What are “loan reserves” at Bank of America? Original blog posting (November 21, 2013)

Bank of America’s credit quality has increased since the financial crisis of 2008 Due to increased loan standards and rising house prices Released $1.4 billion of loan reserves (29% of pretax income) in the third quarter of 2013

Question 1 What are “loan reserves”?  What is the comparable account name that is used for loan reserves in a typical chart of accounts?

Question 2 What is the journal entry when the percentage of bad loans decreases (assume that the aging schedule method for estimating bad debts is used)? What happens to profits when the percentage of bad loans decreases?

Question 3 From an investor standpoint, what issue(s) might you see with these releases of loan reserves?

Question 4 The same article goes on to state that “…accounting rules allow the money to flow directly into profits.” What may be misleading about that statement to uninformed readers of the article?

Question Recap What are “loan reserves”?  What is the comparable account name that is used for loan reserves in a typical chart of accounts? What is the journal entry when the percentage of bad loans decreases (assume that the aging schedule method for estimating bad debts is used)? What happens to profits when the percentage of bad loans decreases? From an investor standpoint, what issue(s) might you see with these releases of loan reserves? The same article goes on to state that “…accounting rules allow the money to flow directly into profits.”  What may be misleading about that statement to uninformed readers of the article?

For additional news stories to use in the accounting classroom, see the Accounting in the Headlines blog at http://accountingintheheadlines.com/ Related video resources can be found at http://www.youtube.com/user/accountingheadlines Questions or comments? Contact Dr. Wendy Tietz at wtietz@kent.edu