Reformulating Allowance for Doubtful Accounts and Bad Debt Expense Merck & Compa
ID: 2339429 • Letter: R
Question
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 $7,185 $6,627 $6,485 $7,017
Allowance for doubtful accounts 153 160 172 201
a. Compute accounts receivable gross for each year.
$ millions 2013 2014 2015 2016
Accounts receivable, gross $Answer 7,338 $Answer 6,787 $Answer 6,657 $Answer 7,218
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 2.09 % Answer 2.36 % Answer 2.58 % Answer 2.78 %
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 2.45 %
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 179.8 $Answer 166.3 $Answer 163.1 $Answer 176.8
Balance Sheets
Adjustments Allowance for doubtful accounts Answer 26.8 Answer Answer Answer
Accounts receivable, net Answer (26.8) Answer 0 Answer 0 Answer 0 Deferred tax liabilities Answer
Retained Earnings Answer (17.4) Answer 0 Answer 0 Answer 0
Income Statements Adjustments
Bad debts expense Answer 26.8 Answer 0 Answer 0 Answer 0
Income tax expense at 35% Answer (9.4) Answer 0 Answer 0 Answer 0
Net Income Answer 17.4 Answer 0 Answer 0 Answer 0
Explanation / Answer
Answer -a year-1 year-2 year-3 year-4 i Net account receivable 7,185 6,627 $6,485 7,017 ii Allowance for doubtful accounts 153 160 172 201 iii=i+ii accounts receivable gross 7,338 6,787 6,657 7,218 Answer -b iv=ii/iii percentage of allowance to gross account receivables 2.09% 2.36% 2.58% 2.78% 9.81% Answer -c v 4 year average % = sum of iv/4 =9.81%/4 2.45% Answer -d vi=iii*2.45% Adjusted allowance for doubtful accts 179.8 166.3 163.1 176.8 Answer -e vii=vi-ii Adjustments Allowance for doubtful accounts 26.8 6.3 (8.9) (24.2) Answer -f viii=iii-vi-i Adjustment Accounts receivable, net (26.8) (6.3) 8.9 24.2 Answer -g ix=viii*(1-0.35) Adjustments retained earning (17.41) (4.08) 5.79 15.70 Answer -h x=vii Income Statements Adjustments- Bad debt 26.8 6.3 (8.9) (24.2) Answer -I xi=-x*0.35 Income tax expense at 35% (9.4) (2.2) 3.1 8.5 Answer -J x=-x-xi Net income (17.41) (4.08) 5.79 15.70
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