1. ORANGE CO. guaranteed a loan of P400,000 granted to ORCHID CO. At the date when directors approved the financial statement of ORCHID, there is no reason to believe that the guarantee will be invoked.

Assuming that the amount of the guarantee is material amount for ORANGE CO, what isthe proper accounting for this guarantee in the books of ORANGE Co.?

• The P400,000 be recognized as a liability with necessary disclosure in the notes to financial statements
• The amount of the guarantee is not accounted for in Orange's books
• The contingent liability should be disclosed by way of note to the financial statements
• The amount of P400,000 should be recognized as a provision.