Reformulating Allowance for Doubtful Accounts and Bad Debt Expense Merck & Compa

Question

Reformulating Allowance for Doubtful Accounts and Bad Debt Expense

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

a. Compute accounts receivable gross for each year.

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

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

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.

Round answers to one decimal place.

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

$ millions 2013 2014 2015 2016 Accounts receivable, net $7,666 $7,105 $6,965 $7,499 Allowance for doubtful accounts 170 179 191 225

Explanation / Answer

a. Accounts receivable gross for each year $ millions 2013 2014 2015 2016 Accounts receivable, gross $7,836 $7,284 $7,156 $7,724 Accounts receivable, gross = Account receivable, net + Allowance for doubtful accounts Accounts receivable, net $7,666 $7,105 $6,965 $7,499 Allowance for doubtful accounts $170 $179 $191 $225 Accounts receivable, gross $7,836 $7,284 $7,156 $7,724 b. Percentage of allowance to gross accounts receivable for each year 2013 2014 2015 2016 % allowance 2.17% 2.46% 2.67% 2.91% % allowance = Allowance for doubtful accounts/ accounts receivable, gross c. Four year average % of allowance to gross accounts receivables Average % = Percentage for four years/4                       =(2.17+2.46+2.67+2.91)/4                       =10.21/4                       =2.55 Reformulate the balance sheet and income statement 2013 2014 2015 2016 Adjusted allowance for doubtful accounts $199.8 $185.7 $182.5 $197.0 Balance sheet adjustments Allowance for doubtful accounts 29.8 6.7 -8.5 -28.0 Accounts receivable, net -29.8 -6.7 8.5 28.0 Deferred Tax liability -10.4 -2.3 2.9 9.8 Retained Earnings -19.4 -4.4 5.6 18.2 Income statement Adjustments Bad Debts Expenses 29.8 6.7 -8.5 -28 Income tax expenses @ 35% -10.4 -2.3 2.9 9.8 Net Income -19.4 -4.4 5.6 18.2 Increase in expense will reduce the income and thus result in reduced income tax expenses Vice versa decrease in expenses will increase the income and income tax expenses. Adjusted allowance for doubtful accounts = Accounts receivable, gross x 2.55% Balance sheet adjustments Allowance for doubtful accounts = Adjusted allowance for doubtful accounts - allowance for doubtful accounts 2013 2014 2015 2016 Adjusted allowance for doubtful accounts $199.8 $185.7 $182.5 $197.0 Allowance for doubtful accounts $170 $179 $191 $225 Difference $29.8 $6.7 ($8.5) ($28.0)

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