C is corrent. Many states prohibit a company from declaring dividends when it has a deficit retained earnings balance. A quasi reorganization eliminates an accumulated deficit and permits the company to continue as if it were legally reorganized without the additional expense of legal reorganization. In a quasi reorganization, assets are revalued to their fair market value, and retained earnings is charged against additional paid-in capital to eliminate the deficit. In this question, the assets were written down which means the deficit balance in retained earnings will increase. However, when the deficit is eliminated, retained earnings will increase and additional paid-in capital is decreased as shown by the entry below.| Paid-in capital | (Deficit amount) | | | | (Deficit amount) |
Note that retained earnings will have increased from its negative balance to zero.
A is incorrect.Many states prohibit a company from declaring dividends when it has a deficit retained earnings balance. A quasi reorganization eliminates an accumulated deficit and permits the company to continue as if it were legally reorganized without the additional expense of legal reorganization. In a quasi reorganization, assets are revalued to their fair market value, and retained earnings is charged against additional paid-in capital to eliminate the deficit. In this question, the assets were written down which means the deficit balance in retained earnings will increase. However, when the deficit is eliminated, retained earnings will increase and additional paid-in capital is decreased as shown by the entry below.| Paid-in capital | (Deficit amount) | | | | (Deficit amount) |
Note that retained earnings will have increased from its negative balance to zero.
B is incorrect. Many states prohibit a company from declaring dividends when it has a deficit retained earnings balance. A quasi reorganization eliminates an accumulated deficit and permits the company to continue as if it were legally reorganized without the additional expense of legal reorganization. In a quasi reorganization, assets are revalued to their fair market value, and retained earnings is charged against additional paid-in capital to eliminate the deficit. In this question, the assets were written down which means the deficit balance in retained earnings will increase. However, when the deficit is eliminated, retained earnings will increase and additional paid-in capital is decreased as shown by the entry below.| Paid-in capital | (Deficit amount) | | | | (Deficit amount) |
Note that retained earnings will have increased from its negative balance to zero.
D is incorrect. Many states prohibit a company from declaring dividends when it has a deficit retained earnings balance. A quasi reorganization eliminates an accumulated deficit and permits the company to continue as if it were legally reorganized without the additional expense of legal reorganization. In a quasi reorganization, assets are revalued to their fair market value, and retained earnings is charged against additional paid-in capital to eliminate the deficit. In this question, the assets were written down which means the deficit balance in retained earnings will increase. However, when the deficit is eliminated, retained earnings will increase and additional paid-in capital is decreased as shown by the entry below.| Paid-in capital | (Deficit amount) | | | | (Deficit amount) |
Note that retained earnings will have increased from its negative balance to zero. |
