Final answer:
To measure and report the expense related to uncollected receivables, banks use an allowance for doubtful accounts that estimates uncollectable loans and affects the income statement. An increase in unexpected defaults, such as those experienced during a recession, will result in additional expenses and can impact a bank's net worth.
Step-by-step explanation:
Measuring and Reporting Receivables Failure Expense
When measuring and reporting the expense associated with the failure to collect receivables, banks calculate an allowance for doubtful accounts. This is an estimate of the receivables that will not be collected, which becomes an expense on the income statement. Expenses tied to uncollected loans are recognized in the bank's annual financial calculations as a factor of credit risk. An example would be Safe and Secure Bank, which expected a number of loan defaults but experienced more than anticipated during a recession, with unexpected defaults resulting in a decline from $5 million to $3 million in the value of its loans. Consequently, the bank's assets decreased, leaving it with negative net worth.
Allowance for doubtful accounts and credit risk are key concepts in this context, especially when unexpected loan defaults exceed the anticipated amount. The increase in loan defaults is then reflected as an increase in the expense recognized in the bank's financial statements.