Final answer:
Receivables that are not expected to be collected are initially recorded as assets and subsequently written off. The assets of a bank include loans and investments, which are not always present as cash in the bank. When buying loans in the secondary market, the price paid is influenced by the borrower's payment history and changes in economy-wide interest rates.
Step-by-step explanation:
Receivables not expected to be collected should initially be included as assets and then be written off when the customer does not pay. This approach aligns with the accrual basis of accounting where revenues and associated expenses are recorded when they are earned or incurred, not necessarily when cash is received or paid. Therefore, when it becomes clear that a receivable will not be collected, it should be removed from the assets via a write-off to reflect the realizable value of assets and the company's financial position accurately. The money listed under assets on a bank balance sheet may not actually be in the bank because banks typically use the money deposited by customers to make loans and investments. The assets shown on the balance sheet include loans given to customers and investments made, which are not immediately available as cash within the bank. When banks face an unexpected number of loan defaults, the value of these assets can decline, potentially leading to a negative net worth situation.
If you were in the position of buying loans in the secondary market, the price you'd pay for a loan can vary depending on several factors:
- If the borrower has been late on a number of loan payments, you might pay less because there's a higher risk of default.
- Interest rates rising since the loan was made might lead you to pay less, as the old loan now has a less competitive interest rate.
- If the borrower is a firm that has just declared high profits, you might pay more due to the lower perceived risk.
- A drop in interest rates since the loan was made could lead you to pay more for the loan because its interest rate is now potentially more favorable compared to current rates.