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Exercise 17

The Skinny Red Company wants to undergo a quasi-reorganization to address its retained earnings deficit of $1,000,000. As part of the reorganization, current assets and buildings will be written down by $100,000 and $300,000 respectively. Ordinary share capital will be restated at $4,000,000, with the difference going to additional paid-in capital to eliminate the retained earnings deficit. Journal entries will be made to record the write downs of assets, restatement of share capital, and cancellation of the deficit. A post-reorganization statement of financial position will be presented.

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286 views7 pages

Exercise 17

The Skinny Red Company wants to undergo a quasi-reorganization to address its retained earnings deficit of $1,000,000. As part of the reorganization, current assets and buildings will be written down by $100,000 and $300,000 respectively. Ordinary share capital will be restated at $4,000,000, with the difference going to additional paid-in capital to eliminate the retained earnings deficit. Journal entries will be made to record the write downs of assets, restatement of share capital, and cancellation of the deficit. A post-reorganization statement of financial position will be presented.

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faye panti
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The Skinny Red Company has a deficit in retained earnings

of P 1,000,000. Business appears to be turning around, so


the president wants the company to go through a quasi-
reorganization. The statement of financial position of the
company prior to the reorganization contains the following
information:
Current assets P 500,000
Land 1,500,000
Buildings 5,000,000
Liabilities 1,000,000
Accumulated Depreciation 1,000,000
Ordinary share capital, 20 par value 6,000,000
Retained earnings (Deficit) (1,000,000)

As part of the quasi-reorganization, the current assets and


buildings are to be written down by P 100,000 and P
300,000, respectively. Ordinary share capital is to be
exchanged and will be restated at a legal capital of P
4,000,000. The resulting additional paid in capital will be
used to cancel the resulting deficit.
a.) Journal entries to record
the quasi-reorganization.

b.) A statement of financial


position immediately after
the quasi-reorganization
REVALUATION FOR BUILDING:
Original Value Change in % RV Amount
(7.5%)
Cost 5,000,000.00 375,000.00 4,625,000.00
(5M x 0.075)
Accumulated Depreciation 1,000,000.00 75,000.00 925,000.00
(1M x 0.075)
Carrying Value 4,000,000.00 300,000.00 3,700,000.00

300, 000 / 4,000,000


= 0.075
A. JOURNAL ENTRIES
i.) Written down of assets

ii.) Restated Capital


iii.) Cancellation of Deficits
B. STATEMENT OF FINANCIAL POSITION
Skinny Red Company
Statement of Financial Position

Current Assets 400,000.00 Liabilities 1,000,000.00


Land 1,500,000.00 Shareholder's Equity:
Building 4,625,000.00 Ordinary Share Capital 4,000,000.00
Accum. Depreciation (925,000.00) Ordinary Share Premium 600,000.00 4,600,000.00
Total Assets 5,600,000.00 Total Liabilities and Shareholder's Equity 5,600,000.00

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