Final answer:
Custodial fund assets and liabilities are recognized at the time the government becomes responsible for the assets, not based on the earnings process or collection certainty. This is distinct from business accrual accounting principles.
The correct option is B.
Step-by-step explanation:
The student's question pertains to the recognition of custodial fund assets and liabilities. In governmental accounting, custodial fund assets and liabilities should be recognized at the time the government becomes responsible for the assets, which is when they come into the government's custodial care.
The recognition criteria do not depend on the earnings process being complete nor on whether the collection is reasonably assured, which relates to the accrual accounting used by businesses rather than to the custodial funds of governments.
In the context of a bank's balance sheet, the assets listed may not physically be in the bank because banks loan out a portion of the deposits they receive. Furthermore, the value a financial entity would be willing to pay for a loan in the secondary market can vary depending on the borrower's payment history, current economic interest rates, and the borrower's financial stability.
The correct option is B.