Question

Posa Hotels, Inc., has a sixth night free policy. Every sixth night a guest stays at the hotel is free. Because not all guests stay enough nights to earn a free stay, on average the number of free nights redeemed is 70% of the maximum possible number of free nights available one obtains by dividing the total number of paid nights the hotel has had by 5. Rooms at Posa Hotels cost $300 per night.

In 2019, Posa had a total of 100,000 paid room-nights and collected a total of $30 million from customers. Also in 2019, customers redeemed a total of 10,000 free room-nights. Some of the room-nights awarded were based on customers paid nights from previous years and some were based on paid nights from the current year.

Required:

Prepare journal entries to record revenue for 2019 for Posa. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Do not round intermediate calculations. Round your answers to the nearest whole dollar amount.)

1

Prepare the entry to record the revenue recognized for the nights paid by customers.

2

Prepare the entry to record the revenue recognized for the free nights redeemed by customers.

Answer 1

Answer 1:

For 2019:

Total collections from 100,000 paid room-nights = $30,000,000

Maximum possible number of free nights available to customers = 100,000 / 5=20,000

Average the number of free nights redeemed is = 70% of the maximum possible number

Deferred revenue = Maximum possible number of free nights * 70% * Rooms cost per night

= 20,000 * 70% * $300 = $4,200,000

The journal entry to record revenue for 2019 for Posa will be as below:

Answer 2:

In 2019, customers redeemed a total of 10,000 free room-nights

Rooms cost per night =$300

Revenue to be recognized = 10,000 * $300 = $3,000,000

The journal entry to record the revenue recognized for the free nights redeemed by customers is as follows: