E188 LO23 Determine Transaction Price Aarons Agency sells an

E18-8 (LO2,3) (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.

Solution

(a) Transaction price = $145

Commission per policy on sale = $100

Average renewal period =$4.5 years

Renewal commission per policy = $10 x 4.5 = $45

Average commission payable to Aaron on each policy = $100 + $45 = $145

Transaction price (Commissions payable) per policy = $145

(b) Number of pilicies sold =100

Commission on sale = $100

Total commission on sale = $10,000

Total number of previous ploiclies = 4.5*100 = $450

Renewal commission on previous policies = $450 x $10 = $4,500

Revenue that Aaron recognizes = $10,000 + $4,500 = $14,500