Question

Exercise 18-8 Ivanhoe’s Agency sells an insurance policy offered by Capital Insurance Company for a commission of $82 on January 2, 2017. Ivanhoe will receive an additional commission of $8 each year for as long as the policyholder does not cancel the policy. After selling the policy, Ivanhoe does not have any remaining performance obligations. Based on Ivanhoe’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 Ivanhoe, assuming 110 policies are sold.

Transaction price $

Determine the revenue that Ivanhoe will recognize in 2017. (Round answer to 0 decimal places, e.g. 5,125.)

Revenue $

Answer 1

1.) Transaction price = $12,980

Commission on sale	110 x $82	$9,020
Additional commission	110 x 4.5 x $8	$3,960
Transaction price		$12,980

2.) Revenue recognised in 2017 = $2,360

Revenue that recognised in 2017 to be calculated by dividing the transaction price by 5.5 year (4.5 +1)year

Transaction price/average policy period

= 12,980/5.5 = $2,360