Question

The balance sheet for the LR Corp is presented below. The only asset on balance sheet is in excess of fair market value is inventory, which has a FMV of $60,000. LR is planning to undertake a quasi-reorganization.

A. Explain why a company in LR's position may want to undertake a quasi-reorganization?
B. What steps are involved in a quasi-reorganization?
C. Present the necessary journal entries?

Cash		30,000
Receivables		55,000
Inventory		70,000
PP&E (net)		175,000
Total Assets		330,000
Liabilities		150,000
Common Stock		100,000
Additional paid-in-capital		220,000
Retained Earnings		(140,000)
Total Liabilities & SE		330,000

Answer 1

A ) the main goal of quasi reorganization is to bring the retained earnings balance to zero.In this case LR corp has a deficit retained earnings of (140000$) which should be eliminated.

B ) steps involved in Quasi Reorganization.

Overvalued assets should be written down to fair value with a direct reduction in retained earnings. Although this increases the deficit momentarily, it will reduce the future depreciation expense. Liabilities are also restated to their fair values with any resulting offset going to the retained earnings deficit.

Once asset have been reduced to fair value, either additional paid in capital or the par value of common stock is reduced to balance out the elimination of the retained earnings deficit.

C ) Journal Entries :

Additional paid in capital A/c -Dr 150000$

To inventory A/c. 10000$

To retained earnings deficit A/c. 140000$

( Being retained earnings are eliminated and inventory valued at FMV and adjusted against additional paid on capital )