Q8RQ - Horngren'S Financial And Managerial Accounting

Question

 What occurs when a business pledges its receivables?

Step-by-Step Solution

Answer

Answer

The business entity sells the receivable to the finance company under pledge.

Step 1: Definition of Accounts Receivables

The accounts receivables are the amount of sales for which payment is still due from the customer. It is considered a current asset of the business as the entity expects to receive it within one year.

Step 2: Pledging of receivable

The business entity pledging its receivables sells the receivables to the financing company or banking institution. The business entity receives cash that is less than the actual amount receivable because the financing company charges a fee against pledging. 

After pledging the receivable, the financing entity collects the cash from the customer. The business entity is not required to record the receivables.