For the last several years, Manion Corporation has encountered a declining market for its major product line. Attempts to diversify have led to additional disappointments. This unfortunate set of circumstances has left the company with significant debt and an inability to service its debt. The existing debt consists of $20,000,000 of principal and $875,000 of accrued interest. Discussions with the creditors have resulted in a proposed restructuring of debt. The restructuring would consist of the following actions:
a. Exchanging preferred stock with a fair value of $5,100,000 and a par value of $5,000,000 in exchange for full settlement of $5,500,000 of principal debt.
b. Exchanging land with a value of $4,000,000 and a book value of $3,000,000 in exchange for $4,500,000 of principal debt.
c. The remaining debt and accrued interest would be repaid over the next 10 years with semi-annual payments due every six months. The annual stated rate would be 8.5%.
Past operating losses have resulted in a deficit in retained earnings of $3,400,000. In addition to the deficit, the company’s equity includes common stock at par value of $6,000,000 and contributed capital in excess of par value in the amount of $1,000,000.
Required
Prepare a schedule that determines the effect on current income of the debt restructuring and the reduction in par value of the common stock necessary to eliminate any deficit in retained earnings. Assume that the restructuring is not part of a formal bankruptcy filing.