Question

Which of the following is not covered under accounts receivable coverage form?

1) Any loans required to offset uncollectible amounts
2) Interest on loans required to offset uncollectible amounts pending payment of the insurance proceeds
3) Sums due to the insured that are uncollectible due to a covered loss
4) Expenses to reestablish the records, if possible, and collection expenses that are in excess of normal costs

Answer 1

The accounts receivable coverage form does not cover any loans needed to offset uncollectible amounts. It does cover sums uncollectible due to covered loss, interest on loans pending payment of insurance proceeds, and excessive expenses in reestablishing records and collection.

Step-by-step explanation:

The correct answer is option 1) Any loans required to offset uncollectible amounts. Accounts receivable coverage forms generally do not cover the cost of any loans a business might need to take out to compensate for uncollectible receivables. They are meant to cover the loss of accounts receivables themselves, such as sums that are uncollectible due to a covered loss (3), interest on loans pending the payment of insurance proceeds (2), and the costs over normal costs to reestablish records and collection expenses (4).

Regarding the supplementary questions:

1. The money under assets on a bank balance sheet may not actually be in the bank because banks often lend out a majority of the deposits they receive, keeping only a fraction as a reserve. This practice is known as fractional-reserve banking.
2. In the secondary market, the value of a loan might fluctuate based on risk and market interest rates. For example, a loan with a borrower who has been late on payments might be worth less due to increased risk of default (a), while a borrower with newly declared high profits could be seen as lower risk, increasing the loan's value (c). Changes in the economy’s interest rates can also affect loan value; if rates have risen, existing loans with lower rates may be worth less (b), and if they have fallen, loans with higher rates can be more valuable (d).

To reassure a bank against imperfect information, a borrower can offer collateral, showing proof of consistent income, providing a larger down payment, or having a co-signer. An insurance premium is a payment made to an insurance company for coverage, which may include copayments for services before insurance covers the remaining costs.