Detecting Accounting Fraud 1st Edition by Cecil Jackson

Exercise 39

Which one of the following statements regarding pay-option ARM loans is not correct? (a) Some borrowers of pay-option ARM loans choose to make monthly payments that are not large enough to cover the interest that accrues on the loans each month.
(b) If a borrower chooses to make monthly payments that do not cover the monthly interest on the loan, the difference between the interest that accrues and the interest that is paid is accrued and added to the loan amount as an asset on the balance sheet.
(c) With pay-option loans, the difference between the interest that accrues each month and the lower amount that borrowers choose to pay is known and reported in financial statements as the "loan delinquency amount."
(d) "Accumulated negative amortization" refers to the accumulated shortfall between the interest that has accrued on a loan and the amount of interest that a borrower has paid.