Final answer:
At the start of a lease, the right-of-use asset and lease liability are recorded at the present value of periodic lease payments and any expected residual value guarantees, not the fair value of the asset.
Step-by-step explanation:
Understanding Lease Accounting When a lessee makes an entry at the beginning of a lease, the amount recorded as both a right-of-use asset and a lease liability includes the present value of periodic lease payments, and if applicable, the present value of any residual value guarantees. The fair value of the asset leased is not directly factored into the right-of-use asset and lease liability unless it affects the lease payments.
In regard to a bank balance sheet, the money listed under assets may not actually be in the bank because banks operate using a fractional reserve system, meaning a portion of customer deposits is lent out, and not all funds are kept on hand. Furthermore, assets may also include loans due to the bank, securities, and other investments that are not physical cash held in the bank's vaults.
The value of loans in the secondary market can fluctuate based on a borrower's creditworthiness, indicated by their payment history, the economic interest rate environment, and the borrower's financial performance. For instance, a loan tied to a borrower who has been late on payments may be valued lower due to increased risk, whereas a loan involving a profitable firm or in a lower interest rate environment may be more desirable and command a higher price.