The Sydney Jazz Festival company made an annual insurance premium payment of $1,200 on 1^st March 2011. It recorded this payment by debiting its insurance prepaid account $1,200 and crediting its cash account $1,200. The insurance adjusting entry that will need to be made at its financial year end of 31 December 2011 is:

Question

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The insurance premium payment of $1,200 was made on 1 March 2011 and covers the entire year. Therefore, at the end of the financial year on 31 December 2011, only 10 months of the insurance has been used up, leaving 2 months remaining as prepaid insurance.

To adjust for this, an adjusting entry needs to be made to transfer $1,000 from the insurance prepaid account to the insurance expense account, reflecting the amount of insurance that has been used up during the year. This will result in a debit to Insurance Expense of $1,000 and a credit to Insurance Prepaid of $1,000.

Therefore, the correct answer is C: Debit Insurance Expense $1,000; Credit Insurance Prepaid $1,000.

The Sydney Jazz Festival Company Made an Annual Insurance Premium