The aircraft company should recognize three revenue types. First, the aircraft company should recognize the revenue generated from the sale of the fractional interest. It is necessary to record the fractional interest revenue on the date of the signing of the agreement, not when the fractional interest agreement is paid. The recording the fractional interest does not include the cash inflows from the resale of the fractional interests. The Securities and Exchange Commission website, www.sec.com, indicates that all revenues must be recognized in accordance with international accounting standards. The Securities and Exchange Commission requires the proper recording of the fractional interest in order make the reporting of the fractional interest revenue more understandable. There many parties interested to view the recording of the fractional interest revenue.
In the same light it is proper record revenues generated from the other cash inflow activities. The company must record its revenues from the revenue comes from the actual use of the airline company’s aircrafts. In addition, the aircraft company should recognize the cash inflows from the sales generated from the collection of the client’s fixed monthly fees. The fees are received in exchange as reimbursement for the aircraft company’s crew costs as well as the clients’ rent of the aircraft company’s hangar. The clients will defray the salaries and other fringe benefits of the airline pilots, stewards, and other crew members.
Further, the company records another type of revenue. The new revenue source is not part of the recorded revenues from the sale of aircraft company’s fractional interests. The new revenue includes all cash inflows as well as receivables received from the hourly fees paid by the airline company’s clients. The hourly fees are computed based on the aircraft’s actual flying time. Under this revenue category, clients using more airplane flying time will have to pay higher fees compared to clients using lesser airplane flying time. The fees generated from this type of revenue will pay for the aircraft company’s fuel, repair, and maintenance costs.
Based on the above discussion, there are three revenue classifications to be recorded. First, fractional interest must be credited. Second, revenues from monthly fixed fees should be entered in the journal books. Third, revenues from hourly flights should be included in the aircraft company’s books of original entry. Indeed, the above discussion clearly explains that the airline company must implement the most advantageous revenue recognition alternative. The chosen alternative is option 1 (Hawkins 3).
The company must recognize fractional interest revenues. The company should recognize the revenue generated from the sale of fractional interests. The Securities and Exchange Commission website, www.sec.com, indicates strict compliance with the Accounting Standards Council Conceptual Statement 605. Statement 605 states that revenue is allowed when it is earned, not when money is paid for the fractional interest. The time of payment is not relevant when recording the fractional interest revenue in the aircraft company’s journal book. The agreed fractional interest revenue amount is equal to 1/8 of the retail price of the clients’ chosen aircraft. In exchange, the clients exercise their right to use the aircraft for their own vested interests.
Applying the same conceptual framework, the aircraft company’s sale of the fractional interests is recorded at the time the customer signs fractional interest contract or agreement. The date of payment of the fractional interest is irrelevant to the issue of fractional interest revenue recognition.
The table below clearly shows the recommended journal entry to record the revenues in the best manner. The revenue excludes the resale of the fractional interest agreement.
In return for the fractional interest revenue received from the clients, the aircraft company pays for the repair and maintenance services of the aircrafts. The aircraft company has the responsibility to keep the aircraft in good flying condition. The clients paid for an aircraft that can fill the clients’ diverse flying needs. In exchange for the clients’ payments, the aircraft company has the responsibility to hire highly trained pilots, make flight arrangements, and pay for the aircraft insurance.
Further, the airline company generates other revenues. The aircraft company records additional revenues generated from the clients, fixed monthly fees. The fees are received as payment for the crew costs as well as the clients’ use of the aircraft company’s aircraft hangar. Likewise, the company records additional revenues generated from the hourly fees paid by the customers. The hourly fees are based on the aircraft’s actual flying time. The fees are collected to pay for the recovery of the aircraft company’s other expenses. The payments are collected from the customers to recover the airline company’s fuel and other expenses.
Based on the above discussion, the aircraft company must recognize three types of revenues. First, the company must record revenues from the signing of the fractional interest contract. Second, the aircraft company must recognize revenues from the fixed monthly fee collections. Third, the aircraft company should record the revenues generated from the hourly flights. Indeed, the above discussion clearly shows that the aircraft company must implement the best revenue scheme. The chosen scheme is option 1 (Hawkins 3).
Works Cited
Hawkins, David F. “ Trans-Share Inc.” Harvard Business Review. 2011: 1-4.
SEC. “Revenue Recognition.” Beginner’s guide to Financial Statements. n.d. 2011. Web.