ExpertMedium2 marksMultiple Choice
ACCA · Question 16 · Capital and the financing of companies
'AgriBotics Ltd' secures a bank loan using its fleet of autonomous tractors as collateral. The company is allowed to sell old tractors and buy new ones without asking the bank's permission, as long as it doesn't default on the loan.
What type of charge has the bank most likely taken over the tractors?
'AgriBotics Ltd' secures a bank loan using its fleet of autonomous tractors as collateral. The company is allowed to sell old tractors and buy new ones without asking the bank's permission, as long as it doesn't default on the loan.
What type of charge has the bank most likely taken over the tractors?
Answer options:
A.
A fixed charge.
B.
A floating charge.
C.
An unsecured debenture.
D.
A mortgage.
How to approach this question
Identify the key characteristic: the company can deal with the assets in the ordinary course of business without permission. This defines a floating charge.
Full Answer
B.A floating charge.✓ Correct
A floating charge is a security interest over a class of assets (present and future) that changes in the ordinary course of business. The defining feature is that the company remains free to deal with the assets (e.g., selling and buying tractors) without the lender's consent, until an event of default causes the charge to 'crystallise' and become fixed.
Common mistakes
Confusing fixed and floating charges. If the company needs the bank's permission to sell the asset, it's a fixed charge.
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