The auditor on inquiring as to the cause of the sudden increase in values shown by the Real Estate account is often told that "the land was valued by three experts, and that the new figures represent the lowest valuation." Still, the land is not yet sold. Again, a conservative merchant who has on hand 1,000 barrels of flour which cost $8 each, would not enter them in his inventory at an increased price, even though a hundred experts might truly testify that the flour was worth $10 a barrel. Why should a different practice obtain in the case of real estate?

This is one of the questions which must ultimately be decided by the circumstances of each case. As a general rule, especially in companies where real estate forms the main asset, the safe and proper plan is to take the real estate at its actual cost, and to adhere strictly to the recognized principle that inventories should always be based on such cost.

The balance sheet, and therefore the Property account in the general ledger, should always show the actual cost of real estate, that is, the cost of acquirement. Most people, when examining a balance sheet, do not consider interest as a part of the cost, and would therefore be misled to some extent if it were included in the Real Estate account.

The cost of acquiring real estate will properly include those expenditures which materially enhance the value of the property, such as physical improvements; but the mere payment of interest does not in any way affect that value, and should not be treated as if it did.