Presented below are income statements prepared on an average cost and FIFO basis for Carlton Company, which started operations on January 1, 2009. The company presently uses the average cost method of pricing its inventory and has decided to switch to the FIFO method in 2010. 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 2009 and 2010?
(b) Explain why, under the FIFO basis, Carlton reports $50 in 2009 and $48 in 2010 for its profit-sharing expense.
(c) Assume that Carlton has a beginning balance of retained earnings at January 1, 2010, of $8,000 using the average cost method. The company declared and paid dividends of $2,500 in 2010. Prepare the retained earnings statement for 2010, assuming that Carlton has switched to the FIFO method.

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FIFO Basis Sales Cost of goods sold Operating expenses Income before profit sharing Profit-sharing expense Net income Average Cost Basis 2009 $3,000 1,000 1,000 1,000 50 $ 950 2010 $3,000 1,130 1,000 870 2010 $3,000 1,100 1,000 900 45 $ 855 2009 $3,000 940 1,000 1,060 53 $1,007 $ 826