Question

Pacific Airlines Co. awards members of its Frequent Fliers Club one free round-trip ticket, anywhere on its flight system, for every 50,000 miles flown on its planes. How would you account for the free ticket award?

Short answer

A free ticket award would be accounted for as an unearned revenue at the time of award, and when a passenger avails a free ticket, it is recorded as revenue.

Step-by-step solution

Meaning of Unearned Revenue

Receipt of cash in advance for services that are going to be performed in the future is unearned revenue. It is the liability of receiving entity.

Accounting for free ticket award:

Pacific airline company provides a free ticket award to its member on completing 50,000 miles from its plane for one round trip, which indicates that the airline is earning revenue of free round trip from the 50,000 miles flight, so it is unearned revenue for the company at the time of giving award because service is still required to be provided. Therefore, it is recorded by debiting cash and crediting an unearned revenue account. Service is deemed to be delivered when any member avails this award within a prescribed time. At that moment, revenue is recorded by debiting unearned income and crediting the passenger revenue account.