GAAP Air Ltd. (GAAP Air) is an airline that was started five years ago to take advantage of the popular brand name associated with The GAAP clothing chain. GAAP Air was incorporated as a separate entity in 2015 and went public two years ago in 2018. GAAP air has struggled financially over the past few years due to depressed demand and intense competition in the airline industry. In fact, several of GAAP Air’s competitors have been forced into bankruptcy over the past few years.

It is now February 2020 and industry experts are projecting a turnaround in the airline industry by 2021. Unfortunately, negative operating cash flows over the past few years have eaten up GAAP Air’s cash and available credit. GAAP air has approached a major bank for a loan to allow it to continue operating for another year, until the industry conditions improve. The bank is waiting for the 2019 audited financial statements to make a final decision on whether or not to lend the funds.

You are a Senior Accountant at GAAP Air. Your boss, the Chief Financial Officer (CFO), has given you the following summary of new transactions undertaken by the company during the year. He would like you to provide a report discussing how GAAP Air should account for each of the transactions. He would like you to discuss alternative policies, where applicable, and give your opinion on which policy the company should select. The CFO would like you consider all of the financial statement users and their objectives, as well as any constraints on accounting policy choices in your analysis. He will use your report in his discussion with the company’s auditors. GAAP Air has a December 31st year end.

1. In an attempt to increase ticket sales, GAAP Air introduced a unique loyalty program. For every mile a customer flies, they get one GAAP Mile. The customer can then redeem GAAP miles for free flights or merchandise at The GAAP, Old Army or Papaya Republic. The CFO would like to know when and how the cost of GAAP miles should be recognized.

2. In an effort to reduce employee turnover, the company has introduced a signing bonus for new employees. The company pays new employees a signing bonus of 5% of annual salary. The employee must repay the entire bonus if they do not stay with the company for at least two years. After the initial two year period, the employee is not obligated to repay any of the bonus. The CFO would like to know how this bonus should be accounted for.

3. Up until now, GAAP Air expensed all laptop computers when purchased, on the grounds that they become obsolete so fast that their value after one year is almost negligible. In the current year, GAAP Air bought $459,000 worth of new computers and tablets to be used by their staff for checking in customers. They plans to write them off over two years.

4. GAAP Air entered a contract on July 1, 2019 with the Toronto Towers hockey team. The contract states that GAAP Air will fly the Toronto Towers hockey players and support staff to all 80 “away games” for a lump sum payment of $800,000. The payment was received on July 31, 2019. The hockey season runs from September through April. The contract is non-cancellable and GAAP Air will keep the $800,000 if for any reason the Towers choose not to use the flights. In addition, as part of the contract, GAAP Air agreed to display the Towers logo on their planes until the end of the hockey season. The CFO would like to know when the revenues related to this contract should be recognized.

Answer rating: 100% (QA)

1 The cost of GAAP miles should be recognized when they are earned by customers This is in accordance with the matching principle of accounting which ... View the full answer