You are performing the year-end audit of Halvorson Fine Foods, Inc. for December 31, 2007.The client has prepared the following schedule for the fixed assets 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.

2. On April 1 of this year, 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 of this year. 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 1998 for $48,000.The bookkeeper recorded depreciation expense of $3,500 on this machine in 2007.

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 foregoing transaction

Required
a. In addition to inquiring of the client, explain how you found each of the described items of information during the audit.
b. Prepare the adjusting journal entries with supporting computations that you would suggest at December 31, 2007, to adjust the accounts for the listed transactions. Disregard income taximplications.

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Halvorson Fine Foods, Inc. Analysis of Fixed assets For the Year Ended December 31, 2007 Final Balance. December 31, 2006 Per Books, Additions Retirements December 31, 2007 Assets: Land Buildings Machinery and equip. 22,500 s 5,000 17,500 40,400 $26,000 62,900 $26,000 27,500 120,000 $527 500 5 60,000 399,400 $564,400 Allowance for depreciation Building Machinery and equip. $ 5,150 39,220 65,150 212.470 $277.620 173,200 $233,250 44,370