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Accounting (Text Only)

26th Edition
Carl Warren + 2 others
ISBN: 9781285743615

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BuyFindarrow_forward

Accounting (Text Only)

26th Edition
Carl Warren + 2 others
ISBN: 9781285743615
Textbook Problem
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Accrued revenue

The following is an excerpt from a conversation between Sonia Lopez and Pete Lemke just before they boarded a flight to Paris on Delta Air Lines. They are going to Paris to attend their company’s annual sales conference.

Sonia: Pete, aren’t you taking an introductory accounting course at college?

Pete: Yes, I decided it’s about time I learned something about accounting. You know, our annual bonuses are based on the sales figures that come from the accounting department.

Sonia: I guess I never really thought about it.

Pete: You should think about it! Last year, I placed a $5,000,000 order on December 30. But when I got my bonus, the $5,000,000 sale wasn’t included. They said it hadn’t been shipped until January 9, so it would have to count in next year’s bonus.

Sonia: A real bummer!

Pete: Right! I was counting on that bonus including the $5,000,000 sale.

Sonia: Did you complain?

Pete: Yes, but it didn’t do any good. Julie, the head accountant, said something about matching revenues and expenses. Also, something about not recording revenues until the sale is final. I figure I’d take the accounting course and find out whether she’s just messing with me.

Sonia: I never really thought about it. When do you think Delta Air Lines will record its revenues from this flight?

Pete: Hmmm ... I guess it could record the revenue when it sells the ticket ... or ... when the boarding passes are scanned at the door ... or ... when we get off the plane ... or when our company pays for the tickets ... or ... I don’t know. I’ll ask my accounting instructor.

Discuss when Delta Air Lines should recognize the revenue from ticket sales to properly match revenues and expenses.

To determine

The revenue recognition principle:

The revenue recognition principle refers to the revenue that should be recognized in the time period, when the performance obligation (sales or services) of the company is completed.

To discuss: The timing of revenue recognition.

Explanation

Customer of D Air Line typically purchase tickets for air travel several weeks prior to their scheduled flight, and pay for their tickets using a credit card. The credit card company will remit payment to D Air line shortly. D Air line will not record revenue from the ticket until the air travel has taken place, because D Air Line does not earn the ticket revenue until it provides the required service.

When D Air line receives payment from the credit card company for an airplane ticket, D Airline records it as a liability (unearned revenue), and the journal entry for cash received from credit card company is as follows:

Date Description Post Ref.

Debit

($)

Credit

($)

XXX Cash   XXX  
  Unearned service revenue     XXX
  (T...

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