When Southwest Airlines sells tickets for future flights, it debits Cash and credits an account entitled Air Traffic Liability (Passenger Revenue Earned is recorded only when passengers are provided flight services). The Air Traffic Liability account, reported recently at nearly $7.2 billion (representing both current and long-term portions), is among the largest liabilities appearing in the company’s balance sheet.
a. Explain why this liability is often referred to as a deferred revenue account.
b. What activity normally reduces this liability? Can you think of any other transaction that would also reduce this account?
c. Assume that, on a recent flight, passengers of the airline used tickets that they had purchased in advance for $200,000. Record the entry Southwest Airlines would make upon completion of this flight.