When does Ford Credit recognize bad debt expense associated with a new car loan?

Every individual has a credit score, which is an approximate measure of the risk of loan default to potential lenders.  Credit scores range from about 300 – 850, with 850 being the best credit score possible.  This credit score is a combination of several categories of history about the individual, including length of credit history, amounts owed, payment history, types of credit in use, and new credit.  A general rule of thumb is that a “good” credit score is above approximately 700.

In 2013, buyers with credit scores of less than 500 (poor credit risks) made up more than 27 percent of loans for new vehicles (see Bloomberg article entitled “Good Job is Good Enough as Subprime Car Buyers Lift Sales”).  This 27 percent compares with 25 percent in 2012 and 18 percent in 2009.

Questions

1)      Why do you think that lenders are making car loans to people with lower credit scores?

2)      What does the term “default” mean as it relates to loans?

3)      Assume that Ford Credit makes a car loan on a new Ford Fusion sold to a customer in 2013.  Assume that this borrower defaults on the loan in 2015.  When will Ford Credit recognize the bad debt expense associated with this car sale/loan? Explain.

4)      If Ford Credit is extending credit to borrowers with lower credit scores, what would you expect to see happen to Ford Credit’s allowance for bad debts balance (i.e., would it increase or decrease)? Why?

Instructor Resources

These resources are provided to give the instructor flexibility for use of Accounting in the Headlines articles in the classroom. The blog posting itself can be assigned via a link to this site OR by distributing the student handout below. †Alternatively, the PowerPoint file below contains a bullet point overview of the article and the discussion questions. †The YouTube video link below is a narration of the blog post article (no discussion questions are included in the YouTube video; those can be assigned separately.)

• Student handout (pdf)†(contains entire blog posting + discussion questions)
• PowerPoint file†(brief article overview + discussion questions)
• YouTube video (narrated article in shareable YouTube link)

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