Question

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 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 value of $3,000,000 and replaces the current 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.

General Journal
Description	Debit	Credit
AnswerRetained earningsCommon stockNoncurrent assetsAdditional paid-in capital	Answer	Answer
AnswerRetained earningsCommon stockNoncurrent assetsAdditional paid-in capital	Answer	Answer
To write down assets to fair value.
AnswerRetained earningsCommon stock ($10 par)Noncurrent assetsAdditional paid-in capital	Answer	Answer
Common stock ($1 par)	Answer	Answer
AnswerRetained earningsCommon stockNoncurrent assetsAdditional paid-in capital	Answer	Answer
To restructure common stock equity.
AnswerRetained earningsCommon stockNoncurrent assetsAdditional paid-in capital	Answer	Answer
AnswerRetained earningsCommon stockNoncurrent assetsAdditional paid-in capital	Answer	Answer
To eliminate deficit.

b. Prepare a balance sheet following the quasi-reorganization.

Hassani Corporation Balance Sheet
Current assets	Answer
Noncurrent assets	Answer
	Answer
Current liabilities	Answer
Long-term liabilities	Answer
Common stock ($1 par)	Answer
Additional paid-in capital	Answer
Retained earnings since (date)	Answer
	Answer

Answer 1

a)

General Journal
Description	Debit	Credit
Retained Earnings	$600,000
Non-Current Assets ($3,600,000 - $3,000,000)		$600,000
(To record write off the non current assets to its fair value)
Common Stock (170,000 shares * $10 par)	$1,700,000
Common Stock (100,000 shares * $1 par)		$100,000
Additional Paid-in Capital ($1,700,000 - $100,000)		$1,600,000
(To restructure the common stock equity)
Additional Paid-in Capital ($600,000 + $950,000)	$1,550,000
Retained Earnings		$1,550,000
(To eliminate the deficit)

b)

Hassani Corporation
Balance Sheet
Current Assets	$700,000
Noncurrent assets	$3,000,000
Total Assets	$3,700,000
Current Liabilities	$600,000
Long-term liabilities	$2,950,000
Common Stock	$100,000
Additional Paid-in Capital ($1,600,000 - $1,550,000)	$50,000
Retained Earnings since (date)	$0
Total Liabilities and Equity	$3,700,000