Krause Industries’ balance sheet at December 31, 2013, is presented below.

KRAUSE INDUSTRIES Balance Sheet December 31, 2013 Assets Current assets Cash $ 7,500 Accounts receivable 82,500 Finished goods inventory (1,000 units) 15,000 Total current assets 105,000 Property, plant, and equipment Equipment $40,000 Less: Accumulated depreciation 10,000 30,000 Total assets $135,000 Liabilities and Stockholders’ Equity Liabilities Notes payable $ 25,000 Accounts payable 45,000 Total liabilities 70,000 Stockholders’ equity Common stock $40,000 Retained earnings 25,000 Total stockholders’ equity 65,000 Total liabilities and stockholders’ equity $135,000 Additional information accumulated for the budgeting process is as follows.

Budgeted data for the year 2014 include the following.

Year 4th Qtr. 2014 of 2014 Total Sales budget (8,000 units at $32) $76,800 $256,000 Direct materials used 17,000 62,500 Direct labor 12,500 50,900 Manufacturing overhead applied 10,000 48,600 Selling and administrative expenses 18,000 75,000 To meet sales requirements and to have 3,000 units of finished goods on hand at December 31, 2014, the production budget shows 9,000 required units of output. The total unit cost of production is expected to be $18. Krause Industries uses the first-in, first-out

(FIFO) inventory costing method. Selling and administrative expenses include $4,000 for depreciation on equipment. Interest expense is expected to be $3,500 for the year. Income taxes are expected to be 40% of income before income taxes.

All sales and purchases are on account. It is expected that 60% of quarterly sales are collected in cash within the quarter and the remainder is collected in the following quarter.

Direct materials purchased from suppliers are paid 50% in the quarter incurred and the remainder in the following quarter. Purchases in the fourth quarter were the same as the materials used. In 2014, the company expects to purchase additional equipment costing $9,000. It expects to pay $8,000 on notes payable plus all interest due and payable to December 31 (included in interest expense $3,500, above). Accounts payable at December 31, 2014, include amounts due suppliers (see above) plus other accounts payable of $6,500. In 2014, the company expects to declare and pay an $8,000 cash dividend. Unpaid income taxes at December 31 will be $5,000. The company’s cash budget shows an expected cash balance of $6,980 at December 31, 2014.

Instructions Prepare a budgeted income statement for 2014 and a budgeted balance sheet at December 31, 2014. In preparing the income statement, you will need to compute cost of goods manufactured (direct materials 1 direct labor 1 manufacturing overhead) and finished goods inventory (December 31, 2014).

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