Final answer:
To determine the adjusted book balance, add bank collections and interest earned to the unadjusted book balance, and subtract bank service charges. The correct answer is 4) All of the above.
Step-by-step explanation:
The calculations used to determine the adjusted book balance are critical for ensuring the accuracy of a business’ financial records. Adjusting the book balance typically involves several key steps:
- Add bank collections of depositors' accounts receivable to the unadjusted book balance.
- Subtract bank service charges from the unadjusted book balance.
- Add interest earned from the bank to the unadjusted book balance.
Therefore, the correct option in the final answer that encompasses all these adjustments is 4) All of the above. Each of these adjustments is made for specific reasons:
- Bank collections on behalf of the depositor increase the available funds and should be added.
- Bank service charges are costs to the account holder and reduce the available balance, thus they should be subtracted.
- Interest earned is an increase to the account and should be added.
When looking at bank balance sheets, the money listed under assets may not physically be in the bank because it often includes loans made to customers that are yet to be repaid. The bank anticipates that some loans may not be repaid on time—or at all—and includes a factor for this in its yearly expense calculations. This expectation of default is built into the value of the bank's loans, showing a certain level of riskiness. If a bank experiences more defaults than expected, like during a recession, this can negatively impact its net worth.
Buying loans in the secondary market means assessing the risk and potential return of the loans. A loan with a borrower who has been late on several payments would carry a higher risk and thus might be purchased for less. Conversely, if interest rates in the economy have increased since the loan was made, you may pay less for the loan due to the lower relative interest yield. If a borrower declares high profits, this suggests they are a lower risk, and thus the loan may command a higher price. Finally, if interest rates have fallen since the loan was issued, the loan's fixed interest rate might be more attractive, prompting you to pay more.