On 1 March 2018, Indiana Ltd rented out part of its manufacturing premises and collected $6000 in advance for a one year period. The receipt was credited to a liability account. At 31 December 2018, Indiana Ltd's end of financial year, the following adjusting journal should be recorded:

Question

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When a company receives payment in advance for rent, it is recorded as a liability in the form of Unearned Rent Income. As time passes, this liability decreases and Rent Income increases as the rent is earned. At the end of the financial year, the adjusting journal entry should reflect the portion of rent that has been earned during the period.

Option A is incorrect because it reduces the liability by $4500, but this does not necessarily mean that all of the rent has been earned.

Option B is incorrect because it suggests that only $3000 of the rent has been earned, while the company has collected $6000 in advance.

Option D is incorrect because the liability is already recorded in the form of Unearned Rent Income, and creating a Rent Receivable account is unnecessary.

Therefore, option C is the best choice as it reduces the Unearned Rent Income liability by $5000 and increases Rent Income by $5000, reflecting the amount of rent that has been earned during the year.

On 1 March 2018, Indiana Ltd Rented Out Part of Its