Plum Creek Timber Company, Inc. , is a Washington State forest products company. Its largest asset is Timber and Timberlands carried on its balance sheet at $3,377 million on December 31, 2011. This represents 79% of Plum Creek’s total assets. A footnote indicates that “timber and timberlands . are stated at cost.” This means that the book value of the land and timber is the cost Plum Creek paid for it whenever it purchased the property. Also on Plum Creek’s books are cash of $254 million; property, plant, and equipment of $138 million; and inventories of $53 million.
1. Does the timber and timberlands book value better meet the criterion of relevance or the criterion of faithful representation? Explain.
2. Plum Creek’s total assets are the sum of the book value of timber and timberlands; cash; property, plant, and equipment; inventories; and several other relatively small assets. What problem do you see with adding these amounts together when measuring total assets?
3. Is there an alternative measure of the timber and timberlands that might be more relevant than the original cost? If so, what is it? Would your measure meet the criterion of faithful representation as well as the original cost does?