Question

In governmental fund financial statements, the assets acquired under a capital lease would be reported at:

A. They are not reported in the fund financial statements.

B. The present value of the required lease payments.

C. The undiscounted total of required lease payments.

D. The total of all payments required under the lease.

Answer 1

In governmental fund financial statements, assets acquired under a capital lease are reported at the present value of the required lease payments. Assets on a bank's balance sheet, like government bonds or loans, may not be present as physical cash but represent future payment streams. The value of loans in the secondary market is influenced by borrower reliability, as well as changes in the overall economic interest rates.

Step-by-step explanation:

The question relates to how assets acquired under a capital lease are reported in governmental fund financial statements. According to governmental accounting standards, the assets would be reported at the present value of the required lease payments. This approach aligns with the concept of present discounted value, an analytical tool used to compare present costs with the present value of future benefits. In the context of a capital lease, this means that the cost of the lease is considered in terms of how much it would be worth in today's dollars, taking into account factors such as the time value of money.

The money listed as assets on a bank's balance sheet might not actually be physically present in the bank because it could be invested in instruments like government bonds. These bonds represent future payment streams to the bank and are considered assets even though the cash isn't on hand. Moreover, funds from deposits may also be used for issuing loans, which generate interest income over time, thereby counted as assets for the bank.

In the secondary market for loans, a financial services company would consider multiple factors when deciding how much to pay for a given loan. If interest rates have risen since the loan was made, the buyer might pay less because the loan is now less competitive compared to new loans with higher rates. Conversely, if rates have fallen, the loan is more valuable, and they might pay more. A borrower's track record with payments affects the perceived risk; late payments increase risk and reduce the price a buyer would be willing to pay. Lastly, if a borrower recently declared high profits, the risk is perceived to be lower, and the loan's value could be higher.

Answer 2

In governmental fund financial statements, capital leases are reported at the present value of required lease payments, as this method ensures accurate representation of financial obligations. Banks may list money as assets not physically present due to investments like government bonds. Factors like payment history and interest rate trends affect the value of loans in the secondary market. Option B is the correct answer.

Step-by-step explanation:

In governmental fund financial statements, the assets acquired under a capital lease would be reported at the present value of the required lease payments. This is because government accounting standards require that leased assets be recorded at their present value to reflect the current value of future lease payments. The method of using present value allows for a more accurate reflection of the government’s financial obligations at the time the financial statements are prepared.

Banks indicate money on their balance sheets as assets, but it might not be physically present in the bank. This is because banks utilize these funds for various investments such as buying bonds. Government bonds, for instance, are low-risk investments banks make with depositor's money, expecting future payments which are also accounted for as assets.

When considering the buying of loans in the secondary market, several factors affect the price a buyer might be willing to pay. If the borrower has repeatedly made late payments, it represents a higher risk, therefore, the buyer might pay less. Rising interest rates in the economy make existing loans with lower rates less attractive, thus potentially lowering their market value. Conversely, if the borrower reveals high profits or if interest rates have fallen, the loan becomes a more appealing asset, and the buyer may be willing to pay more for it.

The final answer to the initially posed question would be option B, the present value of the required lease payments.