Required:

Prepare the journal entries necessary to record the following items that were part of the quasi-
reorganization:

a. Inventory is to be reduced to its fair market value of $90,000.

b. The plant and equipment is to be revalued to $70,000 through the Accumulated

Depreciation account.

c. Par value of the stock is reduced to $1 per share and the deficit is eliminated.

ANS:
a. Retained Earnings 15,000
Inventory 15,000

b. Retained Earnings 10,000

Accumulated Depreciation 10,000

c. Common Stock ($10 par) 50,000

Common Stock ($1 par) 5,000
Reorganization Capital 45,000

Reorganization Capital 40,000

Retained Earnings 40,000

DIF: M OBJ: 21-2

4. Below is a list of unsecured items that may arise during a Chapter 7 liquidation.

a. Wages up to $4,000 earned within 90 days before the filing.

b. Tax claims of a government unit.

c. Debts incurred after commencement of involuntary bankruptcy but before the order for
relief.

d. Claims of general creditors not granted priority.

e. Deposits up to $1,800 each for goods or services never received from the debtor.

f. Expenses to administer the estate.

g. Unpaid contributions to employee benefit plans arising from service performed up to 180
days before filing, up to $4,000 per employee covered.

Required:

Reorder the list of unsecured items by the priority they will receive to meet unsecured claims from
amounts available.

ANS:
1. f. Expenses to administer the estate.

21-1
DIF: E OBJ: 21-5

21-2