Question
Case 6: As individuals fly for pleasure or business, they may earn frequent flyer miles that, once enough miles are accumulated, can be redeemed for
Case 6: As individuals fly for pleasure or business, they may earn frequent flyer miles that, once enough miles are accumulated, can be redeemed for free trips. Rather than account for these bonus miles as they accumulate, airlines typically book a liability only after enough mileage has been accumulated to claim a free ticket. Thus, while experts estimate there are 25 billion miles of free travel resulting from frequent flyer programs, airlines have recognized a liability for approximately only 30 percent, or 7.5 billion miles. The AICPA has argued that with the availability of frequent flyer miles, the earnings process in no longer substantially complete when an airplane ticket is sold. It maintains that a portion of the revenue from each ticket should be deferred, as a "liability reserve," and matched against future periods when the bonus miles are redeemed.
Required: List the specific standards according to the FASB Codification and detail the transaction recording for each of the following questions.
1. Do frequent flyer miles meet the definition of a liability?
2. If frequent flyer miles are a liability, can the liability be estimated at the time a ticket is sold?
3. When should frequent flyer miles be recorded on the books of the airlines: (a) when tickets are sold or (2) as bonus miles are redeemed?
4. If the traveler is flying for business purposes and the business ultimately earns the frequent flyer miles, how should these be accounted for and reported?
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