Question
United Airlines sells a round-trip ticket for a flight from Boston to London for $750. The customer also receives 5,000 award miles, equivalent to 20
United Airlines sells a round-trip ticket for a flight from Boston to London for $750. The customer also receives 5,000 award miles, equivalent to 20 percent of the miles required for a free domestic flight. United expects 20 percent of its customers to redeem awards for future air travel, and the average forgone revenues from these flights to be $400 per passenger. Finally, United estimates that the incremental costs associated with redemption of frequent flyer awards amount to $100 per passenger. What are the financial statement effects of this transaction if (a) the incremental cost approach is used, and (b) revenue is recognized using the deferred revenue approach? What forecasts, if any, do you have to make to complete the recording of this transaction? What factors would determine which of these two approaches is appropriate? As a financial analyst, what questions would you raise with the firms CFO?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
To analyze the financial statement effects of this transaction lets examine the two approaches mentioned the incremental cost approach and the deferred revenue approach a Incremental Cost Approach Und...Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started