Question

Given the following information for a firm before their Quasi- Reorganization:

                                              BV                            FMV  

Assets                                 $ 200,000            $ 220,000

Liabilities                           $ 220,000           $ 215,000

C/S ($10 par)                    $   10,000                         

APIC                                    $   40,000

R/E                                       <$70,000>

List the steps and the required journal entries necessary to complete the Quasi-Reorganization.

Answer 1

A QUASI-REORGANIZATION is a provision under U.S. GAAP which provides that under certain circumstances a firm may eliminate a deficit in its retained earnings account by restating assets,liabilities and equity.

Circumstances/Conditions for Quasi Reorganization:

1.Total book value of the firm’s assets is more than fair value of Assets.

2.There is a debit balance in Retained Earnings but total assets exceed total liabilities.(This condition is applicable in given question)

Steps to complete Quasi Reorganization:

1.Revaluation of Assets And Liabilities. It should be recorded at fair value. (Assets=$220000;Liabilities=$215000)

2.Close the Retained Earning A/c.After Quasi Reorganization takes place the retained earning A/C balance must be zero.

3.Recapitalize the equity structure—after the quasi-reorganization and there must be no equity accounts with debit balances.

JOURNAL ENTRIES(Revaluation Entry:)

Particulars Debit Credit

Assets 20000

Liabilities 5000

Revaluation Surplus 25000 (Being Assets and Liabilities revalued)

Journal entry for Closing Retained Earning A/c and Recaptalize the equity structure:

Particulars Debit Credit

Common Stock 10000

APIC 40000

Capital in excess of par 20000

Retained Earning 70000

(Being retained earning A/c closed and equity structure Recaptalize)

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