1. How does PPLS create value for its customers? What are the critical risks that it has to manage well?
2. How did the pre-1995 commission formula work? Why do you think the company changed its policy?
3. Based on the post-1995 commission formula and information in the case on pricing and commission rates, calculate the cash inflows for premiums and cash outflows for commissions for years 1 to 3 that would arise from the sign-up of 1000 new members at the beginning of year 1. Assume that: (a) actual member renewal rates are 75% for both years 2 and 3, and (b) 25% of recoverable commission advances in each of years 2 and 3 are expected to prove uncollectible.
4. How does Pre-Paid Legal account for the transactions described in question 3? Set up Commission Advance (gross), Commission Expense, Allowance, and Cash T Accounts, and trace the flows in and out of these accounts for years 1 to 3.
5. Do you agree with Fortune’s criticism of PPLS’s method of reporting for commissions? Why or why not?
6. What actions could PPLS’s management take to reduce the unease among key investors about the firm’s accounting and its business model? How does PPLS add value for its members?

Individuals can always hire attorneys as they require legal services. However, PPLS provides users with several additional benefits:
Lower cost. By using its leverage with attorneys, PPLS is able to negotiate lower legal fees than individuals would be able to achieve by themselves. PPLS manages this particularly effectively under the closed panel format, where it selects one law firm to work with per region. PPLS will be the largest client for this firm, and can use this position to negotiate lower fees than the law firm would be willing to offer individual clients. PPLS is therefore performing much the same role in the legal market as HMOs provided in the health industry, changing the