Question

Nature of Uncollectible Accounts

MGM Resorts International (MGM) owns and operates hotels and casinos including the MGM Grand and the Bellagio in Las Vegas, Nevada. As of a recent year, MGM reported accounts receivable of $570,348,000 and allowance for doubtful accounts of $89,789,000. Johnson & Johnson (JNJ) manufactures and sells a wide range of healthcare products including Band-Aids and Tylenol. As of a recent year, J&J reported accounts receivable of $11,002,000,000 and allowance for doubtful accounts of $268,000,000.

a. Compute the percentage of the allowance for doubtful accounts to the accounts receivable for MGM. Round your answer to one decimal place.
%

b. Compute the percentage of the allowance for doubtful accounts to the accounts receivable for Johnson & Johnson. Round your answer to one decimal place.
%

c. Possible reasons for the difference in the two ratios computed in (a) and (b) include:

1. Casino operators historically lose money on operations.
2. Casino operators have larger accounts receivable.
3. Individuals who may have adequate creditworthiness could overextend themselves and lose more than they can afford if they get caught up in the excitement of gambling.
4. Casino operations experience greater bad debt risk because it is difficult to control the creditworthiness of customers entering the casino.

Answer 1

a
Percentage of the allowance for doubtful accounts	15.7%	=89789000/570348000
b
Percentage of the allowance for doubtful accounts	2.4%	=268000000/11002000000

c

Individuals who may have adequate creditworthiness could overextend themselves and lose more than they can afford if they get caught up in the excitement of gambling.

Casino operations experience greater bad debt risk because it is difficult to control the creditworthiness of customers entering the casino.

Option c and d is correct