EYK8-3. Business Decision Problem Sally Smith owned a dance studio in San Francisco, California. Stu- dents could buy access to the dance classes by paying a monthly fee. Unfortunately, many of Sally's students were struggling actors and actresses who lacked the ability to pay their bills in a timely manner. Although the students were expected to pay for classes in advance, Sally had begun offering credit to many of her students in order to grow her business. This, however, created a seri- sons for the diffe liquidity problem for Sally. ous Historical Estimate of Noncollection Trade Receivables Outstanding Balance Age Classification 4% $44,000 31,000 22,000 13,000 9,000 5,000 0-30 days 31-60 days 8% 12% 61-90 days 91-120 days 121-150 days 150 days 14% 20% 50% Sally's accountant, Matt Thomas, had tried to help her get a handle on the problem, but to little aet One trick he had successfully used in the past to make Sally realize the seriousness of the probler was to overestimate the extent of Sally's debts; consequently, there currently existed a balance the Allowance for Uncollectible Accounts totaling $2,700. Chapter 8 Accounting for Receivables Required . The first step to help get Sally's business back on track is to write-off all receivables having very low probability of collection (i.e., those accounts over 150 days). Which accounts are affected and by what amount? 2. Prepare an aging of Sally's remaining accounts receivable. What should be the balance in the Allowance for Uncollectible Accounts? 3. Sally is in need of an immediate cash infusion and Matt has advised her to sell some of her receivables. A local bank has offered her two alternatives: Factor $40,000 of "current" receivables (i.e., 0-30 days old) on a nonrecourse basis at a flat fee of eleven percent of the receivables sold. b. Factor $40,000 of "current" receivables on a recourse basis at a flat fee of six percent of the receivables sold. Which option should Sally choose? Why? a a