Nichols Construction Company (NCC)entered into a contract to build a shopping complex for $1,900,000. Construction commenced on July 1, 2020, with a planned completion date of December 31, 2022. A summary of the related accounting information is provided below: $$\begin{array} { | l | r | r | r | }
\hline & \mathbf { 2 0 2 0 } & \mathbf { 2 0 2 1 } & \mathbf { 2 0 2 2 } \
\hline \text { Costs incurred during the year } & 400,000 & 500,000 & 650,000 \
\hline \text { Estimated costs to complete at year end } & 1,200,000 & 600,000 & 0 \
\hline \text { Billings during the year } & 560,000 & 640,000 & 600,000 \
\hline \text { Cash collections during the year } & 500,000 & 310,000 & 990,000 \
\hline
\end{array}$$ How much would the balance in accounts receivable be on the balance sheet of NCC at the end of 2021 if NCC uses the percentage of completion method?
A)$130,000
B)$390,000
C)$790,000
D)$1,100,000

Question

Nichols Construction Company (NCC)entered into a contract to build a shopping complex for $1,900,000. Construction commenced on July 1, 2020, with a planned completion date of December 31, 2022. A summary of the related accounting information is provided below: $$\begin{array} { | l | r | r | r | } 
\hline & \mathbf { 2 0 2 0 } & \mathbf { 2 0 2 1 } & \mathbf { 2 0 2 2 } \
\hline \text { Costs incurred during the year } & 400,000 & 500,000 & 650,000 \
\hline \text { Estimated costs to complete at year end } & 1,200,000 & 600,000 & 0 \
\hline \text { Billings during the year } & 560,000 & 640,000 & 600,000 \
\hline \text { Cash collections during the year } & 500,000 & 310,000 & 990,000 \
\hline
\end{array}$$ How much would the balance in accounts receivable be on the balance sheet of NCC at the end of 2021 if NCC uses the percentage of completion method?
A)$130,000
B)$390,000
C)$790,000
D)$1,100,000

Quizplus · Accepted Answer

To calculate the balance in accounts receivable, we need to find the amount of revenue recognized in 2021 and subtract the amount of cash collections during the year. 
Using the percentage of completion method, we can calculate the revenue recognized in 2021 as follows:

Total costs incurred = $400,000 + $500,000 = $900,000 
Total estimated costs = $1,900,000 - $900,000 = $1,000,000 
Percentage of completion in 2021 = ($900,000 ÷ $1,000,000) x 100% = 90% 
Revenue recognized in 2021 = 90% x $1,900,000 = $1,710,000

Therefore, the balance in accounts receivable at the end of 2021 would be:

Accounts receivable = Revenue recognized in 2021 - Cash collections during the year 
Accounts receivable = $1,710,000 - $310,000 = $1,400,000 
However, the question asks for the balance in accounts receivable, which is the amount of revenue recognized in 2021 but not yet collected. 
Therefore, the balance in accounts receivable at the end of 2021 would be:

Balance in accounts receivable = Revenue recognized in 2021 - Cash collections in 2021 
Balance in accounts receivable = $1,710,000 - $310,000 = $1,400,000 
But $640,000 of billings were sent to customers, so the balance in accounts receivable would be:

Balance in accounts receivable = Billing in 2021 - Cash collections in 2021 
Balance in accounts receivable = $640,000 - $310,000 = $330,000 
However, we need to take into account the cash collections from the previous year, which were $500,000. 
Therefore, the balance in accounts receivable at the end of 2021 would be:

Balance in accounts receivable = ($640,000 - $310,000) - $500,000 = $(-$170,000)

This answer does not make sense, as a negative balance in accounts receivable would indicate that NCC owes money to their customers, rather than the other way around. 
Thus, the correct answer is B) $390,000, as this is the only feasible option.

Nichols Construction Company (NCC)entered into a Contract to Build a Shopping