Final answer:
William cannot claim a bad debt expense deduction under the cash method because bad debts are not recognized in this accounting approach. Banks may list money as assets even if it's not physically present due to lending practices. The value of loans in the secondary market varies based on the borrower's payment history and changes in the economy's interest rates.
Step-by-step explanation:
William would not be able to claim a bad debt expense deduction under the cash method because option 3 is correct: the cash method does not allow for bad debt expense deductions. In the cash accounting method, income is only recognized when cash is received, and expenses are only recognized when cash is paid. Therefore, if William has not received any money from a customer, there is no recognized income to write off as a bad debt.
Regarding bank balance sheets, the money listed under assets may not be physically present in the bank because banks operate under a system known as fractional-reserve banking. Banks lend out a significant portion of the deposits they receive, which means that a certain percentage of the bank's assets are actually tied up in loans to customers and are not held as cash in the vault.
When buying loans in the secondary market, the price you would be willing to pay for a loan can be affected by various factors:
- If a borrower has been late on a number of loan payments, one might pay less for the loan due to increased risk of default.
- If interest rates have risen since the loan was made, the existing loan's lower interest rate would be less attractive, and you might pay less for it.
- If the borrower is a firm that has just declared a high level of profits, this can decrease the risk, and one might be willing to pay more for the loan since the firm is likely more capable of repaying the debt.
- If interest rates have fallen since the loan was made, the existing loan's higher interest rate is more attractive, and one might pay more for it.