. Because of the rumors, customers were reluctant to come to the building and business declined dramatically in November and December 2022.
3. In late December, the company’s executive manager suggested that because of the decline in business the company should reduce its current depreciation charge, resulting in lower depreciation in the next few years, with greater depreciation in subsequent years. The manager thinks his plan is akin to units-of-production depreciation and he expects future business to be greater, resulting in higher depreciation at that time.