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 $250,000 over the last three years. The company's balance sheet as of December 31, 20X7, is as follows:
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Assets
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Liabilities and Equity
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Cash
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$ (15,000)
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Accounts receivable (net)
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$ 320,000
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Accounts payable
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500,000
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7% Note payable
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1,500,000
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Inventory
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150,000
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Common stock at par
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550,000
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Plant and equipment (net)
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1,560,000
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Contributed capital in excess of par
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550,000
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Goodwill
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150,000
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Retained earnings
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(300,000)
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Other assets
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35,000
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20X7 Net income
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(240,000)
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Total assets
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$2,380,000
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Total liabilities and equity
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$2,380,000
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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.