ExpertMedium2 marksMultiple Choice
ACCA · Question 16 · Syllabus E: Capital and the financing of companies
A company has granted a fixed charge over its factory and a floating charge over its inventory. Which of the following statements regarding these charges is correct?
A company has granted a fixed charge over its factory and a floating charge over its inventory. Which of the following statements regarding these charges is correct?
Answer options:
A.
A floating charge attaches to specific assets as soon as it is created.
B.
A fixed charge allows the company to deal with the charged asset freely in the ordinary course of business.
C.
A floating charge crystallises and becomes a fixed charge upon the occurrence of certain events, such as liquidation.
D.
A floating charge always takes priority over a fixed charge created subsequently.
How to approach this question
Understand the mechanics of how a floating charge operates and when it converts to a fixed charge.
Full Answer
C.A floating charge crystallises and becomes a fixed charge upon the occurrence of certain events, such as liquidation.✓ Correct
A floating charge 'floats' over a class of fluctuating assets (like inventory), allowing the company to deal with them in the ordinary course of business. It 'crystallises' (attaches to the assets and becomes a fixed charge) upon certain triggering events, such as the company going into liquidation or ceasing to trade.
Common mistakes
Confusing the characteristics of fixed and floating charges, particularly regarding the freedom to deal with the assets.
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