Purchasing Bonds Merely to Report a Gain? For the first nine months of 2006, Purdy Company is experiencing lower earnings than forecasted. Management is searching for ways to increase earn¬

ings during the remainder of the year. The controller has suggested that Purdy issue $1,000,000 of bonds and use the proceeds to acquire its subsidiary’s outstanding 15-year, 10% bonds

($1,000,000 face value), which are currently selling at 90. Those bonds were issued at a premium of $75,000 five years ago; thus a $150,000 gain can be reported in 2006. Purdy’s borrowing rate would be 12%.

Required Evaluate the validity and merits of the controller’s idea.