Question

(Determine Transaction Price) Aaron’s Agency sells an insurance policy offered by Capital Insurance Company for a commission of \(100 on January 2, 2017. In addition, Aaron will receive an additional commission of \)10 each year for as long as the policyholder does not cancel the policy. After selling the policy, Aaron does not have any remaining performance obligations. Based on Aaron’s significant experience with these types of policies, it estimates that policyholders on average renew the policy for 4.5 years. It has no evidence to suggest that previous policyholder behavior will change.

Instructions

(a) Determine the transaction price of the arrangement for Aaron, assuming 100 policies are sold.

(b) Determine the revenue that Aaron will recognize in 2017.

Short answer

The transaction price = $14,500

Revenue recognized in 2017 = $10,000

Step-by-step solution

Meaning of Transaction price

The aggregate amount paid by an individual or company to its supplier for goods or services of any kind is treated as thetransaction value for that underlying goods and services.

Calculate transaction price and revenue recognized in 2017

a. Transaction price:

Commission = $ 100 per policy

Additional commission = $10

Estimated policy renewal years = 4.5 years

Policies sold = 100 policies

$$\begin{gathered} \mathrm{commission}\mathrm{received}=\mathrm{No}.\mathrm{of}\mathrm{policies}\mathrm{sold}\times \mathrm{commission}\mathrm{per}\mathrm{policy} \\ =100\times \$100 \\ =\$10,000 \end{gathered}$$

$$\begin{gathered} \mathrm{commission}\mathrm{on}\mathrm{renewal}=\mathrm{No}.\mathrm{of}\mathrm{policy}\mathrm{sold}\times \mathrm{Estimated}\mathrm{policy}\mathrm{renewal}\mathrm{years}\times \mathrm{Additional}\mathrm{commission} \\ =100\times 4·5\times \$10 \\ =\$4,500 \end{gathered}$$

$$\begin{gathered} \mathrm{Total}\mathrm{transaction}\mathrm{price}=\mathrm{Commission}\mathrm{received}+\mathrm{commission}\mathrm{on}\mathrm{renewal} \\ =\$10,000+\$4,500 \\ =\$14,500 \end{gathered}$$

b. Revenue recognized in 2017

In 2017, Aaron sells insurance and received the commission of $100 per policy and Aaron sold 100 policy which means they recognize $10,000.

$$\begin{gathered} \mathrm{Revenue}\mathrm{Recognized}\mathrm{in}2017=\mathrm{No}.\mathrm{of}\mathrm{policy}\mathrm{sold}\times \mathrm{Commission}\mathrm{per}\mathrm{policy} \\ =100\times \$100 \\ =\$10,000 \end{gathered}$$