Part A:

Mead Agency sells insurance policy offered by American Life Insurance for a commission of $150 each policy beginning January 1, 2019. In addition, Mead Agency will receive an additional commission of $20 per policy each year as long as the policyholder does not cancel the policy. After selling the policy, Mead does not have any other performance obligation. Based on significant past experience, Mead estimates that policyholders on average continue to hold the policy (by renewing them) for at least 6 years. There is no evidence suggesting that the past behavior of policyholders will change in future.

Mead Agency has sold 250 policies on January 1, 2019.

1. Determine the transaction price of the revenue arrangement for Mead Agency.

2. Determine the amount of revenue that Mead should recognize in 2019.

Part B:

In September 2020, Biotech Pharma enters into a licensing arrangement with Clover Pharmaceuticals for a drug under development that gives Clover to the right to use Biotechs patent to manufacture and sell the drug under the license given by Biotech Pharma. Biotech will receive a payment of $25,000,000 if the drug is approved by FDA. Based on past experience in drug approval process, Biotech determines that it is 80% likely that the drug will gain approval with 20% change of denial.

1. Determine the transaction price of the revenue arrangement for Biotech.

2. Prepare journal entries for Biotech on December 10, 2020 and January 31, 2021.