Reading and Interpreting Southwest Airlines’ Balance Sheet The following item appears in the current liabilities section of Southwest Airlines’ balance sheet at December 31, 2006.

Air traffic liability $799 million In addition, one of Southwest Airlines’ notes reads as follows: “Tickets sold are initially deferred as ‘air traffic liability.’ Passenger revenue is recognized when transportation is provided. ‘Air traffic liability’ primarily represents tickets sold for future travel dates and estimated refunds and exchanges of tickets sold for past travel dates.”

Required 1. What economic event caused Southwest Airlines to incur this liability? Was it an external or internal event?
2. Describe the effect on the accounting equation from the transaction to record the air traffic liability.
3. Assume that one customer purchases a $500 ticket in advance. Prepare the journal entry on Southwest Airlines’ books to record this transaction.
4. What economic event will cause Southwest Airlines to reduce its air traffic liability? Is this an external or internal event?