Question

Southeast Airlines Inc. awards members of its Flightline program a second ticket at half price, valid for 2 years anywhere on its flight system, when a full-price ticket is purchased. How would you account for the full-fare and half-fare tickets?

Short answer

Full fare tickets are recorded as sales revenue while the half-fare tickets are recorded as unearned revenue.

Step-by-step solution

Definition of Unearned Revenue:

It is the amount which is received by the business firm but no asset has been transferred or no services has been provided for it. Whenever unearned revenue is recognized by business firm, the firm debit the account of unearned revenue and credit the resultant revenue account.

Airlines Revenues

The airline company records revenues when the passenger of the airline company uses the tickets purchased by it. Till then, the ticket sold by the airline industry is recorded as unearned revenue (air traffic liability).

When the passenger buys first ticket, the airlines company give second ticket at half price. Thus, it should record the complete price of first ticket and half price of second ticket as unearned revenue by debiting cash and crediting unearned revenue.

When the customer uses its first ticket, the price of first ticket will be transferred to sales revenue A/c. The price of second ticket will remain in the unearned revenue account till the customer uses that ticket.