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 the warranties with goods includes a debit to Warranty Expense and a credit to Inventory. Since the cost of the replaced goods is $1,500, we need to credit Inventory for that amount. The remaining balance of the warranty expense ($50,000 x 5% = $2,500) needs to be debited to Warranty Expense. Therefore, the correct journal entry is:
Debit: Warranty Expense $2,500
Credit: Inventory $1,500
Credit: Cash $1,000 (assuming the customers did not receive a refund or credit)

Option A is incorrect because it only credits Inventory and does not account for the expense. Option C is incorrect because it debits Cost of Goods Sold, which should not be affected by warranty expenses. Option D is incorrect because it credits Cost of Goods Sold instead of Inventory.

Vargas Company Sold Goods with a Selling Price of $50,000