Question

When a company settles a warranty claim by replacing the defective goods, the journal entry will include a debit to _______ and a credit to _______.

a) Accounts payable, inventory

b) Warranty expense, accounts receivable

c) Cash, accounts payable

d) Inventory, cash

Answer 1

The journal entry for a company settling a warranty claim by replacing goods includes a debit to Warranty Expense and a credit to Inventory, reflecting the cost of the goods being replaced and reducing the inventory respectively.

Step-by-step explanation:

When a company settles a warranty claim by replacing the defective goods, the correct journal entry will include a debit to Warranty Expense and a credit to Inventory. This accounting entry reflects the cost to the company to replace the defective goods, thus recognizing it as an expense. Since the company is using its existing inventory to replace the goods, the inventory account is credited, reducing it by the corresponding amount of the replaced goods. It's important to note that no cash or accounts payable/receivable accounts are involved in this transaction as it is a warranty replacement, not a cash transaction or a new sale.