Final answer:
Garrett Company's estimated total warranty expense is $52,500. Only 30% of this expense, which amounts to $15,750, should be reported on the 2012 income statement as the warranty expense, by the matching accounting principle.
Step-by-step explanation:
The subject question pertains to the accounting treatment of warranty expenses in the financial statements of a company. According to the matching principle in accounting, expenses should be recorded in the period in which they are incurred, not necessarily when they are paid. In the case of Garrett Company, the total estimated warranty expense is the product of the number of units sold and the average repair cost per unit. To calculate this for the income statement of 2012, we will consider only the repairs estimated to be made in 2012.
Firstly, we calculate the total estimated warranty cost:
- Total units sold: 3,500 units
- Average repair cost per unit: $15
- Estimated total warranty cost: 3,500 units * $15 = $52,500
Now, we compute the portion attributable to 2012:
- Percentage of repairs in 2012: 30%
- Warranty expense for 2012: 30% * $52,500 = $15,750
Therefore, on the 2012 income statement, Garrett Company should show a warranty expense of $15,750.