Question

P15.14 Quasi-Reorganization The Hassani Corporation has the following balance sheet: LO 5 Current assets ................. Noncurrent assets .............. $ 500,000 4,000,000 ........ Current liabilities....... Long-term liabilities .... Common stock. ....... Retained earnings ....... Total liabilities and 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 ad- equately 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 value 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-reorganization.

Answer 1

a.

Compute journal entries as follows:

No	Accounts	Debit	Credit
1	Retained earnings (4000000 - 3000000)	1000000
	Non current asset		1000000
2	Common stock @10 par	2500000
	Common stock @1 par		100000
	Additional paid in capital		2400000
3	Additional paid in capital (1000000+1200000)	2200000
	Retained earnings		2200000

b.

Prepare balance sheet as follows:

Hassani corporation
Balance sheet
Current assets	500000
Non current assets	3000000
	3500000
Current liabilities	400000
Long term liabilities	2800000
Common stock	100000
Additional paid in capital	200000
Retained earnings	0
	3500000