A bank determines that a $100,000 home loan to a customer is delinquent and at risk...
A bank determines that a $100,000 home loan to a customer is delinquent and at risk of foreclosure. The bank will:
Multiple Choice
Reduce Loans Secured by Real Estate by $100,000 and reduce Retained
Earnings by $100,000
Reduce Loans Secured by Real Estate by $100,000 and reduce Reserve
for Loan Losses by $100,000
Increase Reserve for Loan Losses by $100,000 and record a $100,000
expense to Provision for Loan Losses
Decrease Reserve for Loan Losses by $100,000 and record a $100,000
expense to Provision for Loan Losses
Wait until the loan forecloses then reduce Loans Secured by Real
Estate and Retained Earnings by $100,000
Homework Answers
Option 3
When loan is at a risk of foreclosure, a provision has to be created for the entire amount, the amount is straight away not reduced hence option 1,2 are incorrect.Provision has to be created when the risk of delinquency rises and not wait till the loan forecloses.
The reseve for loan losses has to be increased and not decreased to cushion the loss if the home is foreclosed, hence option 4 is incorrect.
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