A company with a substantial deficit undertakes a quasi-reorganization. Certain assets will be written down to their present fair market value. Liabilities will remain the same. How would the entries to record the quasi-reorganization affect each of the following? Contributed Capital Retained Earnings
A) Increase Decrease
B) Decrease No effect
C) Decrease Increase
D) No effect Increase

Question

Quizplus · Accepted Answer

In a quasi-reorganization, certain assets are written down to their present fair market value without any corresponding reduction in liabilities. This will result in a decrease in the book value of assets and an increase in the deficit. However, the deficit is resolved through a reduction in contributed capital, not retained earnings. Thus, the entries to record the quasi-reorganization will decrease the contributed capital and increase retained earnings.

A Company with a Substantial Deficit Undertakes a Quasi-Reorganization