Reformulating Allowance for Doubtful Accounts

MGM International operates casinos and resorts across the U$.$S$.$ and in China. The company reported the following in its SEC filings.

We maintain an allowance for doubtful casino accounts at all of our operating casino resorts. The provision for doubtful accounts, an operating expense, increases the allowance for doubtful accounts. We regularly evaluate the allowance for doubtful casino accounts. At domestic resorts where marker play is not significant, the allowance is generally established by applying standard reserve percentages to aged account balances. At domestic resorts where marker play is significant, we apply standard reserve percentages to aged account balances under a specified dollar amount and specifically analyze the collectability of each account with a balance over the specified dollar amount, based on the age of the account, the customer's financial condition, collection history and any other known information. MGM China specifically analyzes the collectability of casino receivables on an individual basis taking into account the age of the account, the financial condition and the collection history of the gaming promoter or casino customer.

Schedule II$-$Valuation and Qualifying Accounts Balance, Provision for Write$-$offs, Balance,

Allowance for doubtful accounts $($In thousands$)$ Beginning of Period Doubtful Accounts Net of Recoveries End of Period

Year ended December $31,$ Year $490,775$ $$39,270$ $$(35,484)$ $$94,561$

Year ended December $31,$ Year $392,57139,762(41,558)90,775$

Year ended December $31,$ Year $297,92020,603(25,952)92,571$

Year ended December $31,$ Year $189,78910,863(2,732)97,920$

MGM reported the following on its balance sheets.

$ thousands Year $1$ Year $2$ Year $3$ Year $4$

Accounts receivable, net $$542,924$ $$540,545$ $$657,206$ $$612,717$

a$.$ According to MGM$,$ which of the following is not considered when estimating its allowance for doubtful accounts?

Answer $1$

Size of casino resort

b$.$ Compute the ratio of the allowance to gross accounts receivable for each year. Round percentages to two decimal places

$ thousands Year $1$ Year $2$ Year $3$ Year $4$

Allowance $/$ Accounts receivable, gross Answer $2$

$15\mathrm{.}27$

Answer $3$

$14\mathrm{.}63$

Answer $4$

$12\mathrm{.}16$

Answer $5$

$13\mathrm{.}37$

What might you conclude after looking at the ratio trend?

MGM expected Answer $6$

fewer

uncollectible accounts in Year $4$ compared to Year $1.$

c$.$ Compute the four$-$year average of the allowance to gross accounts receivable ratio. Round percentage to four decimal places.

Answer $7$

$\%$

Reformulate the income statement and balance sheet accounts listed below for all four years using the four$-$year average of the allowance to gross accounts receivable ratio. Assume that the tax rate is $22\%$ for all four years. Follow the process in Analyst Adjustments $5\mathrm{.}2$; income statement first, followed by balance sheet.

Reformulated data

$ thousands Year $1$ Year $2$ Year $3$ Year $4$

Income Statements Adjustments

Bad debts expense Answer $8$

$0$

Answer $9$

$0$

Answer $10$

$0$

Answer $11$

$0$

Pretax income Answer $12$

$0$

Answer $13$

$0$

Answer $14$

$0$

Answer $15$

$0$

Income tax expense at $22\%$ Answer $16$

$0$

Answer $17$

$0$

Answer $18$

$0$

Answer $19$

$0$

Net Income Answer $20$

$0$

Answer $21$

$0$

Answer $22$

$0$

Answer $23$

$0$

Balance sheet adjustments

Allowance for doubtful accounts Answer $24$

$0$

Answer $25$

$0$

Answer $26$

$0$

Answer $27$

$0$

Accounts receivable, net Answer $28$

$0$

Answer $29$

$0$

Answer $30$

$0$

Answer $31$

$0$

Deferred tax liabilities at $22\%$ Answer $32$

$0$

Answer $33$

$0$

Answer $34$

$0$

Answer $35$

$0$

Retained Earnings Answer $36$

$0$

Answer $37$

$0$

Answer $38$

$0$

Answer $39$

$0$

d$.$ Ignoring the analysis in part c$,$ assume that we anticipate that geopolitical events in Year $5$ will shrink gambling activities worldwide. This will impair Year $4$ accounts receivable. For each of the Year $4$ balance sheet and income statement accounts listed below indicate what adjustments would be required under the assumption that the allowance to gross receivables ratio will increase to $25\%$ of total gross receivables and the tax rates remains $22\%.$ Enter decreases as negative numbers. Round to the nearest whole dollar amount.

$ thousands Year $4$ Adjustment

Income statement adjustment

Bad debts expense Answer $40$

$0$

Income tax expense at $22\%$ Answer $41$

$0$

Net Income Answer $42$

$0$

Balance sheet adjustment

Allowance for doubtful accounts Answer $43$

$0$

Accounts receivable, net Answer $44$

$0$

Deferred tax liabilities at $22\%$ Answer $45$

$0$

Retained Earnings Answer $46$

$0$