State Bank has the following year-end balance sheet (in millions of dollars   

Assets

Cash : $20

Loans : $180

Total Assets : $200

Liability and equity :

Deposits : $180

Equity : $20

Total liability and equity : $200

 

The loans primarily are fixed-rate, medium-term loans, while the deposits are either short-term or variable-rate deposits. Rising interest rates have caused the failure of a key industrial company and, as a result, 3 per cent of the loans are considered to be uncollectable and thus have no economic value. One-third of these uncollectable loans will be charged off. 

(i) What is the impact on the balance sheet after the necessary adjustments are made according to book value accounting? 

(ii) According to market value accounting? 

(iii) How will the impact of rising interest rates be incorporated in the analysis?

Answer rating: 100% (QA)

i Impact on the balance sheet according to book value accounting First we need to calculate the value of uncollectable loans Three percent of total lo... View the full answer