During 2019, Mansmith Company guaranteed a supplier’s P500,000 loan from a bank. On October 1, 2019, the entity was notified that the supplier had defaulted on the loan and filed for bankruptcy protection. Counsel believed that the entity would probably have to pay P250,000 under the guarantee. As a result of the supplier’s bankruptcy, the entity entered into a contract in December 2019 to retool its machines so that the entity could accept parts from other suppliers. Retooling costs are estimated to be P300,000.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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During 2019, Mansmith Company guaranteed a supplier’s P500,000 loan from a bank. On October 1, 2019, the entity was notified that the supplier had defaulted on the loan and filed for bankruptcy protection. Counsel believed that the entity would probably have to pay P250,000 under the guarantee. As a result of the supplier’s bankruptcy, the entity entered into a contract in December 2019 to retool its machines so that the entity could accept parts from other suppliers. Retooling costs are estimated to be P300,000.What amount should be reported as liability on December 31, 2019? 

a. 250,000
b. 450,000
c. 550,000
d. 750,000

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