Special Income Recognition Issues The Broken Rock Mining Company is headquartered in Phoenix, Arizona, and has a series of gold and silver mines in the western United States and South America. It has in inventory at year-end 1,000 troy ounces of gold with a market price of $310 per ounce and 900,000 ounces of silver with a market price of 12 cents per troy ounce. Broken Rock’s costs of producing the refined ore were $270 per troy ounce of gold and 9 cents per troy ounce of silver. In its income statement for the current period, Broken Rock Mining included income of $40,000 (1,000 ounces x $40)

on the gold and $27,000 (900,000 ounces X $0.03) on the silver that was produced during the year but still held in inventory at year-end.

a. What unique characteristics of gold and silver make it possible for a mining company to recognize income on inventory that is not yet sold?

b. Why is Foghorn Motors not permitted to recognize the difference between the sticker price of $41,000 on a new sports utility vehicle it has just produced and its production and distribution costs of $32,000 as income at the time the SUV is produced?

c. If Broken Rock is confident that it will be able to extract an additional 300,000 ounces of gold from its largest mine at a cost of $270 per troy ounce, would it be appropriate for Broken Rock to recognize income of $12,000,000 [($310 — $270) < 300,000 ounces] in the current period?
Explain.

d. The price of precious metals varies substantially from year to year. Is this likely to make reported income for mining companies more volatile than other types of companies?
Explain.