Question 4.5: Flyalot has agreements with several major airlines to obtain...
Flyalot has agreements with several major airlines to obtain airline tickets at reduced rates. The company pays only for tickets it sells to customers. In the most recent period, Flyalot sold airline tickets to customers over the internet for a total of $1.1 million. The cost of these tickets to Flyalot was $1 million. The company’s direct selling costs were $2,000. Once the customers receive their ticket, the airline is responsible for providing all services associated with the customers’ flight.
1. Demonstrate the reporting of revenues under
A. gross reporting.
B. net reporting.
2. Determine and justify the appropriate method for reporting revenues.
Solution to 1. The table below shows how reporting would appear on a gross and a net basis.
Solution to 2. Flyalot should report revenue on a net basis. Flyalot pays only for tickets it sells to customers and thus did not bear inventory risk. In addition, the airline—not Flyalot—is the primary obligor under the contract. Revenues should be reported as $100,000.