Question

Watsontown Yacht Sales has been selling large power cruisers for 25 years. On January 1, 20X1, the company had $5,950,000 in inventory (based on a FIFO valuation). While the number of yachts in Watsontown Yacht Sales’s inventory remained fairly constant throughout 20X1, by December 31, 20X1, yacht prices were 7% higher than at the start of the year. The company reported cost of goods sold for 20X1 of $23,800,000. Required: Calculate the amount of realized holding gains in Watsontown Yacht Sales’s income for 20X1.

Answer 1

Answer: $416,500

Step-by-step explanation:

The Holding gain will be the amount that inventory increased by in the year.

With the inventory remaining fairly constant and prices increasing to 7% more at the end of the year than the start, the realized holding gain will be;

= 5,950,000 * 7%

= $416,500

The reason this is true is because the closing inventory was higher by 7% than the opening inventory which would have reduced the Cost of Goods sold leading to the Sales income getting a gain of that same 7%.