Aaron’s Agency sells an insurance policy offered by Capital Insurance Company for a commission of $100. In addition, Aaron will receive a further 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 its significant experience with these types of policies, Aaron estimates that policyholders on average renew the policy for 4.5 years. It has no evidence to suggest that previous policyholder behaviour will change.

Instructions

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

b. Prepare the journal entries, assuming that the 100 policies are sold in January 2020 and that Aaron receives commissions from Capital.