United Airlines sells a round-trip ticket for a flight from Boston to London for $750. The customer also receives 5,000 award miles, equivalent to 20 percent of the miles required for a free domestic flight. United expects 20 percent of its customers to redeem awards for future air travel, and the average forgone revenues from these flights to be $400 per passenger. Finally, United estimates that the incremental costs associated with redemption of frequent flyer awards amount to $100 per passenger. What are the financial statement effects of this transaction if (a) the incremental cost approach is used, and (b) revenue is recognized using the deferred revenue approach? What forecasts, if any, do you have to make to complete the recording of this transaction? What factors would determine which of these two approaches is appropriate? As a financial analyst, what questions would you raise with the firm’s CFO?


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