Manajemen | Fakultas Ekonomi Universitas Maritim Raja Ali Haji joeb.80.4.206-208

Journal of Education for Business

ISSN: 0883-2323 (Print) 1940-3356 (Online) Journal homepage: http://www.tandfonline.com/loi/vjeb20

Secured Transactions: An Integrated Classroom
Approach Using Financial Statements and
Acronyms
W. Michael Seganish
To cite this article: W. Michael Seganish (2005) Secured Transactions: An Integrated Classroom
Approach Using Financial Statements and Acronyms, Journal of Education for Business, 80:4,
206-208, DOI: 10.3200/JOEB.80.4.206-208
To link to this article: http://dx.doi.org/10.3200/JOEB.80.4.206-208

Published online: 07 Aug 2010.

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Date: 12 January 2016, At: 22:35

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Secured Transactions:
An Integrated Classroom
Approach Using Financial
Statements and Acronyms
W. MICHAEL SEGANISH
Towson University
Baltimore, Maryland

T

he teaching of secured transactions,
a topic generally covered in the second Business Law course, usually

emphasizes its procedural aspects. These
procedures involve a great deal of technical content. Most second Business Law
courses have a majority of accounting
students, most of whom aspire to sit for
the CPA exam, and the secured transactions section is an important part of the
exam. Historically, secured transactions
is one of the Uniform Commercial Code
topics (Uniform Commercial Code: Official Text and Comments, Article 9,
Secured Transactions) that comprises
part of the 20% of the topics tested on the
law portion of the Certified Public
Accounting exam (Delaney & Whittington, 2002–2003). Students seem to have
difficulty comprehending the connection
of secured transactions to accounting
concepts.
Adoption of an integrated approach
that uses a number of tools not only
gives the students a procedural understanding of the topic, but it also links the
secured transaction issue to financial
statements. The tools of this integrated

approach are (a) the use of acronyms to
identify the procedure, (b) the use of a
balance sheet to demonstrate to the students how these secured transactions
relate to financial statements, and (c) an
integrated class example to illustrate
how the procedure works.

206

Journal of Education for Business

ABSTRACT. Students struggle with
the subject of secured transactions
under the Uniform Commercial Code.
In this article, the author presents a
method that uses balance-sheet information to help students visualize the
difference between secured and unsecured creditors. The balance sheet is
also used in the Uniform Commercial
Code process, in which one must classify the collateral to know the procedural steps to follow to become a
secured creditor. The balance-sheet

approach helps students identify
inventories, real property (land),
intangible assets, accounts receivable,
and so forth. The students use
acronyms to organize the steps necessary for becoming a secured creditor.
The acronym CAPP helps students
understand that one must classify the
collateral, attach the security interest,
perfect it, and obtain priority.

Unsecured Creditors
An unsecured creditor has no specific
assets to which to resort upon default and
thus must locate collateral that can be
“seized” for enforcement of the judgment. Often a debtor has few assets, or
the assets may be exempt under a federal
or state statute (Title II, United States
Code Annotated, Section 522d, Federal
Exemptions). Furthermore, if the debtor
is forced into bankruptcy, unsecured

creditors share pro rata whatever assets
are left after payment to secured creditors or priority creditors in bankruptcy
(Title II, United States Code Annotated,

Section 507, Priorities). A simple example to illustrate this asset distribution
should suffice. If unsecured creditors
have outstanding debts totaling $l,000,
and there is only $500 cash left to satisfy
these debts, then each debtor will get
50% ($500 cash available/$l,000 total
unsecured debt of the amount owed to
them; see Table 1).
Secured Creditor
A secured creditor is one who has a
security interest in some type of collateral (asset) to which he or she can resort in
the event of a default in payment by the
debtor. Unlike the pro rata distribution
shown in Table 1, Creditor D is a secured
creditor and his collateral was sold for
$500. He would receive $400 of this, and

the others would share the $l00.
TABLE 1. With Only $500 to
Satisfy $1,000 Debt, Each
Unsecured Creditor Receives
50% of the Original Debt
Unsecured
creditors
A
B
C
D

Owed

Awarded

$100
$200
$300
$400

_____
$1,000

$ 50
$100
$150
$200
_____
$500

Secured Creditor: Real Estate
A secured position in real estate is
obtained through a device called a mortgage (Tiffany & Jones, 1939). Priority is
given to the first creditor to record its
mortgage among the land records where
the property is located (Gordon, 1994).
When viewing a balance sheet (see Figure 1), students see an account called
“Mortgage Payable” and can recognize
that there is a secured creditor.

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Secured Creditors Under Article
9 of the Uniform Commercial
Code Overview
The Uniform Commercial Code, Article 9, Secured Transactions, deals with
security interests in personal property.
Assets
Current
Cash
Short-term investments
Accounts receivable
Notes receivable
Inventory
Total current
Fixed
Property, plant, and equipment
Land
Buildings (net of accumulated
depreciation)

Equipment (net of accumulated
depreciation)
Computer equipment (net of
accumulated depreciation)
Total fixed
Intangible
Patent (net of amortization)
Copyright (net of amortization)
Total tangible
Total assests
Liabilities and stockholders’ equity
Current liabilities
Notes payable
Accounts payable
Total current liabilities
Long-term debt
Mortgage payable
Total liabilities
Stockholders’ equity
Common stock (stated value)

Retained earnings
Total liabilities and stockholders’
equity
FIGURE 1. Balance sheet.

The Uniform Commercial Code was
revised for the first time in 30 years, and
most states adopted the revision effective July 1, 2001. The revision involves
an update in nomenclature and reflects
changes in technology—that is, in electronic transactions and recordings. The
basic procedure for becoming a secured
creditor remains essentially intact. I
have simplified it for undergraduate inclass presentation.
A secured party under the Uniform
Commercial Code has a security interest in
collateral that belongs to a debtor. My primary focus in this article is to aid students
in learning the procedural steps for becoming a secured party to obtain a security
interest and, thus, priority in the collateral.
I tell students to follow this procedure
by putting on their “thinking cap,” or the

acronym “CAPP,” which stands for the
following steps:
• C stands for “Classify the collateral,”
• A stands for “Attach a security
interest to the collateral,”
• P stands for “Perfect a security
interest against most other creditors,” and
• P stands for “Priority of sale proceeds
is given to the first person to perfect.”
The use of the acronym CAPP for classifying, attaching, perfecting, and giving
priority of sales proceeds gives students
an overview of the overall secured transaction procedure. These steps also are
linked to a balance sheet presentation,
which gives the students a better grasp of
the legal process and shows its relevance
to accounting procedures (journal entries
and financial statements).

1. Goods: inventory, equipment,
consumer goods
Example: For goods, it depends on
buyer’s use.
Inventory—Resale
Equipment—Use in business
Consumer—Personal use
2. Account—Accounts receivable
pledged
3. Instruments—Stocks, bonds, notes
4. General—Intangibles,
patent/copyright
5. Fixture—Attached to real property
FIGURE 2. Step 1: Classify the
collateral.

Step 1. Classify the Collateral
Unlike the procedure for real estate,
which involves one type of collateral,
the procedure for obtaining and perfecting a security interest under the Uniform Commercial Code (hereinafter
called the UCC) varies according to the
type of collateral—that is, how it is classified (see Figure 2).
The Uniform Commercial Code provides for a security interest in collateral of
a debtor. The major categories of collateral under the UCC are goods (UCC, 9109[1], 103-[2], 103[3]), including consumer goods; inventory and equipment;
and accounts (UCC, 9-106) instruments
(UCC, 9-105[1][e][i][f], which include
stocks, bonds, and negotiable instruments
and fixtures (UCC, 9-313[2]).
I refer the students to the balance sheet
(see Figure 1) and ask them to identify
the types of collateral represented on the
balance sheet. They identify inventory in
the current assets section and the computer equipment in the fixed-asset section.
There are no consumer goods because
this procedure involves a business situation, so we discuss this category outside
of our balance sheet discussion. The students view accounts receivable in the balance sheet; these are “accounts.” The
marketable securities and the notes
receivable are “instruments.” General
intangibles are shown as a patent.
Step 2. Attach the Security Interest
The second step in obtaining a security interest in CAPP is attachment. In
Figure 3, I show the three steps required
for attachment.
The Uniform Commercial Code
requires that three things occur before
an attachment of a security interest
occurs (UCC, 9-313[2]):
1. There must be a security agreement
in which the debtor gives the secured
party a security interest in the collateral.
It must be in writing unless the creditor
has possession of the collateral. For
example, if the creditor has possession
of the collateral, such as with a stock or
bond, or in the case of a pawn shop, then
an oral agreement will be satisfactory.
2. The creditor must give a value to
the debtor by either a loan to buy the
collateral or extension of credit to the
debtor to obtain the property.
March/April 2005

207

3. The debtor must have rights in the
collateral, which normally are effective
when the goods are delivered.
Step 3. Perfect the Security Interest

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The third requirement in CAPP is for
the secured party to perfect the security
interest. This step represents a major difference from a mortgage on real property,
in which the only way to perfect is to
record the mortgage among the land
records. There are three ways to perfect,
and how it is done depends on the classification of the collateral (see Figure 4).

1. Security agreement: Describe collateral, signed by debtor. It must be
in writing unless credit is going to
take possession of collateral.
2. Creditor must give value to
debtor by a loan to buy collateral or
extension of credit.
3. Debtor must have rights in collateral (delivery).
FIGURE 3. Step 2: Attachment.

1. Creditor takes possession.
2. File a financing statement.
3. Consumer goods perfect when it
attaches: Signed security agreement,
value.
FIGURE 4. Step 3: Perfect the
security interest.

The three ways to perfect are
1. The creditor can take possession of
the collateral. This is the only way to
perfect an interest in instruments
(stocks and negotiable instruments;
UCC, 9-304, 305).
2. A creditor can file a financing
statement where the property is located.
This is the way to perfect for inventory,
equipment, accounts, and general tangibles; UCC, 9-104).
3. The security interest is perfected
automatically when it attaches. This
applies to consumer goods.
Integrated Classroom
Application
I use Table 2 in class as a capstone
exercise to reinforce the secured transactions procedure. The class, individually
or in groups, must decide how to classify
the collateral, determine whether the
security agreement has to be in writing,
and decide how to perfect by either (a)
taking possession, (b) filing a financing
statement, or (c) perfecting automatically
by attachment. I refer the students to the
balance sheet (Figure 1) and ask them
how to perfect the security interest in the
computer used in a business: It is equipment; there must be a written agreement;
and it is perfected by (b), filing a financial
statement. Products that are sold, such as
books in a bookstore, would be inventory,
and one needs a written security agreement, which is perfected by filing. The
marketable securities on the balance

TABLE 2. In-Class Example

Asset
Computer used
in business
TV used in house
Books to be sold by
bookstore
Loan—Stock
Loan pledge account
receivables for
business
Loan pledge software
copyrights

Classify
collateral type

Perfect—Which
method is used to
perfect? a, b, or c

Equipment

Yes

(b) File

Consumer goods

Yes

(c) Automatically

Inventory
Instrument—
Stock

Yes
No

(b) File
(a) Take
possession

Account

Yes

(b) File

General
intangible

Yes

(b) File

No

(a) Take
possession

Pawn watch

208

Security
agreement—Writing
is or is not required

Journal of Education for Business

sheet are classified as instruments. The
security interest does not have to be in
writing, but the only way to perfect is by
taking possession. The accounts receivable would be classified as an account. A
written security agreement is needed, and
one perfects it by filing. The software is
classified as general intangibles. This
requires a written security agreement,
which is perfected by filing. If one has
consumer goods for personal use, a written security agreement is needed, but it
perfects automatically under (c). Students
seem to enjoy the accomplishment of
mastering this entire procedure with this
capstone example.
Priority
The final P in the CAPP is priority.
The general rule is that if there are two
creditors who are claiming the same
collateral, the first to perfect will have
priority over the other creditors.
It is more important to give the students an understanding and appreciation
of the process of how to become a
secured creditor. Exceptions to the
above general rule are complicated and
beyond the scope of this discussion.
Conclusion
It is always a challenge to find ways to
make a legal topic more understandable
for students. Learning secured transactions law is challenging because it deals
with technical legal terms and procedures
that students sometimes have difficulty
conceptualizing. The use of the acronym
CAPP (classify, attach, perfect, priority)
gives students an overview of the overall
secured transaction procedure. In this
approach, I link procedure to a balance
sheet presentation, which gives students a
better grasp of the legal process and its
relevance to accounting procedures (journal entries and financial statements).
Finally, I include an integrated in-class
example to ensure student participation in
the learning process.
REFERENCES
Delaney, P. R., & Whittington, O. R. (2002–2003).
Wiley CPA Examination review (29th ed.), 1, p.
365.
Gordon, A., IV. (1994). Gordon on Maryland foreclosures (p. 185). Baltimore, MD: Maryland Institute for the Continuing Education of Lawyers.
Tiffany, H. T., & Jones, B. (1939). The law of real
property (3rd ed.). Chicago, IL: Callaghan.