Question

Problem 2-P15.14 Please solve this problem below. Quasi-Reorganization: The Hassani Corporation has the following balance sheet: Current assets Noncurrent assets $500,000 $4,000,000 Current Liabilities Long-term liabilities Common Stock Retained Earnings Total Liabilites & Equity $400,000 $2,800,000 $2,500,000 -1,200,000 $4,500,000 Total assets $4,500,000 Company profitability has been marginal, in part due to book values of noncurrent assets that do not adequately reflect the reduced earning power of the assets. To give its balance sheet a better basis for future profitability, the company decides to undertake a quasi-reorganization. Hassani writes down noncurrent assets to their fair alue of $3,000,000 and replaces the current no-par common stock with 100,000 shares of a new issue having a $1 par value. Required: a. Prepare journal entries to record the quasi-reorganization. b. Prepare a balance sheet following the quasi-reorganiztion.

I would just like to know if i'm correct before submitting.

Answer 1

The above solution is absolutely correct. so you can submit the answer. :)

The main goal of a quasi-reorganization is to bring the retained earnings balance to zero. First, overvalued assets should be written down to fair value with a direct reduction to retained earnings. Although this increases the deficit momentarily, it will reduce future depreciation expense. Liabilities are also restated to their fair values with any resulting offsets going to the retained earnings deficit.

Once assets have been reduced to fair value, either additional paid-in capital or the par value of common stock is reduced in order to balance out the elimination of the retained earnings deficit. Companies have some flexibility when deciding how to proceed with the quasi-reorganization – it is possible to reduce par value, increase additional paid-in capital, and zero out retained earnings at the same time.