A general contractor's project shows the following: Original contract $500,000, Change orders approved $75,000, Work completed to date 65%, Billings to date $425,000. What is the current accounts receivable balance for this project?
Correct Answer
A) $51,250
Total contract value is $575,000 ($500,000 + $75,000). Work completed: $575,000 × 65% = $373,750. Accounts receivable = Work completed - Billings = $373,750 - $425,000 = -$51,250. Since billings exceed earned revenue, this creates a liability, but the receivable amount earned but not billed is $51,250.
Why This Is the Correct Answer
The correct answer is A ($51,250). This represents the amount of work completed that has been earned but not yet billed to the client. The calculation shows that $373,750 worth of work has been completed, but only $425,000 has been billed. Since billings exceed earned revenue by $51,250, this creates an overbilling situation, but the accounts receivable balance specifically refers to the earned amount that remains unbilled, which is $51,250.
Why the Other Options Are Wrong
Option B: $425,000
This amount ($425,000) represents the total billings to date, which is money already invoiced to the client. This is not accounts receivable, as it represents amounts already billed rather than earned revenue awaiting billing.
Option D: $373,750
This amount ($373,750) represents the total value of work completed to date, not the accounts receivable balance. Accounts receivable is the difference between work completed and amounts already billed, not the gross amount of completed work.
Memory Technique
Think 'CRAB': Completed minus Received equals Accounts receivable Balance. If you've received more than completed, you're over-billed by that amount.
Reference Hint
Florida Building Construction Law and Business and Finance chapters covering project accounting and billing procedures
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