Question

The balance sheet for the LR Corporation is present below. The only asset on the balance sheet which is in excess of fair market value is inventory, which has a fair market value 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
	330,000
Liabilities	150,000
Common Stock	100,000
Additional paid in capital	220,000
Retained Earnings	(140,000)
	330,000

Answer 1

Answer

Quasi Organisation known as deficit reclassification, which include moving the debit balance of retained earning into the paid in capital. Which requires the journal entry as:

Paid in capital a/c Dr to Retained Earning

The Quasi reorganisation have the following steps which are:

· Step 1

It requires to bring the value of asset & Liabilities to its market value

· Step 2

The resulting gain & loss of above entry now require to transfer to retained earning which will increase or decrease the retained earning value

· Step 3

Eliminate the retained earning deficit by credit the retained earnings and debit the paid in capital or Excess of par value