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13 October, 09:41

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.

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  1. 13 October, 13:36
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    Transaction price is the amount expected to be payed either as wages or revenue in respect of a service delivered.

    Commission per policy = $100

    Additional commission = $10

    Estimated renewal years (based on experience) = 4.5 years

    Number of policies sold = 100

    a) Transaction price

    Commission = 100*100 = $10000

    Commission on renewal = (100*4.5*10) = $4500

    Total transaction price = 10000+4500 = $14500

    Revenue for 2017.

    In IAS 18, revenue are recognized when earned.

    Therefore the revenue recognized for the year 2017 will be the revenue earned and due to be received and not a future revenue.

    The revenue recognized = 100*100 = $10,000
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