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15. Top of Form

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		$7,666	$7,105	$6,965	$7,499
Allowance for doubtful accounts		170	179	191	225

a. Compute accounts receivable gross for each year.

$ millions		2013	2014	2015	2016
Accounts receivable, gross		?$	?$	?$	?$

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	?%	?%	?%		?%

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. __%

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.		?$	?$	?$	?$
Balance Sheets Adjustments
Allowance for doubtful accounts		?$	?$	?$	?$
Accounts receivable, net		?$	?$	?$	?$
Deferred tax liabilities		?$	?$	?$	?$
Retained Earnings		?$	?$	?$	?$
Income Statements Adjustments
Bad debts expense		?$	?$	?$	?$
Income tax expense at 35%		?$	?$	?$	?$
Net Income		?$	?$	?$	?$

Bottom of Form

Answer 1

Part		2013	2014	2015	2016
	Account receivable net	7,666	7,105	6,965	7,499
	Allowance for doubtful accounts	170	179	191	225
a)	Accounts receivable, gross	7,836	7,284	7,156	7,724
b)	% Allowances	2.17%	2.46%	2.67%	2.91%

PART C
	Four- year average of percentage of allowance to gross accounts receivables = (2.17+2.46+2.67+2.91)/4 = 2.55%

PART D
		2013	2014	2015	2016
	Adjusted allowance for doubtful accts.	200	186	183	197
	Balance Sheets Adjustments
	Allowance for doubtful accounts	30	7	(8)	(28)
	Accounts receivable, net	(30)	(7)	8	28
	Deferred tax liabilities	(10.50)	(2.45)	2.80	9.80
	Retained Earnings	(20)	(5)	5	18
	Income Statements Adjustments
	Bad debts expense	30	(23)	(15)	(20)
	Income tax expense at 35%	(11)	8	5	7
	Net Income	(20)	15	10	13