PROBLEM 10-1. Master Budget (Note: This problem is similar to the chapter review problem—only the numbers have been changed. Students who get "stuck" should consult the solution to the review problem.)

The results of operations for the Preston Manufacturing Company for the fourth quarter of 2005 were as follows (in thousands):

Sales $500,000 Less variable cost of sales 300,000 Contribution margin 200,000 Less fixed production costs $100,000 Less fixed selling and administrative expenses 50,000 150,000 Income before taxes 50,000 Less taxes on income 20,000 Net income $ 30,000 Note: Preston Manufacturing uses the variable costing method. Thus, only variable production costs are included in inventory and cost of goods sold. Fixed production costs are charged to expense in the period incurred.

The company's balance sheet as of the end of the fourth quarter of 2005 was as follows (in thousands):

Assets:

Cash Accounts receivable Inventory Total current assets Property, plant, and equipment Less accumulated depreciation Total assets

$ 150,000 250,000 350,000 750,000 400,000

(100,000 )

$1,050,000 Liabilities and owners' equity:
Accounts payable $ 48,000 Retained earnings 502,000 Common stock 500,000 Total liabilities and owners' equity $1,050,000 Additional information:
1 .
Sales and variable costs of sales are expected to increase by five percent in the next quarter.
2. All sales are on credit with 50 percent collected in the quarter of sale and 50 percent collected in the following quarter.
3. Variable cost of sales consists of 40 percent materials, 40 percent direct labor, and 20 percent variable overhead. Materials are purchased on credit and 60 percent are paid for in the quarter of purchase and the remaining amount is paid for in the quarter after purchase. The inventory balance is not expected to change. Also, direct labor and variable overhead are paid in the quarter the expenses are incurred.
4. Fixed production costs (other than $8,000 of depreciation) are expected to increase by two percent. Fixed production costs requiring payment are paid in the quarter they are incurred.
5. Fixed selling and administrative costs (other than $7,000 of depreciation expense)
are expected to increase by two percent. Fixed selling and administrative costs requiring payment are paid in the quarter they are incurred.
6. The tax rate is expected to be 40 percent. All taxes are paid in the quarter they are incurred.
7. No purchases of property, plant, or equipment are expected in the first quarter of 2006.
Required

a. Prepare a budgeted income statement for the first quarter of 2006.

b. Prepare a budgeted statement of cash receipts and disbursements for the first quarter of 2006.

c. Prepare a budgeted balance sheet as of the end of the first quarter of 2006.