18.5 On 1 January 20X1, N.N. Tree, a retired accountancy lecturer, started a business selling caravans. His starting capital was £100,000. His purchases and sales during 20X1 were as follows:

Purchases 2 January 10 caravans at £5,000 each 10 July '

15 caravans at £6,000 each Sales Replacement cost 30 January 2 caravans at £7,000 each

£5,000 28 February 2 caravans at £6,000 each

£5,500 30 March 3 caravans at £6,500 each

£6,000 30 June 1 caravan at £7,000

£7,500 10 August 4 caravans at £8,000 each

£6,000 20 September 5 caravans at £9,000 each

£7,000

(The figures in the ‘replacement cost’ column represent the replacement cost per caravan at the date of sale.)

The replacement cost of one caravan at 31 December 20X1 was £9,000.

Required:

(a) A statement of Tree’s total gain for 20X1, analysed into current operating profit and holding gains.

(b) Say which elements of the total gain might be regarded as Tree’s profit for the year, out¬ lining the arguments for and against the various alternatives.