(Accounting Change) Presented below are income statements prepared on a LIFO and FIFO ba- sis for Kenseth Company, which started operations on January 1, 2006. The company presently uses the LIFO method of pricing its inventory and has decided to switch to the FIFO method in 2007. The FIFO income statement is conhputed in accordance with the requirements of SFAS No. 154. Kenseth's profit- sharing agreement with its employees indicates that the company will pay employees 10% of income be- fore 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 2006 and 2007?

(b) Explain why, under the FIFO basis, Kenseth reports $100 in 2006 and $96 in 2007 for its profitsharing expense.

(c) Assume that Kenseth has a beginning balance of retained earnings at January 1, 2007, of $8,000 using the LIFO method. The company declared and paid dividends of $2,000 in 2007. Prepare the retained earnings statement for 2007, assuming that Kenseth has switched to the FIFO method.

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LIFO Basis FIFO Basis 2007 2006 2007 2006 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 87 100 96 100 Net income $ 783 $ 900 $ 804 $ 960