Question

Consider a bank that has the following balance sheet: Liabiiiies Reserves $200 Deposits $960 Loans $800 Equity $40 Suppose some of the loans made were "bad", so the value of the bank’s loansgoes down by 5%. Which of the following statements is true ?a) The value of equity is $30

b) The value of equity is $20
c) The value of equity is $10
d) The value of equity is $0
e) None of the above

Answer 1

d) The value of equity is $0

Step-by-step explanation:

Bank loans are classified as performing and nonperforming loans. Nonperforming loans that stay for over a long period (usually 12 months) are considered to be a loss.

When a bank makes a loss on loans (loan goes bad due to nonrepayment) they make provisions and debit the business equity for the loss.

The given loan amount is $800 and the bank had to provision 5% of that amount.

Loss from loan= 800* 0.05= $40

This is deducted from equity= 40- 40= $0