A new CEO was hired to revive the floundering Old Mousetrap Corporation (OMC). T

Question

A new CEO was hired to revive the floundering Old Mousetrap Corporation (OMC). The company had endured operating losses for several years, but confidence was emerging that better times were ahead. The board of directors and shareholders approved a quasi-reorganization for the corporation. The reorganization included devaluing inventory for obsolescence by $205 million and increasing land by $15 million. Immediately prior to the restatement, at December 31, 2015, OMC's balance sheet appeared as follows (in condensed form): Required: 1. Prepare the journal entries appropriate to record the quasi-reorganization on January 1, 2016. 2. Prepare a balance sheet as it would appear immediately after the restatement.

Explanation / Answer

Answer:1 To revalue Assets:

Retained earnings A/C Dr. $205 million

      To inventory A/C                               $205 million

Land A/C Dr. $15 million

   To Retained earnings A/C                      $15 million

To eliminate a portion of the deficit against available additional paid in capital:

Additional Paid in capital A/C Dr. $120 million

       To Retained earnings A/C                               $120 million

To Eliminate the remainder of the deficit against common stock:

Common stock A/C Dr. $470 million

     To Retained earnings A/C                               $470 million

Answer:2

Old Mousetrap Corporation Balance sheet At 1 jan 2016 ($ in millions) Cash 35 Receivables 80 Inventory 255 Land 95 Building and equipment (net) 180 645 Liabilities $475 Common stock (170 million shares at $1 par) 170 Additional paid in capital 0 Retained earnings 0 $645

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