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 of the insurance process
3) Sums due 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

Option 1, 'Any loans required to offset uncollectible amounts,' is not covered under accounts receivable coverage form. The money listed as assets on a bank balance sheet isn't always physically in the bank due to fractional-reserve banking. The price paid for loans in the secondary market varies based on borrower reliability and changes in interest rates.

Step-by-step explanation:

The question addresses the accounts receivable coverage form, which is a part of the broader field of insurance and financial accounting. Specifically, it pertains to what is typically not covered under such a policy. To answer the student's question, option 1, "Any loans required to offset uncollectible amounts", is generally not covered under an accounts receivable coverage form. This is because the purpose of the coverage is to protect against losses from receivables that cannot be collected due to covered perils, such as fire or theft, and not to cover the financial gaps caused by customer defaults themselves. Therefore, the costs associated with the need to take out loans to cover such uncollectible amounts would not be typically reimbursed by this type of insurance coverage.

Addressing the other query, the money listed under assets on a bank balance sheet might not actually be physically in the bank due to how modern banking operates. Banks often loan out a majority of the deposits they receive to other customers as a part of their lending activities, which is known as fractional-reserve banking. This means that at any given time, only a fraction of the bank's deposit liabilities are present as liquid assets in the bank.

In the context of buying loans in the secondary market, several factors influence the price a buyer would be willing to pay for a given loan:

1. If a borrower has been late on payments, the loan is at a higher risk of default, leading a potential buyer to pay less for it.
2. If interest rates have risen, existing loans with lower rates are less attractive, so a buyer would pay less.
3. Should a borrower, such as a firm declaring high profits, be seen as more creditworthy, a buyer might be willing to pay more due to lower perceived risk.
4. If interest rates have fallen, loans made at higher rates are more valuable, prompting a buyer to pay more for such loans.