Valuing inventory at replacement cost Refer to P9.6. Svejk is considering whether to change the basis of valuation of its inventory from historical cost to replacement cost (RC). Assume that, at the time of the April x6 sale, the tankard’s RC is 5; at the time of the August sale, it’s 5.5; and at year-end, it has risen again to 6.5.

Required

(a) Calculate the x6 gross profit for the Pilsener Special tankard on an RC basis. What is the effect on Svejk Company’s end-x6 balance sheet of valuing its tankard inventory at RC rather than at FIFO HC?

(b) Determine the holding gains which Svejk realised in x6 as a result of purchasing tankards when the price was low. Assume that in determining the historical cost of inventory sold, Svejk assumes a FIFO flow of costs.

Check figure:

(a) RC cost of sales 7,400 AppenedixLO1