Presented below are income statements prepared on a LIFO and FIFO basis for Kenseth Company, which started operations on January 1, 2013. The company
Presented below are income statements prepared on a LIFO and FIFO basis for Kenseth Company, which started operations on January 1, 2013. The company presently uses the LIFO method of pricing its inventory and has decided to switch to the FIFO method in 2014. The FIFO income statement is computed in accordance with the requirements of GAAP. Kenseth’s profit-sharing agreement with its employees indicates that the company will pay employees 10% of income before profit-sharing.
\r\nIncome taxes are ignored.
\r\nLIFO Basis FIFO Basis
\r\n2014 2013 2014 2013
\r\nSales $3,000 $3,000 $3,000 $3,000
\r\nCost of goods sold 1,130 1,000 1,100 940
\r\nOperating expenses 1,000 1,000 1,000 1,000
\r\nIncome before profi t-sharing 870 1,000 900 1,060
\r\nProfi t-sharing expense 87 100 96 100
\r\nNet income $ 783 $ 900 $ 804 $ 960
\r\nInstructions
\r\nAnswer the following questions.
\r\n(a) If comparative income statements are prepared, what net income should Kenseth report in 2013 and 2014?
\r\n(b) Explain why, under the FIFO basis, Kenseth reports $100 in 2013 and $96 in 2014 for its profit-sharing expense.
\r\n(c) Assume that Kenseth has a beginning balance of retained earnings at January 1, 2014, of $8,000 using the LIFO method. The company declared and paid dividends of $500 in 2014. Prepare the retained earnings statement for 2014, assuming that Kenseth has switched to the FIFO method.