Entries to record a quasi-reorganization. Frankton Corporation has experienced difficult financial times for the past five years resulting in serious cash flow problems, negative earnings, and...

Entries to record a quasi-reorganization. Frankton Corporation has experienced difficult financial times for the past five years resulting in serious cash flow problems, negative earnings, and increasing deficits in retained earnings. The negative cash flows from operations have been managed in part by debt financing, particularly from a major shareholder making loans to the corporation. The level of debt financing is not sustainable and the corporation has decided to engage in a quasi-reorganization. Key elements of the reorganization are as follows:

1. After the reorganization, retained earnings should have a zero balance. The current balance is a deficit of $300,000.

2. Interest bearing debt in the amount of $300,000, held by the major shareholder, will be extinguished in exchange for $250,000 of consideration represented by preferred stock with a par value of $50,000.