Question

P5-54. Interpreting Accounts Receivable and Related Footnote Disclosure Following is the current asset section from the W.W. Grainger Inc. balance sheet. 2015 $ 290,136 2014 $ 226,644 2013 $430,644 ..... As of December 31 ($ 000s) Cash and cash equivalents .... Accounts receivable (less allowances for doubtful accounts of $22,288, $22,121 and $20,096, respectively). Inventories-net.... Prepaid expenses and other assets...... Deferred income taxes.................... Prepaid income taxes....................... Total current assets............. 1,209,641 1,414,177 85,670 0 49,018 $3,048,642 1,172,924 1,356,396 102,669 61,387 47,529 $2,967,549 1,101,656 1,305,520 115,331 75,819 15,315 $3,044,285 .... Grainger reports the following footnote relating to its receivables. Allowance for Doubtful Accounts doubtful accounts. The following table shows the activity in the allowance for For Years Ended December 31 ($ 000s) 2015 2013 Balance at beginning of period .................... Provision for uncollectible accounts. Write-off of uncollectible accounts, net of recoveries ... Business acquisitions, foreign currency and other ..... Balance at end of period .... $22,121 10,181 (10,495) 481 $22,288 2014 $20,096 12,945 (9,628) (1,292) $22,121 $19,449 8,855 (7,942) (266) $20.096 Required a. What amount do customers owe Grainger at each of the year-ends 2013 through 2015? b. What percentage of its total accounts receivable does Grainger deem uncollectible? (Hint: Percentage of uncollectible accounts = Allowance for uncollectible accounts / Gross accounts receivable) c. What amount of bad debts expense did Grainger report in its income statement for each of the years 2013 through 2015? d. Explain the change in the balance of the allowance for uncollectible accounts since 2013. Specifically, rease or decrease as a percentage of gross accounts receivable, and why? e. If Grainger had kept its 2015 allowance for uncollectible accounts at the same percentage of gross accounts receivable as it was in 2013, by what amount would its pretax profit have changed? Explain. f. Overall, what is our assessment of Grainger's allowance for uncollectible accounts and the related bad debts expense?

Answer 1

a.

	2015	2014	2013
Amount owed by customers to Granger	$1,231,929	$1,195,045	$ 1,121,752

b.

	2015	2014	2013
Percentage of accounts receivable deemed uncollectible	1.81 %	1.85 %	1.79 %

c.

	2015	2014	2013
Bad Debt Expense Reported	$ 10,181	$ 12,945	$ 8,855

d. The balance in allowance for uncollectible accounts has increased from $ 20,096 to $ 22,288 between 2013 and 2015. The main reason is that the balance in accounts receivable has increased over the same period. The allowance as a percentage of gross accounts receivable has increased too, due to increasing amount of write-offs.

e. If Granger had maintained the allowance percentage at 1.79 % for 2015, allowance required would have been = $ 1,231, 929 x 1.79 % = 22,051.53

Pretax profit would have been higher by $ 22,288 thousand - $ 22,052 thousand = $ 236 thousand

f. Granger appears to be conservative in its estimation of allowance for uncollectible accounts, as the actual write-offs of uncollectible accounts each year are substantially less than the amount of allowance maintained.