EX 9-2 Nature of uncollectible accounts

The MGM Mirage owns and operates casinos including the MGM Grand and the Bellagio
in Las Vegas, Nevada. As of December 31, 2009, The MGM Mirage reported accounts and
notes receivable of $465,580,000 and allowance for doubtful accounts of $97,106,000.

Johnson & Johnson manufactures and sells a wide range of health care products including
Band-Aids and Tylenol. As of December 31, 2009, Johnson & Johnson reported accounts
receivable of $9,979,000,000 and allowance for doubtful accounts of $333,000,000.

a. Compute the percentage of the allowance for doubtful accounts to the accounts and notes
receivable as of December 31, 2009, for The MGM Mirage. Round to one decimal place.
b. Compute the percentage of the allowance for doubtful accounts to the accounts receivable
as of December 31, 2009, 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. The MGM Mirage: 20.9% ($97,106,000 ÷ $465,580,000)
b. Johnson & Johnson: 3.3% ($333,000,000 ÷ $9,979,000,000)
c. Casino operations experience greater bad debt risk, since 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.

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