Moreover, the approximate recovery from a gold or copper mine is a difficult thing to determine; in fact, it probably cannot ordinarily be determined with any reasonable degree of accuracy. On the other hand, a competent geologist may be able to determine the approximate recovery of a coal mine. The produc tion life of an oil well is purely speculative. Stock holders and investors in enterprises of this character must realize that every dollar's worth of dividends is in part a return of capital investment, unless the or ganization is providing a reserve for exhaustion. Furthermore, the investment of a reserve for ex haustion in additional land may not be desirable for, in many instances, the carrying cost of such investments will prove excessive and the investors in the under taking will find themselves land-poor.
The valuation of timber properties is also a very difficult matter. It is true, that expenditures upon growing timber will usually be recovered and reflected in the increased size and value of the timber. How ever, if scientific reforestation is not employed, the proceeds of sales are a return, in part, of capital in vested and, in part, of net profit.
Assets of this character are also subject to fire hazards, in the case of timber property, and floods in the case of mines. These agencies may destroy a large part of the capital invested or cause great loss to stockholders. If contingencies Of this character have not been provided for thru the medium of ade quate reserves, the investor or stockholder must take this into consideration in the valuation of tis interests.
10. Depreciation or appreciation of tuations in the value of land, due to economic condi tions, should be ignored. This has already been pointed out in the volume on "Accounting Practice." Heretofore, consideration of possible depreciation of plant land was not necessary. The shifting of in dustry, however, may cause it to be an important factor against which a reserve for loss in the value of land may be appropriate. We are all familiar with loss in the value of land used for manufacturing pur poses, which is caused by a relocation or shifting of the industry. Along the line of almost any railroad one may see large factories idle, because of either labor conditions or a shifting of the market for fin ished material, or the opening up of new sources of raw materials, which made it more advantageous for the firm to abandon its present quarters and locate elsewhere. This contingency should be considered in valuing land used for plant purposes.
11. Important paints in the valuaticm, of buildings and a firm acquires buildings, vvhich have already been erected, their valuation will be fixed by the board of directors at the date of ac quisition and will be based upon the amount paid for them. When a corporation erects its own buildings, it may undertake to do the work itself, furnishing the material, labor and supervision, or it may award the contract to a construction company. In the latter in stance, the contract price will fix the value of the structure. When the organization undertakes to do its own construction, the cost of the structures will include the cost of all materials used, the cost of the labor necessary to erect the structure, and the cost of foundations and sub-structures, including water mains and similar items. It would be proper also to charge to cost of construction fees paid for the draw ing of plans and specifications or supervision fees paid to an architect. Any proportion of the time spent by the administrative staff of the organization in supervising the work of construction may alsO be so charged. It is also proper to capitalize subsistence charges and transportation expenses of laborers or supervisors who may be employed. In fact, all the incidental and relevant expenses incurred in con structing the buildings should be charged in this way.
Any interest paid on borrowed money used in financing the construction of the building, may be properly charged to its cost until the building is com plete and ready to operate.
It should be noted that there are differences of opinion about the treatment of discounts on issued or debts incurred in financing construction.
The best American practice, at present, does not favor charging this item.
On the other hand, in England, under certain con ditions, a corporation that issued stock to finance the construction of a building might be allowed to pay a reasonable dividend on the capital stock during the time the money was being employed in constructing the building and getting it ready for operation. The amount of the dividend so declared would be charged to construction account.
Some authorities hold that interest on borrowed money used in construction should not be charged to the cost of structure. The reason advanced is that the method of financing the construction of a build ing has nothing to do with its cost. However, the - - weight of authority at the present time seems to be op posed to this theory.