Question

Shamrock’s Agency sells an insurance policy offered by Capital Insurance Company for a commission of $114 on January 2, 2020. In addition, Shamrock will receive an additional commission of $10 each year for as long as the policyholder does not cancel the policy. After selling the policy, Shamrock does not have any remaining performance obligations. Based on Shamrock’s significant experience with these types of policies, it estimates that policyholders on average renew the policy for 4.5 years, which results in an expected policy life of 5.5 years. It has no evidence to suggest that previous policyholder behavior will change.

Determine the transaction price of the arrangement for Shamrock, assuming 120 policies are sold. (Round answer to 0 decimal places, e.g. 5,125.)
Determine the revenue that Shamrock will recognize in 2020. (Round answer to 0 decimal places, e.g. 5,125.)

Answer 1

Answer:
1)
Transaction Price            = (Policies Sold x Commission )                     + ( Policies Sold x Additional Commission x Average Renewal Years            = ( 120 policies x $ 114 ) + ( 120 policies x $ 10 x 4.5 years )            =     $ 13,680 + $ 5,400	$ 19,080
2)
Expected policy period = 5.5 Years = 66 months
Difference = 5.5 years (-) 4.5 Years = 12 months
Revenue that Shamrock will recognize in 2020                    = $ 19,080 x 12 / 66	$ 3,469