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