The following item appears in the current liabilities section of Southwest Airlines balance sheet at December 31,

Question:

The following item appears in the current liabilities section of Southwest Airlines’ 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 traf-fic 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. Determine the effect on the accounting equation from this transaction.
4. What economic event will cause Southwest Airlines to reduce its air traffic liability? Is this an external or internal event?

Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial...