MGM Resorts International owns and operates hotels and casinos including the MGM Grand and the Bellagio in Las Vegas, Nevada

MGM Resorts International 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 manufactures and sells a wide range of health care products including Band-Aid® bandages and Tylenol®. As of a recent year, Johnson & Johnson 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 Resorts International. Round to one decimal place.

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

c.  Discuss possible reasons for the difference in the two ratios computed in (a) and (b).

Answer:

a. MGM Resorts International:  15.7% ($89,789,000 ÷ $570,348,000)

b. Johnson & Johnson:  2.4% ($268,000,000 ÷ $11,002,000,000)

c. Casino operations experience greater bad debt risk because it is difficult to control the creditworthiness of customers entering the casino. In addition, 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. In contrast, Johnson & Johnson’s customers are primarily other businesses such as grocery store chains.