East Corp. manufactures stereo systems that carry a two-year warranty against defects. Based on past experience, warranty costs are estimated at 4% of sales for the warranty period.

During 2005, stereo system sales totaled $3,000,000, and warranty costs of $67,500 were incurred.

In its income statement for the year ended December 31, 2005, East should report warranty expense of:

$60,000

$52,500

$67,500

$120,000