Cutler Manufacturing manufactures and distributes specialty piping used in the construction industry. Due to the recent contraction in the commercial construction market, Cutler has had difficulty servicing its outstanding debt. In particular, debt bearing interest at a stated rate of 6.00% with 42 remaining payments of $15,000 per month is being considered for restructuring. The creditor and Cutler have identified the following two alternatives:
a. Alternative A: Convey vacant land with a fair market value of $380,000 and a book value of $260,000 to the creditor along with a commitment to make 40 monthly payments of $5,067.60 each. The market rate of interest for a loan with similar characteristics is 6.24%.
b. Alternative B: Convey vacant land with a fair market value of $380,000 and a book value of $260,000 to the creditor along with a commitment to make 60 monthly payments of $3,000 each. The market rate of interest for a loan with similar characteristics is 6.60%.
For each of the above restructuring alternatives, determine the impact on Cutler’s income statement for the first two months of the restructuring period.