Final answer:
Receivables not expected to be collected should be written off from a company's assets. Banks consider the risk of loan defaults and adjust their balance sheets accordingly. In the secondary market, the value of loans is influenced by the borrower's payment history, interest rate changes, and the borrower's financial stability. Option b is the correct answer.
Step-by-step explanation:
Understanding Receivables on a Company's Balance Sheet
When addressing the question of whether receivables not expected to be collected should be counted as assets, it is important to clarify the proper accounting treatment. These receivables, initially recorded as assets, represent money owed to the company. However, if it becomes apparent that a customer will not pay, these receivables should no longer be counted towards the company's assets. Instead, they should be written off or deducted from the total assets, reflecting a more accurate financial position of the company.
Impact of Non-Payment on Bank Assets
Banks also face similar concerns when it comes to their loan portfolios. They anticipate that a certain portion of loans will not be repaid in full or on time and thus plan accordingly. Banks' balance sheets reflect this risk by including a provision for loan losses in their financial calculations. When loan defaults exceed expectations, such as during an economic downturn, this can significantly reduce a bank's assets and potentially lead to negative net worth.
Factors Influence the Value of Loans in the Secondary Market
If you are considering buying loans in the secondary market, the price you are willing to pay can vary based on several factors:
- Credit Risk: A loan from a borrower who has a history of late payments is riskier, and you would likely pay less due to the increased chance of default.
- Interest Rate Fluctuations: If interest rates have risen since the loan was originated, the loan's fixed rate may be less attractive, and its value might decrease. Conversely, if rates have fallen, the loan would be more valuable and could command a higher price.
- Borrower's Financial Health: A loan to a firm that has recently reported strong profits is less risky and could be worth more due to the increased likelihood of repayment.
To sum up, the correct option is that receivables not expected to be collected should initially be included as assets and then be written off when the customer does not pay.