Effect of a quasi-reorganization. Marshall Tool and Die Com- pany has been experiencing signi?cant foreign competition and a declining market. Annual net losses from operations have averaged $250,000 over the last three years. The company's balance sheet as of December 31, 20X7, is as follows:
Assets
|
|
Liabilities and Equity
|
|
Cash
|
$ (15,000)
|
Accounts receivable (net)
|
$ 320,000
|
Accounts payable
|
500,000
|
7% Note payable
|
1,500,000
|
Inventory
|
150,000
|
Common stock at par
|
550,000
|
Plant and equipment (net)
|
1,560,000
|
Contributed capital in excess of par
|
550,000
|
Goodwill
|
150,000
|
Retained earnings
|
(300,000)
|
Other assets
|
35,000
|
20X7 Net income
|
(240,000)
|
Total assets
|
$2,380,000
|
Total liabilities and equity
|
$2,380,000
|
After analyzing accounts receivable and inventory, it has been determined that the allowance for uncollectibles should be increased by $75,000 and the inventory should be written down by $20,000. Based on recent appraisals, it is estimated that the plant and equipment have a market value of $900,000. The goodwill is traceable to the purchase of a small tooling company in 20X3. Based on an analysis of cash ?ows associated with that acquisition, it is estimated that the goodwill has an impaired value of $0. Other assets represent a note receivable from of?cers of the corpora- tion. The note calls for ?ve annual payments of $8,309 including interest at the rate of 6%.
In response to the current situation, the company has decided to take the following actions:
a. Record the suggested impairment in all assets.
b. Restructure the note receivable from the of?cers to re?ect four annual payments and an interest rate of 7.5%.
c. Restructure the note payable, which was due in 20X9, to provide for 12 semiannual pay- ments of $120,000 including interest at the annual rate of 6%.
d. Engage in a quasi-reorganization to eliminate the de?cit in retained earnings.
1. Prepare a revised classi?ed balance sheet to re?ect the effect of management's actions.
2. Compute the following ratios before and after management's actions: current ratio and debt-to-equity ratio.
3. Given the above ratio analysis, if the ratios do not suggest an improvement, discuss the bene- ?ts of management's actions.