Final answer:
Short-term notes receivable are reported at face value plus interest on the balance sheet. The value of loans may fluctuate in the secondary market based on the borrower's creditworthiness and shifts in economic interest rates.
Step-by-step explanation:
Short-term notes receivable are reported on the balance sheet in the current assets section. The correct reporting measure for short-term notes receivable is at their face value plus any interest that is expected to be received for the term of the loan. This reflects the cash realizable value of the asset, which is the amount the company expects to convert into cash within the operating cycle or a year.
The money listed under assets on a bank balance sheet may not actually be in the bank because of the concept of asset-liability time mismatch. Customers can withdraw a bank's liabilities in the short term, while the bank's assets, like loans, are repaid over the long term. This concept underlies the fundamental practice of banking known as fractional reserve banking, which allows banks to lend out a portion of their deposits while retaining only a fraction as reserves.
In the secondary market, the value at which loans are bought and sold can vary based on several factors such as the borrower's payment history, economic interest rates, and the financial health of the borrower. For instance:
- If a borrower has been late on a number of loan payments, the value of the loan decreases since it reflects increased risk.
- If interest rates in the economy have risen since the loan was made, the older loan with a lower rate is less attractive, leading to a decrease in its value.
- If the borrower is a firm that has just declared a high level of profits, the loan's value may increase due to the decreased risk associated with the borrower.
- If interest rates in the economy have fallen, existing loans with higher rates become more valuable, and thus their value increases.