Question
It is early in February 2024, and you are conducting the audit of Oceanic Airlines Ltd. 's 2023 financial statements. Through discussion with Oceanic's chief
It is early in February 2024, and you are conducting the audit of Oceanic Airlines Ltd. 's 2023 financial statements. Through discussion with Oceanic's chief financial officer, you learn of matters that have not yet been incorporated into the 2023 financial statements.
In July 2023, 49 passengers on board Oceanic Airlines Flight 007 were seriously injured when the plane missed the runway on final approach. In January 2024, the injured passengers launched a class-action lawsuit against Oceanic seeking damages of $20 million. Oceanic's internal investigation of the incident determined that the pilot was intoxicated during the flight. The company's solicitors suggest that if the matter goes to court Oceanic will be found liable and ordered to pay the $20 million. In an attempt to reduce its loss, Oceanic's solicitors made a settlement offer of $16 million to the plaintiffs. The litigants' attorney has not provided a formal response but has indicated that the offer is being seriously considered. Oceanic's lawyers estimate that there is a 55% probability the plaintiffs will accept the offer.
During 2023, Oceanic began a customer loyalty program. For each aeronautical mile that a passenger travels on a paid flight, the passenger accrues one flight mile. Passengers can redeem accrued flight miles for free air travel. Earned miles do not expire. Oceanic's analysis of its competitors' programs suggests an average redemption rate of 60%. In 2023, Oceanic awarded 25,000,000 flight miles, 6,000,000 of which were redeemed. Management estimates the performance obligation pertaining to the flight miles is 1,100,000
Begin by preparing the entry to provide for the expected liability settlement. (Record debits first, then credits Leave any unused cells blank. Explanations are not required.)
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