Question

Using the spreadsheet, setup the balance sheet for Eagle Bank when the reserve requirement is 10%: Equity 20, Securities 70, Savings deposits 10, Personal Loans 40, Retained earnings 20, Time deposits 30, Home mortgages 60, Demand deposits 100.

Assets			Liabilities
Securities	70		Equity	20
Personal Loans	40		Savings Deposits	10
Home Mortgages	60		Retained Earnings	20
Cash reserves (10% of deposits)	14		Time Deposits	30
Cash with bank	96		Demand Deposits	100
Total	280		Total	280

I am confused on if my cash with bank and reserves are correct. Saw someone say that the mortgages are liabilities, but my prof specified they're assets.

Answer 1

Answer:-

In the given question Eagal Bank requires reserve of 10%. It means the bank can lend only 90% out of the deposit received. In this case total deposit is $ 140 (Saving Deposits $10, Time Deposits $30 and Demand Deposits 100) hence fractional reserve shall be $140 * 10%= $14.

Home Morgage is a type of loan given by bank to its customer. It is basically given for purchase of Residence. In this loan Borrower transfers the title of that property to the bank on the condition to get back the title on complete repayment of the loan. Hence Home Mortgages is Assets for the Banking Company.

There shall be no Cash or Bank Balance remains. The difference between Assets and liability shall be treated as Net Worth . Hence the correct Balance Sheet of the Bank is as follows:-

Assets	Amount	Liabilities	Amount
Securities	70.00	Equity	20.00
Personal Loans	40.00	Retained Earnings	20.00
Home Mortgage	60.00	Deposits :-
		Savings Deposits	10.00
Fractional Reserve @10%	14.00	Time Deposits	30.00
		Demand Deposits	100.00
		Net Worth	4.00
Total	184.00	Total	184.00