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

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

Step-by-step 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%