Effect of various restructuring alternatives. Ames Corporation has been experiencing dif?culties servicing its long-term debt which has a current balance of $620,000 including accrued interest. Ames is considering two possible alternatives to restruc- turing the debt. Alternative #1 would consist of conveying vacant land with a fair value of $350,000 and a book value of $275,000 to the creditor. In addition, Ames would make two annual payments of $120,000 each. Alternative #2 would call for Ames to make ?ve annual payments of $135,000. All payments are to be made at the end of the respective years. The mar- ket rates of interest for a 2-year and 5-year note are 10% and 12%, respectively.
1. Prepare a schedule to compare the total effect on net income of Alternatives #1 and #2 related to the restructuring.
2. Discuss whether the alternative with the most favorable effect on net income provides the company with the greatest economic advantage.