Question 2 Suppose that the Lannister Company issued, at par, $40 million of 5-percent annual coupon bonds many years ago. The bonds now have 20 years until maturity. The market interest rate is now 9 percent. As a result, the market value of the bonds has dropped to 63.5 percent of par. Lannister has $5 million of current liabilities and $35 million of shareholders' equity in addition to the $40 million of long-term debt in its financial structure. The debt-to-equity ratio (= total liabilities / total liabilities plus shareholders' equity) is 56 percent [= ($40 + $5)/($5 + $40 + $35)]. Shareholders' equity includes the current year's income before any additional transaction described below. Tywin, the president of the Lannister Company, is concerned about boosting reported income for the year, which is about $8 million in the absence of any other actions. Also, the debt-to-equity ratio appears to be larger than that of other firms in the industry. The president wonders what the impact on net income and the debt-to-equity ratio would be if the company issues, at par, new 9- percent coupon bonds to mature in 20 years and uses the proceeds to retire the outstanding bond issue using open market purchases. Ignore all tax consequences of the bond retirement. Required: a. Prepare the accounting entries for 1) the issuance of the new bonds in the amount required to raise the needed funds to retire the old bonds, and 2) for the retirement of the old bonds. b. What is the effect of the transaction on the income for the year? Give both the dollar amount and percentage change. c. What is the debt-to-equity ratio after the transaction