A general contractor has accounts receivable of $85,000 that are 30-60 days old and $45,000 that are over 90 days old. What percentage of the total accounts receivable ($200,000) is considered high risk for collection?
Correct Answer
A) 22.5%
High risk accounts receivable are typically those over 90 days old. $45,000 ÷ $200,000 = 0.225 or 22.5%. The 30-60 day old accounts are not considered high risk.
Why This Is the Correct Answer
In construction accounting, accounts receivable over 90 days old are universally considered high risk for collection due to the significantly decreased likelihood of payment after this timeframe. Only the $45,000 in receivables over 90 days old qualifies as high risk, not the 30-60 day accounts which are still within normal collection periods. The calculation is straightforward: $45,000 ÷ $200,000 = 0.225 or 22.5%. This percentage represents the portion of total receivables that pose the greatest collection risk to the contractor's cash flow.
Why the Other Options Are Wrong
Option B: 42.5%
This incorrectly adds both the 30-60 day accounts ($85,000) and over 90 day accounts ($45,000) together as high risk, totaling $130,000 ÷ $200,000 = 65%. However, 30-60 day accounts are not considered high risk in standard accounting practices.
Option C: 65.0%
This percentage would result from calculating ($85,000 + $45,000) ÷ $200,000 = 65%, incorrectly treating both age categories as high risk when only accounts over 90 days old qualify as high risk.
Option D: 85.0%
This percentage has no mathematical relationship to the given figures and would require $170,000 in high-risk receivables, which exceeds the combined total of both aged account categories provided.
Memory Technique
Think '90+ = High Risk' - anything over 90 days is when contractors should be seriously concerned about collection, just like how 90+ degree weather is when you're seriously concerned about heat.
Reference Hint
Business and Finance chapter covering accounts receivable aging and collection risk assessment
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