How are General Motors’ financial statements affected by borrowers not making auto-loan payments?

Cover of the GM Annual Report

Source: GM Investor Relations

Borrowers who took out new car loans during 2014 are missing payments at the highest level since the recession. Regulators and analysts are beginning to be concerned about the quality of car loans, worrying that borrowers have taken on more debt than they can handle. Overall auto-loan delinquencies are higher now than one year ago, but overall are lower than during the recession, according to Experian Automotive.

Buyers of new Chevrolets can often get auto loans from General Motors Financial Company, Inc., (GM Financial), a wholly-owned subsidiary of General Motors LLC (GM).  GM reports Notes Receivable and Allowance for Doubtful Accounts in its financial statements, which relate to the auto-loan activity of GM Financial.

Questions

  1. What would you expect GM to do to its estimate of uncollectible accounts, given the increase in missed payments? (Assume that GM’s auto loans are similar in risk and delinquency to the national “average” reported by Experian Automotive.) How will this action impact GM’s 2015 balance sheet? How will it impact GM’s 2015 income statement?
  2. How will the missed car payments themselves (not the estimate of uncollectible accounts) impact the balance sheet of GM in 2015? How will the 2015 income statement be impacted?
  3. Assume that, in 2017, GM identifies several automobile loans because the borrowers cannot, and will not be able to in the foreseeable future, pay back their loans. GM decides to write these automobile loans off. How will this action impact GM’s 2017 balance sheet?  How will it impact GM’s 2017 income statement?

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.

  • Student handout (pdf) (word) (contains entire blog posting + discussion questions)
  • PowerPoint file (brief article overview + discussion questions)

Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial 3.0 Unported License.

About Dr. Wendy Tietz, CPA, CMA, CGMA

Dr. Wendy Tietz is a professor of accounting at Kent State University in Kent, Ohio, USA. She is also a textbook author with Pearson Prentice-Hall.

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