Mgm Mirage Case

MGM MIRAGE CASE

**values in thousands

1. MGM’s listed amount under 2004 Casino Accounts Receivable of $174,713 is the gross value because MGM has not yet taken into account allowance for doubtful accounts valued at $57,111. The net casino accounts receivable would therefore be the difference which is $117,602.

1. To estimate the amount of net write-offs, we deduct recoveries from write-offs.

Estimating Write-Off

We assume the full amount of provision for doubtful casino accounts as our write-off value; this will (later) yield to a more conservative net write-off estimate

We are told that 95% of the provision for doubtful accounts relate to Casino Receivables.

Estimating Recoveries

We assume that the year-year change in allowance for doubtful casino accounts receivables listed on the table under exhibit 2 are a result of successful collections, they are therefore MGM’s recoveries.

Computing for Net Write-off

In 2003, we estimate a net write off of $1,702.5. MGM’s recoveries for 2004, however, are greater than the write off, therefore we have a negative write off value of $21,632.55. Having a negative write off value indicates that MGM did not write anything off, instead the company recovered cash from accounts that were previously written off.

        A negative write off value due to recoveries will positively impact MGM’s income statement with increased revenues and could also explain the increase in income per share. It also made positive impact MGM’s balance sheet under improved cash position due to increased collections.

1. To compute cash collections related to casino accounts receivable we take Casino revenues made on account, subtract write-offs, subtract receivables for the year that can only be collected the following year, and lastly, carry over (add) receivables collectible from the previous year

Casino Revenues – on account

We are told that 40% of Casino Revenues were made on account.

Net Write-offs

We take the values from exercise number 2

Receivables for next year collection

We take the values from exercise number 2

Computing for Cash Collections

1. In class, we were taught that expense accounts should be debited. However, a possible explanation for setting a negative balance in an expense account under provision for doubtful accounts on 2004 could indicate the likelihood of previously written off receivables to be collectible again. This is possible because of the sudden normalization of economic conditions during 2004.

A similar concept of such negative expense is late refund whereby something that you recorded as expense in the previous year, can be reversed as under the same expense account in the event that it is refunded later.