Aaron’s Agency sells an insurance policy offered by Capital Insurance Company for a commission of $100 on January 2, 2025. In addition, Aaron will receive an additional commission of $10 each year for as long as the policyholder does not cancel the policy. Based on Aaron’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.

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 2025.