Impact of a troubled debt restructuring on income. Howard Manufacturing has two debts outstanding with a creditor. Howard is experiencing financial difficulties, and the creditor has granted a concession. Therefore, accounting for the debt in question qualifies as a troubled debt restructuring. At the date of the restructuring, July 1 of the current year, the two debts and the proposed restructuring are as follows:
Debt A—This debt has a carrying value of $1,200,000 plus accrued interest of $24,000 at the restructuring date. The terms of restructuring call for Howard to transfer to the creditor a vacant parcel of land with a fair market value of $600,000 and a book value of $425,000. In addition, Howard will pay $70,000 to the creditor at the end of each of the next eight calendar quarters.
Debt B—This 6% debt has a carrying value of $2,100,000 and accrued interest of $52,500. The terms of the restructuring call for Howard to issue nonvoting common stock with a fair value of $500,000 to the creditor. In addition, $193,553.02 will be paid at the end of each of the next seven quarters, along with an additional payment of $400,000 at the end of the seventh quarter. Determine the total impact on income of the above restructurings for the current year.