Presented below are income statements prepared on a LIFO and FIFO basis for Kenseth Company, which started operations on January 1, 2024. The company presently uses the LIFO method of pricing its inventory and has decided to switch to the FIFO method in 2025. 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. Income taxes are ignored.

Instructions

Answer the following questions.

a. If comparative income statements are prepared, what net income should Kenseth report in 2024 and 2025?

b. Explain why, under the FIFO basis, Kenseth reports $100 in 2024 and $96 in 2025 for its profitsharing expense.

c. Assume that Kenseth has a beginning balance of retained earnings at January 1, 2025, of $900 using the LIFO method. The company declared and paid dividends of $500 in 2025. Prepare the retained earnings statement for 2025, assuming that Kenseth has switched to the FIFO method.

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Sales revenue Cost of goods sold Operating expenses Income before profit-sharing Profit-sharing expense Net income LIFO Basis 2025 2024 $3,000 $3,000 1,130 1,000 1,000 1,000 870 1,000 87 100 $783 $ 900 FIFO Basis 2025 $3,000 1,100 1,000 900 96 $804 2024 $3,000 940 1,000 1,060 100 $ 960