Ragas Inc. sold goods worth $50,000 in the year 2013 and estimated 4% warranty expense for the year. Customers complained of defects and goods worth $1,500 had to be replaced. Which of the following is the correct the journal entry for honoring the warranties with goods?

Question

Quizplus · Accepted Answer

The journal entry for honoring the warranties with goods would be:
Debit: Warranty Expense: $2,000 ($50,000 x 4%)
Credit: Inventory: $1,500
Credit: Cash/Bank: $500 ($2,000 - $1,500)

Option A shows a debit to the Cash/Bank account, which is not correct as there is only a partial cash payment made.
Option C shows a debit to the Sales account, which is not relevant to the warranty expense.
Option D shows a credit to the Warranty Expense account, which is also not correct as the expense has already been estimated and recorded at the time of sale.

Ragas Inc Sold Goods Worth $50,000 in the Year 2013 and and Estimated