Question

E22-5 (Accounting Change) Presented below are income statementsprepared 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 theFIFO 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 employees10% of income before profit-sharing.
Income taxes are ignored.

			LIFO BASIS			FIFO BASIS
			2017	2016		2017	2016
sales			3000	3000		3000	3000
cost of good sold			1130	1000		1100	940
operation expenses			1000	1000		1000	1000
incomebefore profitsharing			870	1000		900	1060
porfit sharing expense			87	100		96	100
net income			783	900		804	960

Instructions
Answer the following questions.
(a) If comparative income statements are prepared, what net incomeshould Kenseth report in 2016
and 2017?
(b) Explain why, under the FIFO basis, Kenseth reports $100 in 2016and $96 in 2017 for its profit-sharing
expense.
(c) Assume that Kenseth has a beginning balance of retainedearnings at January 1, 2017, of $8,000
using the LIFO method. The company declared and paid dividends of$500 in 2014. Prepare the
retained earnings statement for 2017, assuming that Kenseth hasswitched to the FIFO method.