Question

Nature of Uncollectible Accounts

The XYZ Corporation owns and operates hotels and casinos including the XYZ Grand and the Bellagio in Las Vegas, Nevada. As of a recent year, XYZ reported accounts receivable of $425,000 and allowance for doubtful accounts of $69,700.

Patient Care manufactures and sells a wide range of healthcare products including Band-Aids and Tylenol. As of a recent year, Patient Care reported accounts receivable of $976,000 and allowance for doubtful accounts of $25,376.

Round your answers to one decimal place.

a. Compute the percentage of the allowance for doubtful accounts to the accounts receivable for The XYZ Corporation.
%

b. Compute the percentage of the allowance for doubtful accounts to the accounts receivable for Patient Care.
%

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, since it is difficult to control the creditworthiness of customers entering the casino.

Answer 1

A. % OF ALLOWANCE FOR DOUBTFUL DEBT TO ACCOUNTS RECEIVABLE FOR XYZ = $69700 / $425000 * 100

= 16.4%

B. % OF ALLOWANCE TO ACCOUNTS RECEIVABLE FOR PATIENT = $25376 / $976000 * 100

= 2.6%

C. D. Casino operations experience greater bad debt risk, since it is difficult to control the creditworthiness of customers entering the casino.

SINCE THE PERSON ENTERING THE CASINO IS NOT BEING ANALYSED AS TO WHAT IS THE CREDIT WORTHINESS OF THAT PERSON IS, AND ACCORDINGLY THERE ARE HIGHER CHANCES OF INCURRING BAD DEBT LOSSES.