Caldwell Corporation (a fictional company) operates an ice cream processing plant and uses the FIFO inventory cost flow assumption. A partial income statement for the year ended December 31, 20X2, follows:

Caldwell Corporation
Statement of Income
For the Year Ended December 31, 20X2
Sales revenues	$680,000,000
Cost of goods sold	360,000,000
Gross margin	320,000,000
SG&A expenses	200,000,000
Income before taxes	$120,000,000

Caldwell’s physical inventory levels were virtually constant throughout 20X2. The FIFO dollar amount of inventory at January 1, 20X2, was $60,000,000. During 20X2, the Consumer Price Index (an index of overall average purchasing power for typical urban-dwelling consumers) increased by 4%.

Caldwell Corporation’s largest competitor, Cohen Confections (a fictional company), uses LIFO for inventory accounting. Excerpts from its December 31, 20X2, inventory note were:

Cohen Confections

Inventory Note

Inventories are computed using the LIFO cost flow assumption. Comparative amounts were:

The difference between the LIFO inventory amounts and the replacement cost of the inventory at December 31, 20X2 and 20X1, respectively, was $18,000,000 and $12,000,000. A LIFO liquidation occurred in 20X2, which increased the reported gross margin by $1,000,000.

Required:

Using the preceding information, what is the best estimate of the amount of realized holding gains (or inventory profits) included in Caldwell Corporation’s income before taxes?

Transcribed Image Text:

December 31, 20X2 20X1 $ 8,100,000 76,000,000 $ 84,100,000 $ 8,000,000 80,000,00 Raw materials Finished goods $ 88,000,000