Final answer:
To honor 500 warranty contracts at $20 each, debit Warranty Expense by $10,000 and credit Warranty Liability by $10,000, reflecting the cost incurred and the reduction in liability or assets.
Step-by-step explanation:
To record the honoring of 500 warranty contracts at an average cost of $20 each, a business would make the following journal entry in their accounting records:
Debit the Warranty Expense account for the total cost of warranties honored. This represents the cost of servicing the warranty contracts.
Credit the Warranty Liability account (or Inventory, or another relevant asset account if the warranties had been pre-accumulated) to remove the liability or reduce the asset for the cost allocated to warranties serviced.
The actual journal entry would be:
Debit Warranty Expense: $10,000 (500 contracts x $20/contract)
Credit Warranty Liability: $10,000
This entry reflects that the company has incurred an expense and decreased its liability or asset by honoring the warranty contracts.