Final answer:
Capitalized collections should be recognized as assets in the period they are acquired. They include tangible items like collectibles that provide utility and the potential for profit upon resale, but they are not typically high-yield long-term investments.
Step-by-step explanation:
Capitalized collections should be recognized as assets in the period in which they are acquired. When a company or individual purchases items such as paintings, fine wine, jewelry, antiques, or even baseball cards, these items are considered tangible assets. These collectibles are expected to provide returns in the form of both their utility (for example, a painting can be displayed) and a potentially higher selling price in the future. However, it is noted that while collectibles may experience price surges, they typically do not yield a higher-than-average rate of return over long periods.
In the context of a bank's balance sheet, not all money listed under assets is physically present in the bank. This is because banks employ the fractional-reserve banking system, where only a fraction of bank deposits is held in reserve, and the rest is used for loans and investments. This is known as the asset-liability time mismatch, as customers can withdraw bank liabilities in the short term, while the assets (loans given out) are repaid in the long term. When purchasing loans in the secondary market, a financial institution may pay more or less based on factors such as the borrower's payment history, changes in interest rates, and the borrower's profitability.