Frederick Company borrows $63,000 from First City Bank and pledges its receivables as security. Which of the following is true regarding this transaction:

Question

Quizplus · Accepted Answer

When a company pledges its receivables as security for a loan, it means the receivables serve as collateral, but the ownership of the receivables remains with the borrower. Therefore, First City Bank is not the factor in this transaction, and ownership of the receivables is not transferred to the bank. However, Frederick Company must disclose the pledging of receivables in its financial statements as it affects its financial position and borrowing capacity. Therefore, option D is the correct answer. Option A and B are incorrect because the bank does not become the factor or owner of the receivables, and option C is incorrect because Frederick Company still bears the risk of bad debts. Lastly, option E is incorrect because a journal entry is required to record the receipt of cash and the pledge of receivables as collateral.

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