Lawrences Company operates a real estate abstract, title, and insurance company. Below are selected transactions and events that occurred during the years 20X1 to 20X4. Using those transactions and events, follow the instructions given.

TRANSACTIONS AND EVENTS 20X1 AND 20X2

The company purchased a building site for $225,000 on August 2, 20X1. Preparation for construction began in October. Costs that were incurred other than land in 20X1 and 20X2 were:

grading and preparing the site, $10,000. in late June 20X2, paving the sidewalks and parking lot, $18,750 (estimated life 15 years, no salvage value; straight-line depreciation to be used). fencing back of the property, $4,000, erected in same week building was completed (estimated life, 10 years; no salvage value; straight-line depreciation to be used). building construction contract costs $180,000, completed June 25, 20X2 (estimated life, 35 years; salvage value, $5,000; straight-line depreciation to be used). telephone system installed in the last week of June 20X2, $10,000 (estimated life, five years; estimated salvage value, $1,000; sum-of-the-years-digits depreciation method to be used). furniture and fixtures purchased in late June 20X2, $22,500 (estimated life, 10 years; estimated salvage value, $1,500; double-declining-balance method to be used).

The company opened for business in the new building on July 5, 20X2. During the remainder of 20X2, the business grew at about the pace anticipated by the companys management when the project was planned.

20X3 AND 20X4

The business continued to grow at the anticipated pace in 20X3. In June 20X4, a rumor was circulated that a hazardous waste deposit existed on the companys property, but no evidence was presented to support the allegation. In November 20X4, 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 companys attorneys are concerned about the investigation because the companys 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 20X4. In late December 20X4, the companys 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. Required:

1. Prepare the adjusting entries on December 31, 20X2, 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) 20X2 and (2) 20X3. (Use MACRS Table).

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

4. Do you agree with the companys financial manager that depreciation should be reduced in 20X4 because of the decline in business?