Final answer:
The commonly used method for reporting defaults and repossessions is Net Realizable Value, which takes into account the risk of borrowers not repaying. This method is crucial for maintaining accurate asset values on a bank's balance sheet, especially during periods of unexpected loan defaults.
Step-by-step explanation:
The method most commonly used to report defaults and repossessions in accounting is Option 3: Net Realizable Value. This method reflects the estimated selling price in the ordinary course of business, minus reasonably predictable costs of completion, disposal, and transportation. When banks face loan defaults, they need to reassess the value of loans on their balance sheets. The value of a bank's loans considers the risk that some borrowers will not repay. For example, if a bank like the Safe and Secure Bank in various figures experienced unexpected defaults causing a decline in loan value from $5 million to $3 million, this would reduce the bank's assets and could lead to negative net worth. This hypothetical situation illustrates the importance of banks maintaining an accurate assessment of loan value to remain financially stable, especially during economic downturns.