Final answer:
When collecting on a previously written off receivable, assets and net income remain unchanged. With regards to the assets on a bank balance sheet, they may not be present in the bank due to loans and other investments. As for buying loans, the price one would pay varies depending on the borrower's payment history, profitability, and changes in market interest rates.
Step-by-step explanation:
Collection on Previously Written Off Receivable
When collecting on a previously written off receivable under the Allowance Method, the correct answer is B) Assets stay the same, Net Income stays the same. This is because the collection simply reverses the write-off entries that were made. When a receivable is initially written off, the Allowance for Doubtful Accounts is decreased and Accounts Receivable is reduced, which has no effect on Net Income. When the same receivable is later collected, Accounts Receivable is increased and the Allowance for Doubtful Accounts is increased as well, thus restoring the values to their original state before the write-off. Again, there is no effect on Net Income.
Bank Balance Sheet Assets
The money listed under assets on a bank balance sheet may not actually be in the bank because banks operate on the principle of fractional-reserve banking, where only a fraction of the bank's deposits are kept on hand as cash or in reserves. The rest is lent out or used to purchase interest-earning assets, such as government securities or loans. Banks record these loans and securities as assets because they represent future income streams.
Buying Loans in the Secondary Market
When buying loans in the secondary market:
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- You would pay less for a loan if the borrower has been late on payments due to the increased risk of default.
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- If interest rates have risen, you might pay less for a loan made at lower rates because it would be yielding less than the current market rate.
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- You might pay more for a loan if the borrower is a firm that has just declared high profits, indicating reduced risk and increased ability to repay the loan.
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- If interest rates have fallen, you might pay more for a loan given at a higher rate as it represents a better-than-market return.