Quasi-Reorganization
The Hassani Corporation has the following balance sheet:
| Current assets | $ 700,000 | Current liabilities | $ 600,000 |
| Noncurrent assets | 3,600,000 | Long-term liabilities | 2,950,000 |
| | Common stock ($10 par) | 1,700,000 |
| | Retained earnings | (950,000) |
| Total assets | $4,300,000 | Total liabilities and equity | $4,300,000 |
Company profitability has been marginal, in part due to book valuesof noncurrent assets that do not adequately reflect the reducedearning power of the assets. To give its balance sheet a betterbasis for future profitability, the company decides to undertake aquasi-reorganization. Hassani writes down noncurrent assets totheir fair value of $3,000,000 and replaces the current commonstock with 100,000 shares of a new issue having a $1 parvalue.
Required
a. Prepare journal entries to record thequasi-reorganization.
| General Journal |
|---|
| Description | Debit | Credit |
|---|
| Retained earningsCommon stockNoncurrent assetsAdditionalpaid-in capital | | |
| Retained earningsCommon stockNoncurrent assetsAdditionalpaid-in capital | | |
| To write down assets to fair value. | | |
|
| Retained earningsCommon stock ($10 par)NoncurrentassetsAdditional paid-in capital | | |
| Common stock ($1 par) | | |
| Retained earningsCommon stockNoncurrent assetsAdditionalpaid-in capital | | |
| To restructure common stock equity. | | |
|
| Retained earningsCommon stockNoncurrent assetsAdditionalpaid-in capital | | |
| Retained earningsCommon stockNoncurrent assetsAdditionalpaid-in capital | | |
| To eliminate deficit. | | |
b. Prepare a balance sheet following the quasi-reorganization.
Hassani Corporation
Balance Sheet |
|---|
| Current assets | $ |
| Noncurrent assets | |
| $ |
| Current liabilities | $ |
| Long-term liabilities | |
| Common stock ($1 par) | |
| Additional paid-in capital | |
| Retained earnings since (date) | |
| $ Â Â |
