Question

The following is an excerpt from a conversation between Monte Trask and Jamie Palk just before they boarded a flight to Berlin on American Airlines. They are going to Berlin to attend their company's annual sales conference. Answer the critical thinking question that follows. Monte: Jamie, aren't you taking an introductory accounting course at college? Jamie: Yes, I decided it's about time I learned something about accounting. You know, our annual bonuses are based on the sales figures that come from the accounting department. Monte: I guess I never really thought about it. Jamie: You should think about it! Last year, I placed a $900,000 order on December 27. But when I got my bonus, the $900,000 sale wasn't included. They said it didn't ship until January 5, so it would have to count in next year's bonus. Monte: A real bummer! Jamie: Right! I was counting on that bonus including the $900,000 sale. Monte: Did you complain? Jamie: Yes, but it didn't do any good. Sophia, the head accountant, said something about matching revenues and expenses. Also, something about not recording revenues until the sale is final. I figured I'd take the accounting course and find out whether she's just jerking me around. Monte: I never really thought about it. When do you think American Airlines will record its revenues from this flight? Jamie: Hmmm, I guess it could record the revenue when it sells the ticket ... or when the boarding passes are taken at the door ... or when we get off the plane ... or when our company pays for the tickets ... or I don't know. I'll ask my accounting instructor. Critical Thinking Question: Discuss when American Airlines should recognize the revenue from ticket sales to properly match revenues and expenses.

Answer 1

The balance of air traffic liability fluctuates seasonally and according to the amount of ticket sales. In addition to representing tickets and freight bills for future flights, air traffic liability adjustment includes an estimate for possible future ticket refunds for past flights. This air traffic liability aspect involves some subjective judgment by the airline in its estimation, since it is impossible to know precisely in advance what amount of tickets will be refunded or exchanged.

The estimates are commonly based on the airline's historical experience and on seasonal patterns. Estimates are also made in regard to the number of unused tickets that will eventually be forfeited. Because unused tickets are often eligible for exchange for an extended time period, revenues received for them must remain part of the air traffic liability calculation until the time period for exchanges has expired and the tickets are recognized as forfeited.

Taxes and fees that airlines have to pay are another element in the air traffic liability equation. Airline ticket prices typically include such things as transportation taxes, fees for airport facility and security charges, and taxes related to foreign travel. Because the airline company only acts as a collection agent for these taxes and fees, and it does not retain them, the airline does not record them as revenue. Instead, they are initially recognized as a liability at the time a ticket is sold. When the airline renders payment to the appropriate entity, the liabilities are accordingly reduced in the airline's accounting records.

• If the buyer has a right of refund or can apply the ticket purchase to a later flight, revenue should not be recognized   until the flight is taken.
• If it is a non refundable ticket, the airline could properly record the revenue at the time of payment .
• However , If the flight was cancelled and the buyer was never able to complete the flight, the airline would have to reverse the transaction.
• Most airlines would provide an alternative seat and deliver the passenger to their destination . In such a case , no reversal of the sales transaction is necessary .
• According to the textbook, revenues are normally recorded at the time when a service is rendered .
• Realistically once the boarding passes are collected , the airline fully intends to provide the airline seat to the passenger and deliver them to their destination.
• Even for a refundable ticket, most airlines probably would record the transaction as a sale at this point.
• Technically speaking revenues should not be recorded until service has being provided (or other ways it still will be recorded as “unearned revenue “under the liabilities).
• That is said that American airlines will record its revenues only when monte and Jamie will get off the plane , because airlines has delivered the passenger to their destination, but only if their company has already paid for tickets in advance .
• If company paid in advance for trip (before their employee took a flight ) then its revenue will be recorded after airline has delivered passengers to their destination.
• But if company paid it after the service has being provided then revenue will be recorded only after American airlines received this payment.