COST OR MARKET VALUES. Randy Patterson, the president of Landco, is con- cerned about the way generally accepted accounting principles require his firm to pres- ent its assets. Landco specializes in the acquisition and resale of land that is used for shopping centers. Landco identifies the likely growth areas in Atlanta, Chicago, Seat- tle, and Phoenix. Landco then purchases land in these growth areas that it believes will be suitable for shopping centers. After holding the land for 3 to 5 years, Landco sells the land to shopping center developers. Because Landco purchases land prior to the time it is considered for use as a shopping center, the selling price is typically four to five times the price that Landco pays for the land.

Randy Patterson argues that the requirement that Landco state its assets at cost misleads users of the balance sheet. Randy notes that Landco has received bona fide offers to purchase nearly all the parcels of land that it holds for much more than their cost. Randy argues that Landco should be able to report its inventory of land in the balance sheet at its current market value. Then, Randy argues, users of the balance sheet would be able to assess much more accurately the value of the firm.

REQUIRED:

Why do you suppose generally accepted accounting principles do not permit the kind of accounting Randy Patterson favors? (Hint: You might read paragraph 21 of FASB Statement of Financial Accounting Concepts No. 1 and paragraph 17 of APB Opinion 6 to help formulate your response.) l01