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 $562,947,000 and allowance for
doubtful accounts of $89,602,000. Johnson & Johnson
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 $11,260,000,000 and allowance for
doubtful accounts of $275,000,000.
a. Compute the percentage of the allowance for doubtful accounts to
the accounts receivable for MGM. Round your answer to one decimal
place.
2.4
%
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:
Casino operators historically lose money on operations.
Casino operators have larger accounts receivable.
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.
c and d
Feedback
Recall that the percent of the allowance for doubtful accounts to
total accounts receivable will vary across companies and industries
based on their risks. Consider the differences in the two
businesses and their operations. Which type of operation would you
consider to have the greater risk and why?
Learning Objective 2.
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