Problem 12-46 Cost Allocation for Travel Reimbursement (LO 12-1, 7) Your company
ID: 2594629 • Letter: P
Question
Problem 12-46 Cost Allocation for Travel Reimbursement (LO 12-1, 7)
Your company has a travel policy that reimburses employees for the “ordinary and necessary” costs of business travel. Employees often mix a business trip with pleasure by either extending the time at the destination or traveling from the business destination to a nearby resort or other personal destination. When this happens, an allocation must be made between the business and personal portions of the trip. However, the travel policy is unclear on the allocation method to follow.
Consider this example. An employee obtained a business-class ticket for $9,600 and traveled the following itinerary:
On the date of the flights between Chicago and Paris (and return), a restricted round-trip fare of $4,990 was available.
Required:
a. Compute the business portion of the airfare and state the basis for the indicated allocation that is appropriate according to each of the following independent scenarios:
1. Based on the maximum reimbursement for the employee.
Business portion of the airfare:
2. Based on the minimum cost to the company.
Business portion of the airfare
From To Miles One-Way Regular Fare Purpose Chicago Paris 4,070 $ 3,720 Business Paris Rio de Janeiro 5,700 4,230 Personal Rio de Janeiro Chicago 5,290 3,330 ReturnExplanation / Answer
Solution:
For maximum reimbursement to employee, we may reimburse to employee one way regular fare to Chicago to Paris and Rio de Janeiro to Chicago.
Maximum reimbursement for business portion = 3720 + 3330 = $7,050
2. Based on minimum cost to the company:
For minimum cost to the company, we may reimburse to employee restricted round trip fare between Chicago to Paris for $4,990
Out of 2 scenarios, 2nd scenario is most appropriate to reimburse business airfare to employee because in first scenario we are reimbursing employee return airfare from “Rio de Janeiro” from which distance to Chicago is 5290 miles. But distance from Paris to Chicago is only 4070 miles.
Therefore we should reimburse round trip fare to employee for business trip only.