Example of Guarantee

Example of Guarantee

Guarantee is arrangement where one party promised to pay on behalf of second party in case of default of second party. This type of arrangement is normal in banking loan etc. The provision is required where there is expected outflow of resources.

Example of Guarantee

ABC & Company a guarantee to pay the loan if XYZ Company defaults of $ 5 million. The XYZ has already paid an amount of $ 4 million and due to financial condition it is expected that XYZ would not be able to pay the remaining loan.

Solution

it is a legal obligation of an amount of $ 1 million and it is expected to be paid in next year. Therefore a provision is required.

Date	Particulars	Dr.	Cr.
31.Dec.2012	Default Guarantee	1 Million
31.Dec.2012	Provision for Default Guarantee		1 Million