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Author: TourDeFarce Big gold star, 5000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 2818  
Subject: Accounting Question Date: 6/23/2006 11:29 AM
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Any accounting majors or profs out there up for a theory question on how to calculate an expense?

Suppose an airline wants to report the cost of flights given away as part of a frequent flier program. Figures show an occupied seat brings in 12.6 cents per seat-mile, but that it costs 9.6 cents per seat-mile to transport an empty seat. Let's suppose a frequent flier takes a journey of 1000 miles. Would the airline report:

a) The gross (unit) cost of the trip based on the revenue it would have realized (12.6 * 1000 = $126).

b) The net (marginal) cost of the trip based on how much *extra* the airline would have gotten ((12.6 - 9.6) * 1000 = $30.)

People in my class worked the problem both ways and the instructor seems inclined to accept both, but is there an actual "right" answer as to what FASB accepts?

Corollary (and perhaps related) question:

Suppose Ford supplies a game show with a car in exchange for advertising. When recording the car as an expense, would Ford use the retail price (what it could sell the car for) or the actual cost (what it took to make the car, deliver it to the show, prep it for use,..)?

TDeF
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