Final answer:
None of the answer choices regarding accounting for government grants are incorrect; they represent valid accounting methods. The money on a bank's balance sheet may represent loans and bonds, not just cash. Factors such as payment history and changes in interest rates affect the value of loans in the secondary market.
Step-by-step explanation:
With regard to the accounting for government grants, the statement that assets may be recorded at fair value or nominal cost is true. Companies can use either the capital or income approach to account for the asset and the grant. Companies may also apply the income approach either by recording the grant as deferred revenue or as an adjustment to the asset. Thus, none of these answer choices are incorrect; each choice correctly describes possible ways to account for government grants in financial statements.
The money listed under assets on a bank balance sheet may not be physically present in the bank because banks operate on a fractional reserve basis and may use the funds to provide loans or purchase investments like government bonds. In the secondary market, a buyer may pay more or less for a loan based on various factors. If a borrower has been late on payments, the loan is riskier, which might prompt a lower offer.
Conversely, if interest rates have risen since the loan was issued, the existing loan at a lower rate is less attractive, which could again lead to a lower offer. If the borrower is a firm with recently declared high profits, the loan seems safer, and a higher price might be justified. Lastly, if overall interest rates have fallen, the loan's higher fixed rate becomes more valuable, and a higher price might be warranted.
Banks often purchase bonds as a way to earn interest income. These government bonds are considered low-risk assets and contribute to the bank's revenue stream over time, even though they do not represent cash held in the bank's vaults.