Question

Merck & Company reported the following from its 2016 financial statements. $ millions 2013 2014 2015 2016 Accounts receivable, net $7,184 $6,626 $6,484 $7,018 Allowance for doubtful accounts 146 153 165 195 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 1

Answer:

a. Compute accounts receivable gross for each year.

• 2013 $7,330
• 2014 $6,779
• 2015 $6,649
• 2016 $7,213

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

• 2013 1.99%
• 2014 2.26%
• 2015 2.48%
• 2016 2.70%

c.                                                             2013         2014       2015      2016

adjusted allowance for                         $173         $160        $157      $170      

doubtful accounts

Balance sheet adjustments:

allowance for doubtful accounts          $27            $7          -$8       -$25

accounts receivable net                      $7,157     $6,633   $6,476   $6,993

deferred tax liability                            -$9.45      -$2.45      $2.8      $8.75

retained earnings                                 $9.45       $2.45     -$2.8     -$8.75

Income statement adjustments:

bad debt expense                                  $27            $7          -$8       -$25

income tax expense                            -$9.45      -$2.45      $2.8      $8.75  

net income                                            $9.45       $2.45     -$2.8     -$8.75

Explanation:

                                                                 2013         2014       2015      2016

Accounts receivable, net                       $7,184     $6,626   $6,484   $7,018

Allowance for doubtful accounts            $146        $153        $165      $195

four year average of allowance for doubtful accounts = (1.99 + 2.26 + 2.48 + 2.7) / 4 = 2.36%