Vargas, Inc. sold goods with a selling price of $ 54,000 in 2019 and estimated 4%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? A. Estimated Warranty Payable 1,500 Cash 1,500B. Estimated Warranty Payable 1,500 Warranty Expense 1,500C. Warranty Expense 1,500 Merchandise Inventory 1,500D. Estimated Warranty Payable 1,500 Merchandise Inventory 1,500

Estimated Warranty Payable 1,500 Debit

Merchandise Inventory 1,500 Credit

Explanation:

Vargas, Inc.

Sales $ 54,000

Warranty  4%

Defected Items $ 3500

The Estimated Warranty Payable is a deferred liability and is posted in the journal unless paid . It is debited when an equal amount of merchandise inventory is credited . An equal amount of inventory is credited to honor the warranty charges which are a liability of the seller if the deal is not accordingly set. So the correct entry is

Estimated Warranty Payable 3,500  Debit

Merchandise Inventory 3,500 Credit

The amount is equal to the defected items claimed. But from the given choices it is

Estimated Warranty Payable 1,500 Debit

Merchandise Inventory 1,500 Credit