Chapter 4
Current Liabilities
205
AP-21B (
8
)
Safe Sound Airlines is a low-cost airline operating in North America. The company offers a
customer loyalty program whereby customers are rewarded 1 “Safe Mile” for every 10 miles
travelled with the airline. One Safe Mile can be redeemed for a two-cent discount toward
future flights. In March 2016, customers flew 6,000,000 miles with Safe Sound Airlines.
Historically, customers redeem an average of 55% of Safe Miles issued.
Required
a) Prepare the journal entry to record the issuance of Safe Miles in March 2016.
Date
Account Title and Explanation
Debit
Credit
b) Safe Sound Airlines’ total air ticket sales in April was $640,000, of which $636,000 was
received in cash and $4,000 was redeemed using Safe Miles. Prepare the journal entry
to record the sales through cash and Safe Miles redemption in April.
Date
Account Title and Explanation
Debit
Credit
Analysis
If the redemption rate for the rewards program has decreased to 50% this year, should the
company use the lower rate to record its redemption rewards liability?
