Tyco Ltd entered into a contract to build a sports arena for $1,800,000. Construction commenced on August 1, 2020, with a planned completion date of December 31, 2022. A summary of the related accounting information is provided below: $$\begin{array} { | l | r | r | r | }
\hline & \mathbf { 2 0 2 0 } & \mathbf { 2 0 2 1 } & \mathbf { 2 0 2 2 } \
\hline \text { Costs incurred during the year } & 400,000 & 500,000 & 650,000 \
\hline \text { Estimated costs to complete at year end } & 1,200,000 & 600,000 & 0 \
\hline \text { Billings during the year } & 560,000 & 640,000 & 700,000 \
\hline \text { Cash collections during the year } & 500,000 & 310,000 & 990,000 \
\hline
\end{array}$$ How much would the balance in accounts receivable be on the balance sheet of Tyco at the end of 2020 if Tyco uses the percentage of completion method?
A)$110,000
B)$60,000
C)$500,000
D)$660,000

Question

Tyco Ltd entered into a contract to build a sports arena for $1,800,000. Construction commenced on August 1, 2020, with a planned completion date of December 31, 2022. A summary of the related accounting information is provided below: $$\begin{array} { | l | r | r | r | } 
\hline & \mathbf { 2 0 2 0 } & \mathbf { 2 0 2 1 } & \mathbf { 2 0 2 2 } \
\hline \text { Costs incurred during the year } & 400,000 & 500,000 & 650,000 \
\hline \text { Estimated costs to complete at year end } & 1,200,000 & 600,000 & 0 \
\hline \text { Billings during the year } & 560,000 & 640,000 & 700,000 \
\hline \text { Cash collections during the year } & 500,000 & 310,000 & 990,000 \
\hline
\end{array}$$ How much would the balance in accounts receivable be on the balance sheet of Tyco at the end of 2020 if Tyco uses the percentage of completion method?
A)$110,000
B)$60,000
C)$500,000
D)$660,000

Quizplus · Accepted Answer

To calculate the balance in accounts receivable, we need to find out the portion of revenue earned and billed during the year that is yet to be collected. 
Total revenue earned during the year = Costs incurred during the year / Percentage of completion
Percentage of completion at the end of 2020 = Costs incurred during the year / Total estimated costs
= $400,000 / $1,800,000 = 22.22%
Total revenue earned during the year = $560,000 x 22.22% = $124,320
Total collections during the year = $500,000
Balance in accounts receivable = Total revenue earned during the year - Total collections during the year
= $124,320 - $500,000 = -$375,680
This means that Tyco has collected more than it has earned on the project in 2020. Therefore, there would be a negative balance in accounts receivable, and the best answer is B) $60,000, which is not an option.

Tyco Ltd Entered into a Contract to Build a Sports