Ames Corporation has been experiencing difficulties servicing its long-term debt which has a current balance of $620,000
Question:
Ames Corporation has been experiencing difficulties servicing its long-term debt which has a current balance of $620,000 including accrued interest. Ames is considering two possible alternatives to restructuring 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 five annual payments of$135,000. All payments are to be made at the end of the respective years. The market 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.
Financial and Managerial Accounting the basis for business decisions
ISBN: 978-0078111044
16th edition
Authors: Jan Williams, Susan Haka, Mark Bettner, Joseph Carcello