Henning Inc. is a medium-sized manufacturer that has been experiencing losses for the five years that it has been in business. Henning is a private company. Although the operations for the year just ended resulted in a loss, several important changes resulted in a profitable fourth quarter, and the company’s future operations are expected to be profitable. The treasurer, Peter Henning, suggests that there be a financial reorganization to eliminate the accumulated deficit of $650,000.
Instructions
(a). What are the characteristics of a financial reorganization? In other words, what does it consist of?
(b). List the conditions that generally justify a financial reorganization.
(c). Discuss the propriety of the treasurer’s proposals to eliminate the deficit of $650,000.
(AICPA adapted)