Problem: DEFERRED REVENUE
When American Airlines sells tickets for future ?ights, it debits Cash and credits an account entitled Air l Traffic Liability (as opposed to crediting Passenger Revenue Earned). This account, reported recently at nearly $4.5 billion, is among the largest liabilities appearing in the company's balance sheet.
1. Explain why this liability is often referred to as a deferred revenue account.
2. What activity normally reduces this liability? Can you think of any other transaction that would also reduce this account?
3. Assume that, in a recent flight, passengers ofthe airline used tickets that they had purchased in advance for $87,500. Record the entry American Airlines would make upon completion of this flight.