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Southwest Airlines is paid in advance for its ticket sales, recognizing a deferred revenue, called air traffic liability, when it receives the cash. The liability is then converted to revenue when the passenger takes the flight. During 2008 Southwest recognized passenger revenues in the amount of $10.5 billion. On the balance sheet Southwest reported air traffic liabilities of $963 million and $931 million as of the end of 2008 and 2007, respectively.
a. Explain why Southwest does not recognize revenue when it receives the payment from its customers.
b. What kind of a liability is air traffic liability? Discuss whether it should be considered current or long-term.
c. Compute the cash received by Southwest from passengers during 2008.
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