Frankton Corporation has experienced difficult financial times for the past five years resulting in serious cash flow pro- blems, 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 share- holder 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.

3. Treasurystockwithacostof$150,000wasretirednotingthatthe10,000commonsharesof $10 par value were originally sold for $13 per share.

4. Inventory with a book value of $80,000 was written off and equipment with a net book value of $840,000 and an original cost of $1,200,000 was written down to a net book value of $700,000, in part through the elimination of accumulated depreciation.

5. The par value of the remaining 94,000 shares of outstanding common stock was reduced from $10 to $5 per share.