Question

Vargas, Inc. sold goods with a selling price of $ 54,000 in 2019 and estimated 4​%warranty expense for the year. Customers complained of​ defects, and goods with a cost of $ 3,500 had to be replaced. Which of the following is the correct journal entry for honoring the warranties with​ goods?

A. Estimated Warranty Payable ​1,500 Cash ​1,500B. Estimated Warranty Payable ​1,500 Warranty Expense ​1,500C. Warranty Expense ​1,500 Merchandise Inventory ​1,500D. Estimated Warranty Payable ​1,500 Merchandise Inventory ​1,500

Answer 1

Estimated Warranty Payable ​1,500 Debit

Merchandise Inventory ​1,500 Credit

Step-by-step explanation:

Vargas, Inc.

Sales $ 54,000

Warranty 4%

Defected Items $ 3500

The Estimated Warranty Payable is a deferred liability and is posted in the journal unless paid . It is debited when an equal amount of merchandise inventory is credited . An equal amount of inventory is credited to honor the warranty charges which are a liability of the seller if the deal is not accordingly set. So the correct entry is

Estimated Warranty Payable ​3,500 Debit

Merchandise Inventory ​3,500 Credit

The amount is equal to the defected items claimed. But from the given choices it is

Estimated Warranty Payable ​1,500 Debit

Merchandise Inventory ​1,500 Credit