The Mathematics of Money

Copyright © 2008, The McGraw-Hill Companies, Inc.

Under most circumstances, capital gains are calculated on a FIFO basis.

Example 15.2.8 Sarah recently sold 250 shares of Tesla Nitrates Corp. for a total

sale price of $8,745. These shares came from an investment in the company that

she acquired by buying 100 shares of stock in 1999 for $1,755, then 200 shares in

2003, for which she paid $5,578, and fi nally 450 shares that she bought in 2005 for

$24,935. Determine the cost basis for the shares she sold and the capital gain from

the sale.

To calculate her cost basis, we fi rst need to determine which shares she sold from her “inventory”

of shares of Tesla Nitrates stock. We do this in the same way as with inventory.

Lot

Number of

Shares Cost

Number

Sold

Number

Left

1 100 $1,755 100 0

2 200 $5,578 150 50

3 450 $24,935 0 450

In this case, though, we are not interested in the cost of her remaining shares, we are interest

in her cost for the shares she sold. She sold the entire fi rst lot and 150/200 of her second lot.

Her cost basis for the shares she sold was then:

Cost basis
$1,755  (^)
150200 ____ (^)  $5,578
$1,755  $4,183.50
$5,938.50
Her capital gain is then:
Capital gain
$8,745  $5,938.50
$2,806.50
Copyright © 2008, The McGraw-Hill Companies, Inc.
EXERCISES 15.2
A. Average Cost

1. A dairy bought 450 gallons of organic milk from one farmer for $1,135, and 675 gallons from a second farmer for
   $2,403. Based on these purchases, calculate the dairy’s average cost per gallon of organic milk.


2. A municipal electric utility charges its business customers 5.2 cents per kilowatt hour for the fi rst 2,800 kilowatt-hours
   used in a month, and 8.3 cents per kilowatt-hour for any use above this amount. If your company uses 4,372 kilowatt-
   hours in May, what would your average cost per kilowatt hour be for that month?


3. Burned Beans Coffee Shop ordered 85 pounds of Charred Roast coffee beans at a cost of $5.35 per pound, for a total
   cost of $454.75. They placed a new order for 57 pounds at $6.10 per pound for a total cost of $347.70. When the new
   order arrived they had 28 pounds left from the original order. Calculate the value of their inventory of this type of coffee
   bean using the average cost method.


4. Stassler Hardware ordered 25 model TJX-35 chain saws. The total cost of this order was $1,813. After a few weeks,
   the store manager placed a new order for another 20 at a cost of $1,575. When this order arrived, they had 8 saws left

Exercises 15.2 599