Question

Question 6                                                                                                               9 marks

You are the accountant for Serry Company which has agreed to act as guarantor on a loan of $2 million obtained by Webster and Sons. Serry Company, as guarantor, is required to pay back the loan if Webster and Sons cannot pay.

Required:

In light of the AASB Framework, justify how (or if) the guarantee of the loan would be shown in the books of Serry Company.                                                                                                                                          

there is no picture - this is the question

Answer 1

Sol :

Need to recognize an issued financial guarantee at fair value.

Normally, when you issue a financial guarantee to the third party, not intragroup, then you would charge some premium for the guarantee, some fee for issuing that guarantee – and in this case, that would be the fair value of it.

Often, the guarantee is issued intragroup at no fee.

For Example received a premium of $1000 for issuing a guarantee

The Journal entry is

Debit Cash $1000

Credit Liabilities from financial guarantees   $1000

The Journal entry for issuing guarantee

Debit Profit or loss (The fair value of your guarantee)

Credit Liabilities from financial guarantees (The fair value of your guarantee)

Note :

If the interest rate on the loan taken is 5% & market interest rate on unguaranteed loan is 6% then the fair value of the guarantee is the present value of the difference in interests charged on guaranteed and unguaranteed loans.