Question

Ragas, Inc. sold goods with a selling price of​ $50,000 in the 2017 and estimated​ 5% warranty expense for the year. Customers complained of​ defects, and goods with a cost of​ $1,500 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 1,500
B. Estimated Warranty Payable 1,500
     Warranty Expense 1,500
C. Warranty Expense 1,500
     Merchandise Inventory 1,500
D. Estimated Warranty Payable 1,500
     Merchandise Inventory ​1,500

Answer 1

D. Estimated Warranty Payable 1,500

 Merchandise Inventory ​1,500

When the Warranty is honored, the Estimated Warranty account is debited to show the claiming of the expense.

The relevant asset account which in this case is Merchandise inventory is credited to show that it's reduction.