Vargas Company sold goods with a selling price of $50,000 in 2019 and estimated 5% warranty expense for the year.Customers complained of defects,and goods with a cost of $1500 had to be replaced.Which of the following is the correct journal entry for honoring the warranties with goods?

Question

Quizplus · Accepted Answer

The journal entry for honoring warranties with goods would be to debit Warranty Expense and credit Inventory or Cost of Goods Sold (depending on the company's accounting policy). 
In this case, only $1500 worth of goods were replaced, which is the cost of replacing the defective goods. Therefore, the journal entry should be:

Debit Warranty Expense for $1500
Credit Inventory or Cost of Goods Sold for $1500

Option A and C are incorrect because they both debit Accounts Payable instead of Warranty Expense. Option D is incorrect because it debits Warranty Liability, which is not applicable in this scenario as the company has already replaced the defective goods.

Vargas Company Sold Goods with a Selling Price of $50,000 Estimated Warranty Payable 1500 Cash 1500\begin{array} { | c | l | l | } \hline \text { Estimated Warranty Payable } & 1500 & \\\hline \text { Cash } & & 1500 \\\hline\end{array} Estimated Warranty Payable Cash ​1500​1500​​

Vargas Company Sold Goods with a Selling Price of $50,000 $\begin{array} { | c | l | l | } \hline \text { Estimated Warranty Payable } & 1500 & \\\hline \text { Cash } & & 1500 \\\hline\end{array}$