Red Lake Mining Co. engages in the search and mining of gold in North America, principally Canada. During the year, it discovered a substantial new source of gold, which it estimates holds 15.5 million troy ounces of gold. At the time of discovery, gold was selling for $400 per ounce, and it is estimated that the cost of mining the gold will approximate $250 an ounce. There is little doubt that all of the gold will be sold at market prices. The company estimates that the cost of discovering the ore was approximately $25 million, and that it will cost another $225 million to construct a plant to mine the gold.

Required

a. Because there is a ready market for gold, the controller has proposed that the discovery be valued at the market value, or net market value, of the gold discovered. He says that such a valuation better informs investors as to the real value of the company. Would such a valuation be acceptable?

b. How would the auditor verify the estimate of 15.5 million troy ounces of gold?

c. The controller suggests that a depletion schedule be established based on the $250 million of discovery and plant construction. The audit senior suggests that a depletion allowance be established on the $25 million discovery cost, not the $250 million. Would a depletion allowance based on $250 million be acceptable? Explain.