Larkspur’s Agency sells an insurance policy offered by Capital Insurance Company for a commission of $103 on January 2, 2017. Larkspur will receive an additional commission of $9 each year for as long as the policyholder does not cancel the policy. After selling the policy, Larkspur does not have any remaining performance obligations. Based on Larkspur’s significant experience with these types of policies, it estimates that policyholders on average renew the policy for 4.5 years after the first year before terminating their insurance policy. It has no evidence to suggest that previous policyholder behavior will change.Determine the transaction price of the arrangement for Larkspur, assuming 100 policies are sold.Determine the revenue that Larkspur will recognize in 2017.

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Asked Jan 30, 2019
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Larkspur’s Agency sells an insurance policy offered by Capital Insurance Company for a commission of $103 on January 2, 2017. Larkspur will receive an additional commission of $9 each year for as long as the policyholder does not cancel the policy. After selling the policy, Larkspur does not have any remaining performance obligations. Based on Larkspur’s significant experience with these types of policies, it estimates that policyholders on average renew the policy for 4.5 years after the first year before terminating their insurance policy. It has no evidence to suggest that previous policyholder behavior will change.

Determine the transaction price of the arrangement for Larkspur, assuming 100 policies are sold.

Determine the revenue that Larkspur will recognize in 2017.

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Expert Answer

Step 1

Part-1 

Transaction price is total commission reeived on policy sold i.e. new business commission and commission on renewal business.

Therefore, Transaction price is computed as under:

New business commission = 100 policies @ 103 = 10300

Renewal business commission =100 policies @ (4.50 years @9 per year): 4050

Total Transaction price = 10300+4050 = 14350.

Step 2

part-2

Revenue to be recognized for the year 2017 is a comission earned and due to be recived. It does not includes the renewal business commission as the renewal is due next yea...

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