Presented below are income statements prepared on a LIFO and FIFO basis for Kenseth Company, which started operations on January 1, 2019. The company presently uses the LIFO method of pricing its inventory and has decided to switch to the FIFO method in 2020. 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. LIFO Basis FIFO Basis 2020 2019 2020 2019 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 Instructions Answer the following questions. a. If comparative income statements are prepared, what net income should Kenseth report in 2019 and 2020? b. Explain why, under the FIFO basis, Kenseth reports $100 in 2019 and $96 in 2020 for its profit-sharing expense. c. Assume that Kenseth has a beginning balance of retained earnings at January 1, 2020, of $900 using the LIFO method. The company declared and paid dividends of $500 in 2020. Prepare the -retained earnings statement for 2020, assuming that Kenseth has switched to the FIFO method.
Presented below are income statements prepared on a LIFO and FIFO basis for Kenseth Company, which started operations on January 1, 2019. The company presently uses the LIFO method of pricing its inventory and has decided to switch to the FIFO method in 2020. 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.
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LIFO Basis
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FIFO Basis
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2020
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2019
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2020
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2019
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Sales
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$3,000
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$3,000
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$3,000
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$3,000
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Cost of goods sold
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1,130
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1,000
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1,100
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940
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Operating expenses
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1,000
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1,000
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1,000
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1,000
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Income before profit-sharing
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870
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1,000
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900
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1,060
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Profit-sharing expense
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87
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100
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96
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100
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Net income
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$ 783
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$ 900
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$ 804
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$ 960
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Instructions
Answer the following questions.
a. If comparative income statements are prepared, what net income should Kenseth report in 2019 and 2020?
b. Explain why, under the FIFO basis, Kenseth reports $100 in 2019 and $96 in 2020 for its profit-sharing expense.
c. Assume that Kenseth has a beginning balance of retained earnings at January 1, 2020, of $900 using the LIFO method. The company declared and paid dividends of $500 in 2020. Prepare the -retained earnings statement for 2020, assuming that Kenseth has switched to the FIFO method.
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