Presented below are income statements prepared on an average-cost and FIFO basis for Carlton Company, which started operations on January 1, 2014. The company presently uses the average-cost method of pricing its inventory and has decided to switch to the FIFO method in 2015. The FIFO income statement is computed in accordance with IFRS. Carlton’s profit-sharing agreement with its employees indicates that the company will pay employees 5% of income before profit sharing. Income taxes are ignored.

Instructions Answer the following questions.

(a) If comparative income statements are prepared, what net income should Carlton report in 2014 and 2015?

(b) Explain why, under the FIFO basis, Carlton reports €50 in 2014 and €48 in 2015 for its profitsharing expense.

(c) Assume that Carlton has a beginning balance of retained earnings at January 1, 2015, of €8,000 using the average-cost method. The company declared and paid dividends of €2,500 in 2015. Prepare the retained earnings statement for 2015, assuming that Carlton has switched to the FIFO method.

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Average-Cost Basis FIFO Basis 2015 2014 2015 2014 Sales 3,000 3,000 3,000 3,000 Cost of goods sold 1,130 1,000 1,100 940 Operating expenses 1,000 1,000 1,000 1,000 Income before profit sharing 870 1,000 900 1,060 Profit-sharing expense 44 50 45 53 Net income 826 950 865 1,007