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Chapter 13: Q25Q (page 692)

Pacific Airlines Co. awards members of its Frequent Fliers Club one free round-trip ticket, anywhere on its flight system, for every 50,000 miles flown on its planes. How would you account for the free ticket award?

Short Answer

Expert verified

A free ticket award would be accounted for as an unearned revenue at the time of award, and when a passenger avails a free ticket, it is recorded as revenue.

Step by step solution

01

Meaning of Unearned Revenue

Receipt of cash in advance for services that are going to be performed in the future is unearned revenue. It is the liability of receiving entity.

02

Accounting for free ticket award:

Pacific airline company provides a free ticket award to its member on completing 50,000 miles from its plane for one round trip, which indicates that the airline is earning revenue of free round trip from the 50,000 miles flight, so it is unearned revenue for the company at the time of giving award because service is still required to be provided. Therefore, it is recorded by debiting cash and crediting an unearned revenue account. Service is deemed to be delivered when any member avails this award within a prescribed time. At that moment, revenue is recorded by debiting unearned income and crediting the passenger revenue account.

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Most popular questions from this chapter

EXCEL (Equity Securities Entries and Disclosures) Parnevik Company has the following securities in its

investment portfolio on December 31, 2017 (all securities were purchased in 2017): (1) 3,000 shares of Anderson Co. common

stock which cost \(58,500, (2) 10,000 shares of Munter Ltd. common stock which cost \)580,000, and (3) 6,000 shares of King Company

preferred stock which cost \(255,000. The Fair Value Adjustment account shows a credit of \)10,100 at the end of 2017.

In 2018, Parnevik completed the following securities transactions.

1. On January 15, sold 3,000 shares of Anderson’s common stock at \(22 per share less fees of \)2,150.

2. On April 17, purchased 1,000 shares of Castle’s common stock at \(33.50 per share plus fees of \)1,980.

On December 31, 2018, the market prices per share of these securities were Munter \(61, King \)40, and Castle $29. In addition, the

accounting supervisor of Parnevik told you that, even though all these securities have readily determinable fair values, Parnevik

will not actively trade these securities because the top management intends to hold them for more than one year.

Instructions

(a) Prepare the entry for the security sale on January 15, 2018.

(b) Prepare the journal entry to record the security purchase on April 17, 2018.

(c) Compute the unrealized gains or losses and prepare the adjusting entry for Parnevik on December 31, 2018.

(d) How should the unrealized gains or losses be reported on Parnevik’s income statement and balance sheet?

In determining the amount of a provision, a company using IFRS should generally measure:

(a) Using the midpoint of the range between the lowest possible loss and the highest possible loss.

(b) Using the minimum amount of the loss in the range.

(c) Using the best estimate of the amount of the loss expected to occur.

(d) Using the maximum amount of the loss in the range.

On January 1, 2017, Roosevelt Company purchased 12% bonds, having a maturity value of \(500,000, for \)537,907.40.

The bonds provide the bondholders with a 10% yield. They are dated January 1, 2017, and mature January 1, 2022, with interest

received January 1 of each year. Roosevelt’s business model is to hold these bonds to collect contractual cash flows.

Instructions

(a) Prepare the journal entry at the date of the bond purchase.

(b) Prepare a bond amortization schedule.

(c) Prepare the journal entry to record the interest revenue and the amortization for 2017.

(d) Prepare the journal entry to record the interest revenue and the amortization for 2018

How does unearned revenue arise? Why can it be classified properly as a current liability? Give several examples of business activities that result in unearned revenues.

On December 21, 2017, Zurich Company provided you with the following information regarding its trading investments.

December 31, 2017

Investments (Trading) Cost Fair Value Unrealized Gain (Loss)

Stargate Corp. shares \(20,000 \)19,000 \((1,000)

Carolina Co. shares 10,000 9,000 1000

Vectorman Co. shares 20,000 20,600 600

Total of portfolio \)50,000 \(48,600 \)(1,400)

Previous fair value adjustment balance-0-

Fair value adjustment-Cr. \((1,400)

During 2018, Carolina Co. shares were sold for \)9,500. The fair value of the shares on December 31, 2018, was Stargate Corp.

shares-\(19,300: Vectorman Co. shares-\)20,500

Instructions

(a) Prepare the adjusting journal entry needed on December 31, 2017.

(b) Prepare the journal entry to record the sale of the Carolina Co. shares during 2018.

(c) Prepare the adjusting journal entry needed on December 31, 2018.

See all solutions

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