Question

Question text

Reformulating Allowance for Doubtful Accounts and Bad Debt Expense

Merck & Company reported the following from its 2016 financial statements.

$ millions		2013	2014	2015	2016
Accounts receivable, net		$7,189	$6,631	$6,489	$7,019
Allowance for doubtful accounts		149	156	168	199

a. Compute accounts receivable gross for each year.

$ millions		2013	2014	2015	2016
Accounts receivable, gross		$Answer Correct The correct answer is: 7338 Mark 1.00 out of 1.00	$Answer Correct The correct answer is: 6787 Mark 1.00 out of 1.00	$Answer Correct The correct answer is: 6657 Mark 1.00 out of 1.00	$Answer Correct The correct answer is: 7218 Mark 1.00 out of 1.00

b. Determine the percentage of allowance to gross account receivables for each year.

Round answers to two decimal places (ex: 0.02345 = 2.35%).

	2013	2014	2015	2016
% allowance	Answer Correct The correct answer is: 2.03 Mark 1.00 out of 1.00 %	Answer Correct The correct answer is: 2.3 Mark 1.00 out of 1.00 %	Answer Correct The correct answer is: 2.52 Mark 1.00 out of 1.00 %	Answer Correct The correct answer is: 2.76 Mark 1.00 out of 1.00 %

c. Assume that we want to reformulate the balance sheet and income statement to reflect a constant percentage of allowance to gross accounts receivables for each year. Compute the four-year average and then reformulate the balance sheet and income statements for each of the four years. Follow the process shown in Analyst Adjustments 5.2 and assume a tax rate of 35%.

Four- year average of percentage of allowance to gross accounts receivables.

Round answer to two decimal places (ex: 0.02345 = 2.35%)

Answer

Correct
The correct answer is: 2.4
Mark 1.00 out of 1.00

%

Reformulate the balance sheet and income statements.

• Use rounded answer above for computations, then round answers to one decimal place.

• Use negative signs with answers to indicate the adjustment decreases an account.

		2013	2014	2015	2016
Adjusted allowance for doubtful accts.		$Answer Correct The correct answer is: 176.1 Mark 1.00 out of 1.00	$Answer Correct The correct answer is: 162.9 Mark 1.00 out of 1.00	$Answer Correct The correct answer is: 159.8 Mark 1.00 out of 1.00	$Answer Correct The correct answer is: 173.2 Mark 1.00 out of 1.00
Balance Sheets Adjustments
Allowance for doubtful accounts		Answer Correct The correct answer is: 27.1 Mark 1.00 out of 1.00	Answer Incorrect The correct answer is: 34 Mark 0.00 out of 1.00	Answer Incorrect The correct answer is: 25.8 Mark 0.00 out of 1.00	Answer Correct The correct answer is: 0 Mark 1.00 out of 1.00
Accounts receivable, net		Answer Correct The correct answer is: -27.1 Mark 1.00 out of 1.00	Answer Incorrect The correct answer is: -34 Mark 0.00 out of 1.00	Answer Incorrect The correct answer is: -25.8 Mark 0.00 out of 1.00	Answer Correct The correct answer is: 0 Mark 1.00 out of 1.00
Deferred tax liabilities		Answer Correct The correct answer is: -9.5 Mark 1.00 out of 1.00	Answer Incorrect The correct answer is: -11.9 Mark 0.00 out of 1.00	Answer Incorrect The correct answer is: -9 Mark 0.00 out of 1.00	Answer Correct The correct answer is: 0 Mark 1.00 out of 1.00
Retained Earnings		Answer Correct The correct answer is: -17.6 Mark 1.00 out of 1.00	Answer Incorrect The correct answer is: -22.1 Mark 0.00 out of 1.00	Answer Incorrect The correct answer is: -16.8 Mark 0.00 out of 1.00	Answer Correct The correct answer is: 0 Mark 1.00 out of 1.00
Income Statements Adjustments
Bad debts expense		Answer Correct The correct answer is: 27.1 Mark 1.00 out of 1.00	Answer Incorrect The correct answer is: 6.9 Mark 0.00 out of 1.00	Answer Incorrect The correct answer is: -8.2 Mark 0.00 out of 1.00	Answer Incorrect The correct answer is: -25.8 Mark 0.00 out of 1.00
Income tax expense at 35%		Answer Correct The correct answer is: -9.5 Mark 1.00 out of 1.00	Answer Incorrect The correct answer is: -2.4 Mark 0.00 out of 1.00	Answer Incorrect The correct answer is: 2.9 Mark 0.00 out of 1.00	Answer Incorrect The correct answer is: 9 Mark 0.00 out of 1.00
Net Income		Answer Correct The correct answer is: -17.6 Mark 1.00 out of 1.00	Answer Incorrect The correct answer is: -4.5 Mark 0.00 out of 1.00	Answer Incorrect The correct answer is: 5.3 Mark 0.00 out of 1.00	Answer Incorrect The correct answer is: 16.8 Mark 0.00 out of 1.00

Answer 1

	2013	2014	2015	2016
Accounts Receivable , Gross	7189 + 149 =7338	6631 + 156 = 6787	6489 + 168 =6657	7019 + 199 =7218

	2013	2014	2015	2016
% Allowance	149/7338 =2.03	156/6787 =2.3	168/6657 =2.52	199/7019 =2.76

3. Four year average of percentage of allowance to gross accounts receivables

= (2.03+2.3+2.52+2.76)/4   = 2.40

      d.

	2013	2014	2015	2016
Adjusted allowance for doubtful accounts	7338*2.40% =176.10	6787*2.40% =162.9	6657*2.4 =159.8	7218*2.4 =173.2
Balance Sheet Adjustments
Allowance for doubtful accounts	176.1-149 =27.1	162.9-156+27.1 =34	159.8-168+34 =25.8	173.2-199+25.8 =0
Accounts Receivable, net	-27.1	-34	-25.8	0
Deferred Tax Liabilities (allowance * 35%) It will be negative due to creation of deferred tax assets here	-9.5	-11.9	-9	0
Retained Earnings. It will be in negative due to debit in Profit and loss because of allowances and deferred tax liability. = Allowances +deferred tax assets	-(27.1-9.5) =-17.6	-(34-11.9) =-22.1	-(25.8-9) =-16.8	0-0 =0
Income statement adjustments
Bad debt expense	27.1	34-277.1 =6.9	25.8-34 = -8.2	0-25.8 = -25.8
Income tax expense	27.1 * 35% = -9.5	6.9*35% = -2.4	-8.2 * 35% =2.9	-25.8*35% =9
Net income (as it is decreased by bad debt and tax) = -(bad debt expense + income tax expense)	-(27.1-9.5) = -17.6	-(6.9-2.4) = -4.5	-(8.2+2.9) = 5.3	-(25.8+9) =16.8

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