Final answer:
The correct journal entry when a company replaces defective goods under a warranty claim is a debit to Estimated Warranty Payable and a credit to Inventory, reflecting the settlement of the liability and the reduction of inventory respectively.
Step-by-step explanation:
When a company settles a warranty claim by replacing the defective goods, the journal entry will reflect the cost of providing the replacement item. The correct entry would be a debit to the Estimated Warranty Payable account and a credit to Inventory. This accounts for the liability that has been settled and the reduction in inventory for the replacement product provided. Therefore, the correct answer is A. Estimated Warranty Payable, Inventory. When a claim is honored, the estimated warranty payable is decreased because a part of the liability has been fulfilled while the inventory account is decreased because it reflects the outflow of goods from the company's inventory.