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
Retained earningsCommon stockNoncurrent assetsAdditional paid-in capital
Retained earningsCommon stockNoncurrent assetsAdditional paid-in capital
To write down assets to fair value.
Retained earningsCommon stock ($10 par)Noncurrent assetsAdditional paid-in capital
Common stock ($1 par)
Retained earningsCommon stockNoncurrent assetsAdditional paid-in capital
To restructure common stock equity.
Retained earningsCommon stockNoncurrent assetsAdditional paid-in capital
Retained earningsCommon stockNoncurrent assetsAdditional paid-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)
	$

Answer 1

Journal entries to record the quasi-reorganization
General Journal	Debit	Credit
Retained earnings	$600,000
Noncurrent assets		$600,000
(To write down assets to fair value)
Common stock ($10 par)	1700000
Common stock ($1 par)		100000
Additional paid in capital		1600000
(To restructure common stock equity)
Additional Paid in capital	$1,550,000
Retained earnings (950000+600000)		$1,550,000
To eliminate deficit
b.
Following shows the balance sheet post quasi-reorganization
Hassani Corporation
Balance Sheet
Current assets	700000
Non current assets	3000000
	3700000
Current liabilities	600000
Long-term liabilities	2950000
Common stock ($1 par)	100000
Additional paid in capital	50000		1600000-1550000
Retained earnings since (date)	0
	3700000