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Southwest Airlines
Have you ever flown on Southwest Airlines? Here is a bit of information about them,
from (https://swamedia.com/pages/corporate-fact-sheet). Southwest Airlines offers "one-of-a-kind value and
hospitality" at 121 airports across 11 countries. It celebrated its 50th anniversary in 2021. Southwest Airlines
is based in Dallas, Texas, and employs approximately 55,000 people. It has carried as many as 130 million
customers in a year, and has been profitable for 47 consecutive years. In 1994, Southwest became the first
major airline to offer ticktless travel. During its peak travel seasons, Southwest operated more than 4,000 flights
a day.
Please refer to the December 31, 2021 10-k for Southwest Airlines. You will be using
the balance sheet (page 80), the statement of income (income statement, page 81), and the retained earnings
portion of the consolidated statement of stockholders' equity (page 83).
On the following worksheets in this workbook I have prepared the income statement,
statement of retained earnings, and balance sheet, but have not entered balances. Enter the balances,
with excel formulas for all totals and subtotals, then create transaction columns for each of the transactions
below. Create a "Revised" column showing the revised totals after entering the
transactions. Sum and copy numbers across the worksheet such that financial statements
update appropriately for each transaction recorded. Remember to use a formula which captures all of the
revenues and expenses showing the effect of the change of those items for each transaction, in "Net income"
on the statement of retained earnings. Also be sure to link numbers from the statement of retained earnings
to retained earnings on the balance sheet such that any change in retained earnings will update approprately on
the balance sheet. Please be sure to do this as shown in the online lectures, and refer to my solutions for
previous cases as a guide. Lastly, format your work properly, no page breaks running through the
analyses, use proper number formatting and alignment, etc. Amounts are in $millions. Transactions follow.
A tip. On the balance sheet, be careful with Allowance for depreciation and amortization. This is a negative
asset and companies usually show it as a negative number. However, Southwest Airlines has elected to show
this as a positive number, with the positive number being subtracted from Flight equipment, Ground and
property, etc. You will increase the Allowance by recording it as a positive number, leading one to believe
that this increases assets. However, this positive number will reduce assets, if you enter the balance sheet
formulas correctly.

(transactions are on next page)

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Southwest Airlines

a "Cumulative effect of adoption of accounting standard" reflects the change in net income arising if the
company adopts a new accounting standard which changes how something is accounted for. Assume
another new stardard was adopted, and this standard changed how prepaid items are accounted for. The
adoption of this standard increased "Prepaid expenses and other current assets" by $14, and record the
corresponding $14 in "Cumulative effect of adoption of accounting standard" such that the balance sheet
continues to balance.
b Record depreciation on flight equipment and ground property and equipment. Assume accumulated
depreciation associated with flight equipment is $8,000 and that accumulated
depreciation associated with ground property and equipment is $4,732. Assume Southwest Airlines
depreciates flight equiment using the straight-line approach, with a $1,200 salvage value and 10-year
life. Assume they depreciate ground property and equipment using double declining balance and
an 11 year life.
c Sold Ground and property equipment that had a cost of $650 and accumulated depreciation of $300. This property
was sold for $400, cash. Again, be careful with the Allowance for depreciation portion of this entry, as you
should remove the $300 from this account.
d Additional passenger purchases of mainline flights online $3,900, cash. Please note these passengers have purchased
the flights; they have not yet flown. Revenue is not recorded until the passengers fly. As such this is unearned
revenue (liability). Southwest Airlines has a special liability account to record these unearned revenues,
it is "Air traffic liability." Record this in the Air traffic liability in current liabilities.
e Assume it is some time later, and $5,000 of the Air traffic liability is earned, these passengers have
flown to their destinations. Assume these are for mainline flights. Adjust the Air traffic liability (current liab)
and record the revenue
f Additional revenue for flying freight and cargo was $1,250, received in cash.
g Acquired a competing airline. Assets and liabilities of the airline purchased, at their fair market values,
are: short term investments $60, flight equipment $870, ground equipment $290,
and long-term debt of $340. Cash of $2,000 was paid to acquire this airline.
h Acquired various ground equipment. Cost of this equipment was $281. Also paid
$1 to test the equipment, $2 to install the equipment, and $3 to remove the old equipment
that was replaced. This was paid in cash.
i Let's take a look at "Operating lease right-of-use assets" on the balance sheet. In the "good old days," when a company
rented something, it would simply record the rent payments as rent expense. Relatively recently the accounting
standard setting folks decided that, for all leases that have a duration of one year or longer, an asset be recorded
for the present value of the sum of the lease payments. That asset is then amortized to depreciation as are other
plant and equipment assets, usually over the life of the lease. Assume Southwest Airlines leased several new
aircraft with five-year leases, and that the present value of the lease payments is $620. Please record this by
increasing "Operating lease right-of-use assets" and increasing "Noncurrent operating lease liabilities."
j Other office facilities were renovated, adding landscaping, replacing benches and tables, etc. These
were considered significant improvements over what was already in place. Cost was $64,
on account.
 Southwest Airlines Co
Statement of Income
Year ended December 31, 2021
(In millions)
OPERATING REVENUES: a b c d e f g h i j Revised
Passenger $ 14,066 5,000 $ 19,066
Freight 187 1,250 1,437
Other 1,537 1,537
Total operating revenues 15,790 22,040

OPERATING EXPENSES, NET:

Salaries, wages and benefits 7,743 7,743
Payroll support and voluntary Employee programs, net (2,960) (2,960)
Fuel and oil 3,310 3,310
Maintenance materials and repairs 854 854
Landinf fees and airport rentals 1,456 1,456
Depreciation and amortization 1,272 2,295 3,567
Other operating expenses 2,394 2,394
Total operating expenses, net 14,069 16,364

OPERATING INCOME 1,721 5,676

OTHER EXPENESES (INCOME):

Interest expense 467 467
Capitalized interest (36) (36)
Interest income (13) (13)
Other (gains) losses, net (22) (50) (72)
Total other expenses (income) 396 346

INCOME (LOSS) BEFORE INCOME TAXES 1,325 5,330

PROVISION FOR INCOME TAXES 348 348
NET INCOME $ 977 $ 4,982

Southwest Airlines Co.

Statement of Retained Earnings
Balance, December 31, 2020 $ 14,777 $ 14,777
Cumulative effect of adopting accounting standard 20 14 34
Net income 977 0 (2,295) 50 0 5,000 1,250 0 0 0 0 4,982
Balance, December 31, 2021 $ 15,774 $ 19,793
 Southwest Airlines Co
Balance Sheet
December 31, 2021
(In millions, except share data)
ASSETS
Current assets: a b c d e f g h i j Revised
Cash and cash equivalents $ 12,480 400 3,900 1,250 (2,000) (287) $ 15,743
Short term investments 3,024 60 3,084
Accounts and other receivables 1,357 1,357
Inventories of parts and supplies,at cost 537 537
Prepaid expenses and other current assets 638 14 652
Total current assets 18,036 21,373

Property and equipment, at cost:

Flight equipment 21,226 870 22,096
Ground property and equipment 6,342 (650) 290 287 64 6,333
Assets constructed for others 6 6
27,574 28,435
Less allowance for depreciation and amortization 12,732 2,295 (300) 14,727
14,842 13,708
Goodwill 970 1,120 2,090
Operating lease right-of-use assets 1,590 620 2,210
Other assets 882 882
$ 36,320 $ 40,263

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable $ 1,282 64 $ 1,346
Accrued liabilities 1,624 1,624
Current operating lease liabilities 239 239
Air traffic liability 5,566 3,900 (5,000) 4,466
Current maturities of long-term debt 453 453
Total current liabilities 9,164 8,128

Long-term debt less current maturities 10,274 340 10,614

Air traffic liability - noncurrent 2,159 2,159
Deferred incomne taxes 1,770 1,770
Noncurrent operating lease liabilities 1,315 620 1,935
Other noncurrent liabilities 1,224 1,224
Stockholders' equity:
Common stock, $1.00 par value; issued 888,111,634 million shares 888 888
Capital in excess of par value 4,224 4,224
Retained earnings 15,774 14 (2,295) 50 0 5,000 1,250 0 0 0 0 19,793
Accumulated other comprehensive income 388 388
Treasury stock (10,860) (10,860)
Total stockholders' equity 10,414 14,433
$ 36,320 $ 40,263
 (b) Depreciation
Flight equipment Ground property and equipment
Cost 21,226 Cost 6,342
Salvage 1,200 Accum dep'n 4,732
Depreciable value 20,026 Book value 1,610
Life 10 DDB fraction 2/11
2021 depreciation 2,003 2012 depreciation 293

Total Depreciation = 2,295

(c )Ground equipment sold (g) Acquisition of airline

Cost 650 Net assets acquired, at FMV:
Accum dep'n 300 Investments 60
Book value 350 Flight equipment 870
Assets received 400 Ground equipment 290
Gain on sale 50 Debt (340)
Net 880
Cash paid 2,000
Goodwill acquired 1,120