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
D) 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 A: 65.0%
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.
Option C: 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.
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
More Business & Finance Questions
A general contractor purchases equipment worth $45,000 with a useful life of 9 years and no salvage value. Using straight-line depreciation, what is the annual depreciation expense?
What is the typical recommended coverage amount for general liability insurance for a small to medium-sized general contracting business?
A contractor estimates startup costs of $75,000 for equipment, $25,000 for initial inventory, $15,000 for insurance premiums, and $10,000 for working capital. They can finance 70% of the total. How much cash do they need?
When establishing professional relationships with architects and engineers, what is the most important factor for a general contractor to consider?
A partnership agreement for a construction company should address all of the following EXCEPT:
A contractor purchases a truck for $60,000. After 5 years, it has accumulated depreciation of $35,000. What is the truck's book value?
A contractor's business plan projects first-year revenue of $500,000 with a 15% net profit margin. If actual revenue is $450,000 with the same profit margin, what is the variance in net profit?
Using the Modified Accelerated Cost Recovery System (MACRS), construction equipment is typically depreciated over how many years?
A contractor is comparing financing options for equipment purchase. Option A: $80,000 cash purchase. Option B: $20,000 down, $65,000 financed at 6% for 4 years. What is the total cost of Option B?
A contractor purchases equipment using a capital lease with a present value of $120,000. How should this be recorded on the balance sheet?
People Also Study
Related Study Resources
Previous Question
Which insurance certificate requirement is most critical when qualifying subcontractors for a public works project in Florida?
Next Question
A general contractor purchases a new excavator for $85,000. Using the MACRS 5-year depreciation schedule with a first-year rate of 20%, what is the depreciation expense for the first year?