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

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

JOURNAL ENTRY

DATE	PARTICULARS	DEBIT	CREDIT
2019	CASH A/C DR	30,000,000
	TO , DEFERRED REVENUE-FREE A/C		4,200,000
	REVENUE A/C		25,800,000
	{ BEEING AMOUNT RECIVED FROM PAID CUSTOMERS }

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

DATE	PARTICULARS	DEBIT	CREDIT
2019	DEFERRED REVENUE - FREE NIGHTS A/C DR	3,000,000
	TO , REVENUE A/C		3,000,000
	{ BEEING REVENUE RECOGNIZED FOR THE FREE NIGHT }