b)Mandell Company manufactures tennis equipment and has been in operations for five years. Over the years, the company used its cash flows from operations and investments from its main owner Robert Mandell,to finance its operations. However, the company is now contemplating expanding its production line into the manufacturing of products for other sporting activities.

Mandell realizes that he will need additional funds to finance the companys expansion plan and is considering to borrow a note payable or to issue bonds. In the past, the company has had little need for external borrowing so the management team has a number of questions concerning the accounting for these new non-current liabilities. They have asked you to conduct some research on this topic.

Instructions

i.With respect to a decision of issuing notes or bonds, management is aware of certain costs (e.g., printing, marketing, and selling) associated with a bond issue. How will these costs affect the companys reported earnings in the year of issue and while the bonds are outstanding?(3 marks)

ii.If the companys expansion is successful, the financial performance of Mandell Company could dramatically improve. As a result, the companys market rate of interest (which is currently around 10%) could decline.

This raises the possibility of retiring or exchanging the debt, in order to get a lower borrowing rate. How would such a debt extinguishment be accounted for?(3 marks)

Provide all the workings