Current GAAP requires companies
A)to get a guarantee for all debt issued when a company does not have sufficient cash to pay for a purchase on its own
B)to recognize a liability equal to the profit on a sale for which its guarantees another company's debt
C)to recognize a liability for the fair value of a guarantee
D)to recognize a liability for the preset value of a guarantee and must reduce the profit it recognizes on the sale

Question

Quizplus · Accepted Answer

Under current GAAP, when a company guarantees another company's debt, it must recognize a liability for the fair value of that guarantee. This is in accordance with the matching principle, which requires expenses to be recognized in the same period as the revenue they are associated with. The fair value of the guarantee is determined by estimating the expected amount of the payment and discounting it to present value. It is important to note that GAAP does not require a guarantee for all debt issued when a company does not have sufficient cash to pay for a purchase on its own, nor does it require recognition of a liability equal to the profit on a sale for which its guarantees another company's debt.

Current GAAP Requires Companies