Kate Miller owns a dance studio in Los Angeles, California. Students can buy access to the dance classes by paying a monthly fee. Unfortunately, many of Kate’s students are struggling actors and actresses who lack the ability to pay their bills in a timely manner. And, although the students were expected to pay for classes in advance, Kate began offering credit to many of her students to grow her business. This, however, put Kate in a serious liquidity problem as revealed by the growing balance in the studio’s outstanding accounts receivable:

Age Classification	Accounts Receivable Outstanding Balance	Historical Estimate of Non-Collection
0–30 days	$44,000	4%
31–60 days	31,000	8%
61–90 days	22,000	12%
91–120 days	13,000	14%
121–150 days	9,000	20%
> 150 days	5,000	50%

Kate’s accountant, Matt Thomas, tried to help her get a handle on the studio’s accounts receivable problem, but to little avail. One trick he successfully used in the past to make Kate realize the seriousness of the problem was to overestimate the extent of Kate’s bad debt problem; consequently, there currently exists a balance in the allowance for uncollectible accounts totaling $2,700.

Required
1. The first step to help get Kate’s business back on track is to write off all receivables having a very low probability of collection (those accounts over 150 days). What balance sheet accounts will be affected, and in what amount, when Matt executes this action?

Indicate which balance sheet accounts will be affected by choosing Yes or No for each account:

Net revenue	No
Accounts receivable	Yes
Bad debt expense	No
Cash	No
Accounts payable	No
Allowance for uncollectible accounts	Yes

These account(s) will decrease by $5000

2. Prepare the age of Kate’s remaining accounts receivable. What balance should be in the Allowance for Uncollectible Accounts account?

Hint - Remember that Kate has already written off all accounts greater than 150 days old.

Balance in Allowance for Uncollectible Accounts is $10,500
What is Kate's new estimate for bad debt expense?

3. Kate 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:
a. Factor $40,000 of “current” receivables (0–30 days old) on a non-recourse basis at a flat fee of 11% of the value of the receivables sold.
b. Factor $40,000 of “current” receivables on a recourse basis at a flat fee of 6% of the value of the receivables sold.
Please calculate the cost of both options.

Cost of Option A
Cost of Option B