When a portion of inventories has been pledged as security on a loan,
A) the value of the portion pledged should be subtracted from the debt.
B) an equal amount of retained earnings should be appropriated.
C) the fact should be disclosed but the amount of current assets should not be affected.
D) the cost of the pledged inventories should be transferred from current assets to noncurrent assets.

Question

Quizplus · Accepted Answer

The fact that a portion of inventories has been pledged as security on a loan should be disclosed in the financial statements, but it does not affect the classification of the inventory as a current asset. The value of the inventory remains part of current assets, and the disclosure is made to inform users of the financial statements about the encumbrance on the assets.

When a Portion of Inventories Has Been Pledged as Security