A company estimates that warranty expense will be 4% of sales. The company's sales for the current period are 185,000 The current period's entry to record the warranty expense is: Debit Estimated Warranty Liability 7,400 credit Warranty Expense 7,400 Debit Warranty Expense 7,400 credit Sales 7,400 Debit Warranty Expense 7,400 credit Estimated Warranty Liability 7,400 Debit Estimated Warranty Liability 7,400 credit Cash 7,400 No entry is recorded until the items are returned for warranty repairs.

To determine the correct journal entry, let's analyze the situation:<br /><br />### Step 1: Calculate the warranty expense<br />The company estimates that **warranty expense is 4% of sales**, and the sales for the current period are \( \$185,000 \). <br /><br />\[<br />\text{Warranty Expense} = \text{Sales} \times \text{Warranty Rate}<br />\]<br />\[<br />\text{Warranty Expense} = 185,000 \times 0.04 = 7,400<br />\]<br /><br />### Step 2: Determine the correct journal entry<br />When a company estimates warranty expenses, it records an expense (to reflect the cost incurred) and a liability (to reflect the obligation to honor warranties in the future). The correct journal entry is:<br /><br />- **Debit Warranty Expense**: This increases the expense account, reflecting the estimated cost of honoring warranties.<br />- **Credit Estimated Warranty Liability**: This increases the liability account, representing the company's obligation to repair or replace defective products under warranty.<br /><br />Thus, the correct journal entry is:<br /><br />\[<br />\text{Debit Warranty Expense } \$7,400; \text{ Credit Estimated Warranty Liability } \$7,400.<br />\]<br /><br />### Step 3: Evaluate the options<br />- **Option A**: Debit Estimated Warranty Liability \$7,400; credit Warranty Expense \$7,400 — Incorrect. This reverses the proper accounts.<br />- **Option B**: Debit Warranty Expense \$7,400; credit Sales \$7,400 — Incorrect. Warranty expense is not directly related to sales revenue.<br />- **Option C**: Debit Warranty Expense \$7,400; credit Estimated Warranty Liability \$7,400 — Correct. This properly reflects the estimated warranty expense and liability.<br />- **Option D**: Debit Estimated Warranty Liability \$7,400; credit Cash \$7,400 — Incorrect. This would be used when actual warranty repairs are made, not for estimating expenses.<br />- **Option E**: No entry is recorded until the items are returned for warranty repairs — Incorrect. The expense must be estimated and recorded in the same period as the sales.<br /><br />### Final Answer:<br />**Debit Warranty Expense \( \$7,400 \); credit Estimated Warranty Liability \( \$7,400 \).**