JetGreen Airways instituted a frequent flyer program in which passengers accumulate points toward a free flight based on the number of miles they fly on the airline. One point was awarded for each mile flown, with a minimum of 750 miles being given for any flight. Because of competition in 2010, the company began a bonus plan in which passengers received triple the normal mileage points. In the past, about 1.5 per cent of passenger miles were flown by passengers who had converted points to free flights. With the triple mileage program, JetGreen expects that a 2.5 per cent rate will be more appropriate for future years.
During 2010, the company had passenger revenues of $966.3 million and passenger transportation operating expenses of $802.8 million before depreciation and amortization. Operating income was $86.1 million. What is the appropriate rate to use to estimate free miles? What would be the effect of the estimated liability for free travel by frequent fliers on 2010 net income? Describe several ways to estimate the amount of this liability. Be prepared to discuss the arguments for and against recognizing this liability
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