Cash flows, debt restructuring, effect on income under bankruptcy and nonbankruptcy law. Peltzer…

Cash flows, debt restructuring, effect on income under bankruptcy and nonbankruptcy law. Peltzer Manufacturing is experiencing financial difficulties. Rather than entering into a lengthy bankruptcy proceeding, the company has reached an agreement with its long-term creditors to restructure various loans. The restructured loans are described below.

Loan A—This 12% debt has a principal balance of $4,000,000 and accrued interest of $80,000. Under the restructuring agreement, $500,000 of debt would be forgiven, and the balance of the amounts due would be refinanced at a rate of 10% with monthly installment payments of $50,000 and a term of eight years. Assets with a net realizable value of $2,500,000 would also be pledged as additional security against the restructured loan.

Loan B—This debt has a principal balance of $1,000,000 and accrued interest of $25,000. Under the restructuring agreement, the accrued interest would be forgiven, and the principal amount would be exchanged for preferred stock with a par value of $500,000 and a fair value of $900,000.

Loan C—This 12% debt has a principal balance of $2,000,000 and accrued interest of $37,500. Under the restructuring agreement, the creditor would receive a parcel of land with a book value of $200,000 and a fair value of $250,000. The remaining unpaid balance would be refinanced over five years at a 9% interest rate. Installment payments would be on a quarterly basis.

1. Determine the total quarterly cash outflows that will be required by Peltzer’s debt restructuring.

2. Covering the first quarter subsequent to restructuring, prepare a schedule that compares the effect on Peltzer’s net income of accounting for the restructuring as part of a formal bankruptcy filing versus it not being part of such a filing.

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