Frederick Company borrows $63,000 from First City Bank and pledges its receivables as security.Which of the following is true regarding this transaction:
A)First City Bank is the factor in this transaction.
B)Frederick Company's financial statements must disclose the pledging of receivables.
C)Frederick Company no longer has the risk of bad debts.
D)First City Bank takes ownership of the receivables at the time of the pledge.
E)No journal entry is required for this event.

Question

Quizplus · Accepted Answer

When Frederick Company borrows money from First City Bank and pledges its receivables as security, Frederick Company's financial statements must disclose the pledging of receivables. This disclosure is required because the pledging of receivables represents a significant commitment of resources and indicates that Frederick Company's ability to borrow in the future may be limited. The other options are incorrect because: A) First City Bank is not acting as a factor in this transaction because it is not purchasing the receivables from Frederick Company. C) Frederick Company still has the risk of bad debts because it has pledged its receivables as security for the loan but it remains responsible for collecting the receivables. D) First City Bank does not take ownership of the receivables at the time of the pledge; it only has a security interest in them. E) A journal entry is required for this event to record the receipt of cash and the liability for the loan.

Frederick Company Borrows $63,000 from First City Bank and Pledges