Question

Suppose Macy’s decided to hold a managers’ meeting in Honolulu in February. To take advantage of special fares, Macy’s purchased airline tickets in advance from Delta Airlines at a total cost of $55,000. Macy’s acquired the tickets on December 1 for cash. Using the balance-sheet-equation format, analyze the impact of the December payment and the February travel on the fi nancial position of both Macy’s and Delta

Answer 1

Answer:

The impact of the travel payment of $55000 in December is shown as:

Dr Prepaid travel      $55000

Cr Cash                                   $55000

The February balance sheet impact of the transaction is shown as:

Dr Prepaid expense       $55000

Cr Prepaid travel                              $5000

Explanation:

The payment of $55000  for travelling paid  in December for a trip in February is known advance payment or prepayment and an asset.

Asset  is debited when asset increases,hence the prepaid travel account is debited.The credit goes to cash account as it is an outflow of cash and a reduction in asset.

When the trip is due in February,the expense account can now be debited since the expense is now incurred and the corresponding credit goes to prepaid travel account that was previously debited.

Above all,the first impact was an increase in asset(prepayment) and reduction in asset(cash).