Final answer:
Costs incurred for demolishing an old building on purchased land are capitalized and added to the land's book value, impacting the balance sheet by increasing the asset's value. The money under assets on a bank's balance sheet might not be in the bank due to loans made to borrowers. The purchase price of loans in the secondary market varies based on payment history, changes in economy-wide interest rates, and the borrower's financial condition.
Step-by-step explanation:
The cost of demolishing an old building that was on land when purchased would be included in the balance sheet under the asset category, specifically as part of the land's cost. Since the demolition cost is necessary to prepare the land for its intended use, it is capitalized, meaning it is added to the asset's value on the balance sheet rather than treated as an expense immediately. This increases the land's book value. When the company eventually sells the land, this capitalized cost will be part of the total cost of the asset used to calculate gain or loss on the sale.
Money listed under assets on a bank's balance sheet may not always be physically present in the bank because the bank utilizes the money received from deposits to issue loans, which are also listed as assets on the balance sheet. A bank generates income from interest on these loans, and some cash is held at the Federal Reserve.
The willingness to pay more or less for a loan in the secondary market depends on several factors:
- A borrower who has been late on loan payments is riskier, and this loan would be purchased at a discount.
- If interest rates have risen since the loan was made, the loan's fixed rate is less attractive, so it might sell for less.
- For a borrower that is a firm declaring high profits, the loan would carry lower risk and could command a higher price.
- If interest rates have fallen, existing loans with higher rates are more valuable and might sell for more.