Cash ?ows, debt restructuring, effect on income under bank- ruptcy and nonbankruptcy law. In an attempt to avoid liquidating the company, the management of Carter, Inc., is considering a reorganization that calls for the restructuring of $2,100,000 of debt maturing in three years and related accrued interest payable of $72,737. The restructuring agreement calls for monthly payments over the next 60 months, a reduction in the interest rate to 8%, and the cancellation of $200,000 of debt. The market rate of interest for such a re?nancing would be 13%. In addition to the debt restructuring, management is pro- posing to reduce the par value of its common stock in order to generate enough paid-in capital in excess of par value to absorb a $500,000 de?cit in retained earnings. The present balance of paid-in capital in excess of par value is $80,000.
1. Prepare a schedule to determine the total gain resulting from the forgiveness and restructuring of debt and the amount of future interest expense assuming (a) a nonbankruptcy approach and (b) a bankruptcy approach to the reorganization.
2. Determine by how much the par value of common stock would have to be reduced in order to absorb the de?cit in retained earnings assuming (a) a nonbankruptcy approach and (b) a bankruptcy approach.