An airline received $1,500 cash in September for a round-trip ticket (Denver–Hawaii–Denver) with flights in October and November. When should the airline recognize revenue?

Rationale

In October and November.

Revenue recognition for the airline should occur in October and November when the flights take place, in accordance with the revenue recognition principle. This principle states that revenue should be recognized when it is earned, which, in this case, corresponds to the completion of the flights.

A (In September, October, and November) YOUR ANSWER

Recognizing revenue in September would violate the revenue recognition principle, as the service (the flights) has not yet been provided. Revenue should only be recognized when the flights occur in October and November, not before.

B (Only in November) YOUR ANSWER

This choice is incorrect because it suggests that revenue should be recognized solely in November. Since the round-trip ticket includes flights in both October and November, the airline must recognize revenue for both months when the services are rendered.

C (Only in September) YOUR ANSWER

Recognizing revenue only in September would also contravene the revenue recognition principle, as the service has not been performed at that time. The airline has not fulfilled its obligation until the flights occur in October and November.

D (In October and November) CORRECT

This is the correct answer because it aligns with the principle that revenue is recognized when the service is performed. Since the airline provides the flights in October and November, revenue should be recognized in those months.

Conclusion

Revenue recognition must align with the timing of service delivery. In this scenario, the airline should recognize the $1,500 in revenue during October and November, when the flights are conducted. This adherence to the revenue recognition principle ensures accurate financial reporting and aligns with accounting standards.

An airline received $1,500 cash in September for a round-trip ticket (Denver–Hawaii–Denver) with flights in October and November. When should the airline recognize revenue?

In October and November.

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