Question

Use the information presented in Northeastern Mutual Bank's balance sheet to answer the following questions. Bank's Balance Sheet Assets Liabilities and Owners' Equity Reserves $150 Deposits $1,200 Loans $600 Debt $200 Securities $750 Capital (owners' equity) $100 Suppose a new customer adds $100 to his account at Northeastern Mutual Bank, which the owners of the bank then use to make $100 worth of new loans. This would increase the loans account an

Answer 1

Answer:

A. Increase; Deposits

B. Initial Value 15; New Value 16

C. The aim of Capital requirement is to protect the interests of all depositors.

Explanation:

A. This would increase the loans account and INCREASE the DEPOSITS account since the double entry principle state that every Debit entry must have a corresponding Credit entry and every Credit entry must have a corresponding Debit entry, therefore based on the information given assuming the new customer adds the amount of $100 to his account at the Mutual Bank, which we were told that the owners of the bank then use to make $100 worth of new loans, in this case both the loans and deposits will be have to increase by the amount of $100.

B. Calculation to determine the leverage ratio from its initial value to a new value

Calculation for Leverage Ratio using this formula

Leverage Ratio = Reserves+Loans+Securities/Capital

Let plug in the formula

Leverage Ratio = $150+$600+$750/$100

Leverage Ratio = $1,500/$100

Leverage Ratio =15

Calculation for New Leverage Ratio

Using this formula

New Leverage Ratio=Reserves+(Loans+increase in loans)+Securities/Capital

Let plug in the formula

New Leverage Ratio=$150+($600+$100)+$750/$100

New Leverage Ratio=$150+$700+$750/$100

New Leverage Ratio=$1,600/$100

New Leverage Ratio=16

Therefore This would also bring the leverage ratio from its INITIAL VALUE of 15 to a NEW VALUE of 16

C.The aim of CAPITAL REQUIREMENT is to protect the interests of all depositors.