I Found Gold!!! Can It Go on My Balance Sheet?
Ling Company owns several mining claims in Nevada and California. The claims are carried on the books at the cost paid to acquire them 10 years ago. At that time, it was estimated that the claims represented ore reserves valued at $250,000, and the price paid for the properties reflected this value. Subsequent mining and exploration activities have indicated values up to four times the original estimate. Additional capital is needed to pursue the claims, and Ling has decided to issue new shares of common stock. The company wants to report the true value of the claims in the financial statements to make the stock more attractive to potential investors. The accountant, Jennifer Harrison, realizes that the cost basis of accounting does not permit the recording of discovery values. On the other hand, she believes that to ignore the greatly increased value of the claims would be misleading to users. Isn’t there some way the recorded asset values can be increased to better reflect future cash flows arising from the claims? You are hired as an accounting consultant to assist Ling in obtaining additional capital. What recommendations can you make?