Question

Assume a customer of Air New Zealand prepays $600 for a package holiday involving six trips. The company collects the $600 in advance and will provide the travel later. After two trips have been used up, what should Air New Zealand report on its income statement?

Select one:
a. Unearned service revenue of $400
b. Service revenue of $600
c. Service revenue of $200
d. Cash at bank of $600

Answer 1

Air New Zealand should report unearned service revenue of $400 on its income statement.

Step-by-step explanation:

Air New Zealand should report Unearned service revenue of $400 on its income statement after two trips have been used up.

When the customer prepays $600 for the package holiday, it is considered unearned revenue because Air New Zealand has not yet provided the service. As the trips are taken, the company recognizes the revenue for each trip that is completed. Therefore, after two trips have been used, $200 worth of revenue has been earned (2 trips x $100). The remaining $400 ($600 - $200) is still unearned and should be reported as such on the income statement.