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Nature of Uncollectible Accounts MGM Resorts International owns and operates hotels and casinos including the MGM...

Nature of Uncollectible Accounts MGM Resorts International owns and operates hotels and casinos including the MGM Grand and the Bellagio in Las Vegas, Nevada. As of a recent year, MGM reported accounts receivable of $592,937,000 and allowance for doubtful accounts of $101,207,000 Johnson & Johnson manufactures and sells a wide range of healthcare products including Band-Aids and Tylenol. As of a recent year, Johnson & Johnson reported accounts receivable of $11,775,000,000 and allowance for doubtful accounts of $466,000,000. a. Compute the percentage of the allowance for doubtful accounts to the accounts receivable for MGM Resorts International. Round to one decimal place. % b. Compute the percentage of the allowance for doubtful accounts to the accounts receivable for Johnson & Johnson. Round to one decimal place. % c. Possible reasons for the difference in the two ratios computed in (a) and (b) include: Casino operators historically lose money on operations. Casino operators have larger accounts receivable. Individuals who may have adequate creditworthiness could overextend themselves and lose more than they can afford if they get caught up in the excitement of gambling. Casino operations experience greater bad debt risk because it is difficult to control the creditworthiness of customers entering the casino. c and d Feedback Recall that the percent of the allowance for doubtful accounts to total accounts receivable will vary across companies and industries based on their risks. Consider the differences in the two businesses and their operations. Which type of operation would you consider to have the greater risk and why? Learning Objective 2.

Solutions

Expert Solution

(a) Allowance for doubtful accounts for MGM Resorts International = 17.1%

Accounts Receivable =$592,937,000 , Allowance for doubrful accounts = $101,207,000

Allowance for doubtful Accounts % = 101,207,000 / $592,937,000 = 17.1%

(b) Allowance for doubtful accounts for Johnson & Johnson = 4.0%

Accounts Receivable =$11,775,000,000 , Allowance for doubrful accounts = $466,000,000

Allowance for doubtful Accounts % = 466,000,000 / $11,775,000,000 = 4.0%

Reasons for difference in the two ratios are

(i) Individuals who may have adequate creditworthiness could overextend themselves and lose more than they can afford if they get caught up in the excitement of gambling.

(ii) Casino operations experience greater bad debt risk because it is difficult to control the creditworthiness of customers entering the casino.

The difference is also due to the different industries to which they belong to.

MGM :Casinos are into gaming industry where, the outcome of the activity is unpredictable, whereby customers who play with high stakes may loase and end up not able to pay the monies.

Johnson and Johnson :

The manufacturing industry is relatively less affected by the customer solvency.the products are such that the customers are willing to pay for the products.Normally the final transaction is cash based whereby the customers pay cash to get the product. Hence the allowance for doubtful acounts in such companies will be low when compared to gaming companies.

ekkarill92 answered 2 years ago
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