Question

A contractor sends a progress billing report to a city requesting payment of $20 million for work done to date on a new fire station. The city retains 10 percent of the payment to the contractor until the fire station is completed and construction is inspected and approved. Which account and amount is credited to record the progress billing in a Capital Projects Fund?

a. Expenditures—construction cost is credited for $20 million.
b. Construction contracts payable is credited for $20 million.
c. Construction contracts payable is credited for $18 million.
d. Retainage payable is credited for $18 million.

Answer 1

The correct entry to record the progress billing in a Capital Projects Fund is option c, which credits Construction contracts payable for $18 million, reflecting the 90% payment after the city retains 10% of the total billed amount.

Step-by-step explanation:

The correct option to record the progress billing in a Capital Projects Fund when a contractor sends a progress billing report to a city requesting payment of $20 million for work done to date on a new fire station, and the city retains 10 percent of the payment, is option c. Construction contracts payable is credited for $18 million.

The contractor has billed the city for $20 million, but due to the retainage clause (10% holdback until completion and inspection), the city will only pay 90% of the amount billed at this time. Therefore, the construction contracts payable would reflect the actual amount the city is liable to pay at this moment, which is $18 million (90% of the $20 million billed).

The retainage amount of 10%, which amounts to $2 million ($20 million x 10%), will be recognized in a separate liability account titled Retainage Payable.