There is no consensus on the proper amount for airlines to record with respect to frequent flyer expense. Two alternative scenarios are presented below:
a. The person claiming a ticket under the frequent-flyer program would use a seat that otherwise would be empty.
b. The person claiming a ticket under the frequent-flyer program would use a seat that otherwise would be used by a full-fare-paying passenger.
Required
1. Recommend to an airline how much it should record as a liability under each of the scenarios. Which amount would you suggest the airline record, given that it doesn't know which will occur?
2. Write a response to the person who states that, since it is not known if the frequent-flyer miles will be used, the liability is contingent and need not be expensed until the passenger actually uses the frequent-flyer miles. This person suggests that because the liability is contingent, not actual, it should be disclosed in the notes.