A company with a $2,000,000 deficit undertakes a quasi-reorganization on November 1, 2020. Certain assets will be written down by $400, 000 to their present fair market value. Liabilities will remain the same. Capital stock was $3,000,000 and additional paid-in capital was $1,000,000 before the quasi-reorganization. How would the entries to accomplish these changes on November 1, 2020, affect each of the following? $\begin{array}{c}
&Capital~Stock&Total ~Stockholders' ~Equity\
\hline
A)&\text { No effect } & \text { No effect } \
B)&\text { No effect } & \text { Decrease } \
C)&\text { Decrease } & \text { Decrease } \
D)&\text { Decrease } & \text { No effect }
\end{array}$

Question

Quizplus · Accepted Answer

The quasi-reorganization only affects the surplus accounts and not the capital stock. In this case, since the liabilities remain the same, the decrease in the deficit will be offset by a corresponding decrease in the additional paid-in capital, resulting in no change to the total stockholders' equity. However, since the present fair market value of certain assets was written down, this will result in a decrease in the capital stock. Therefore, the correct choice is (D), which shows a decrease in the capital stock and no effect on the total stockholders' equity.

A Company with a $2,000,000 Deficit Undertakes a Quasi-Reorganization on November