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.

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A: Please see Step 2 for the required information.

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Inventory Valuation

Before discussing the topic inventory valuation let’s discuss the meaning of inventory. In accounting, inventory is also known as stock. Inventory means all the finished goods, materials, merchandise that a business holds for the purpose of selling it in the market with the motive of earning profit.