Rustic Construction Company uses the percentage of completion method of recognizing revenue on construction contracts. It uses full accrual accounting and prepares monthly financial statements. Rustic’s records showed the following data relating to the construction of an office building:
Total contract awarded $95,000
Total estimated costs on the project $95,000 – $18,000
Payments from the buyer on April 25th = 30% of contract
Payments from the buyer on June 17th = 30% of contract
Payments from the buyer on July 30th = 40% of contract
Costs incurred on the project and billed for the month of April = 40% of total
Costs incurred on the project and billed for the month of May = 30% of total
Costs incurred on the project and billed for the month of June = 30% of total
Project was completed at the end of month 3.
Required 1: Assuming no other transaction happened, what is the balance of Accounts Receivables at April 30th? $
Required 2: Assuming no other transaction happened, what is the balance of Accounts Receivables on May 30th? $
Required 3: Assuming no other transaction happened, what is the balance of Accounts Receivables on June 30th? $Rustic Construction Company uses the percentage of completion method of recognizing revenue on construction contracts. It uses full accrual accounting and prepares monthly financial statements. Rustic’s records showed the following data relating to the construction of an office building:
Total contract awarded $95,000
Total estimated costs on the project $95,000 – $18,000
Payments from the buyer on April 25th = 30% of contract
Payments from the buyer on June 17th = 30% of contract
Payments from the buyer on July 30th = 40% of contract
Costs incurred on the project and billed for the month of April = 40% of total
Costs incurred on the project and billed for the month of May = 30% of total
Costs incurred on the project and billed for the month of June = 30% of total
Project was completed at the end of month 3.
Required 1: Assuming no other transaction happened, what is the balance of Accounts Receivables at April 30th? $
Required 2: Assuming no other transaction happened, what is the balance of Accounts Receivables on May 30th? $
Required 3: Assuming no other transaction happened, what is the balance of Accounts Receivables on June 30th? $
In the construction industry, revenue recognition is a critical aspect of financial reporting. Companies involved in construction projects, such as Rustic Construction Company, often employ the percentage of completion method to recognize revenue, allowing them to report their financial performance as projects progress. This essay delves into the application of this method in the context of Rustic Construction and addresses three specific questions regarding the balance of accounts receivables on April 30th, May 30th, and June 30th.
Rustic Construction Company operates with a full accrual accounting system and prepares monthly financial statements. This method necessitates careful tracking of project costs and billings to determine the percentage of completion, which, in turn, determines the revenue that can be recognized at different stages of a project.
At the end of April, Rustic Construction had billed the buyer for 40% of the estimated project costs, which amounted to $30,800. They had also received a payment of $28,500 on April 25th. Consequently, the accounts receivables balance on April 30th was calculated as $30,800 – $28,500, resulting in an accounts receivables balance of $2,300.
By the end of May, Rustic Construction had billed the buyer for 70% of the estimated project costs, which included 40% from April and an additional 30% from May, totaling $53,900. Payments from the buyer, amounting to $28,500, had been received by the end of May. This led to an accounts receivables balance on May 30th of $53,900 – $28,500, equaling $25,400.
As the project neared completion, Rustic Construction had billed the buyer for the full estimated project costs, including 40% from April, 30% from May, and 30% from June, resulting in a total of $77,000. Payments from the buyer had accumulated to $66,500 by the end of June. The accounts receivables balance on June 30th was calculated as $77,000 – $66,500, resulting in an accounts receivables balance of $10,500.
In summary, Rustic Construction Company’s application of the percentage of completion method to recognize revenue on their construction contract demonstrates the dynamic nature of accounts receivables in construction projects. The accounts receivables balance changes as the project progresses and payments are received from the buyer. Understanding the timing of billings and payments is essential in accurately reflecting the company’s financial position and performance. This method aligns with the industry’s need to track revenue as work on a project advances, rather than waiting until the project’s completion, providing a more accurate portrayal of financial health.
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