A compensating balance is a balance that must be kept with a lender in order for a borrower to qualify for a line of credit or instalment loan. Effectively it acts as collateral and thus compensates the lender for the risk of making the loan.
What is a compensating balance savings account balances?
What Is a Compensating Balance? A compensating balance is a minimum deposit that must be maintained in a bank account by a borrower. The borrower cannot use the money but is required to disclose it in the borrower’s notes attached to its financial statements.
What is a compensating balance quizlet?
A compensating balance is a minimum balance that must be maintained in a bank account, and the compensating balance is used to offset the cost incurred by a bank to set up a business loan. The bank is free to loan the compensating balance to other borrowers and profit from differences between the interest rates.
Why do banks require firms that it lends to keep compensating balances at the bank?
Compensating balances help the bank monitor the activities of a borrowing firms so that it can prevent the firm from taking on too much risk, thereby not acting in the interest of the bank. 10.
What will happen to the bank’s assets after the $150 deposit?
What will happen to the bank’s assets after the $150 deposit? Since deposits are a liability, there is no change to the asset side of the bank’s balance sheet. The value of cash holdings will decrease by $150. The value of cash holdings will increase by $150.
Is a compensating balance an asset?
However, if it is anticipated that the cash will remain unavailable for use for more than a year, then it should be classified as a non-current asset. A compensating balance is a minimum balance that a company must maintain in an account as part of an agreement with a current or potential lender.
Can a deposit be held as a compensating balance?
Deposits held as compensating balances:A) usually do not earn interest. B) if legally restricted and held against short-term credit may be included as cash. C) if legally restricted and held against long-term credit may be included among current assets. D) none of these.
Which is not included in the cash caption on the balance sheet?
Which of the following items should not be included in the Cash caption on the balance sheet? a. Coins and currency in the cash register b. Checks from other parties presently in the cash register c. Amounts on deposit in checking account at the bank d. Postage stamps on hand d All of the following may be included under the heading of “cash” except
What should not be included in the balance sheet?
Which of the following items should not be included in the Cash caption on the balance sheet? a. Coins and currency in the cash register b. Checks from other parties presently in the cash register d. Postage stamps on hand 30. All of the following may be included under the heading of “cash” except a. currency. b. money market funds.
What should travel advances be reported as on the balance sheet?
Travel advances should be reported as a. supplies. b. cash because they represent the equivalent of money. c. investments. d. none of these answers are correct. 29. Which of the following items should not be included in the Cash caption on the balance sheet? a. Coins and currency in the cash register b.
