Question

vargas company sold goods with a selling price of $54,000 in 2026 and estimated 2% 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?
o a
accounts
debit
credit
estimated warranty payable
3,500
cash
3,500
o b
accounts
debit
credit
estimated warranty payable
3,500
warranty expense
3,500
o c
accounts
debit
credit
warranty expense
3,500
merchandise inventory
3,500
o d
accounts
debit
credit
estimated warranty payable
3,500
merchandise inventory
3,500

Explanation:

When honoring warranties with goods, the liability (Estimated Warranty Payable) is reduced (debited) and the asset (Merchandise Inventory) is reduced (credited) as goods are given out. Option A uses Cash which is incorrect as goods (inventory) are used. Option B wrongly credits Warranty Expense (it was already recognized when estimating). Option C debits Warranty Expense again which is wrong (expense was recognized in the year of sale when estimating).

Answer:

D.

Accounts	Debit	Credit
Merchandise Inventory		3,500