Problem
Flummoxed Limited has acted as a guarantor for a loan taken out by one of its' subsidiaries. The loan amount is considered material to both companies and is due to be repaid next month. The subsidiary is facing some financial difficulties and there is a possibility that the subsidiary may not be able to pay the loan when it falls due. However, based on the net assets of the subsidiary, it is more likely than not that the subsidiary will be able to liquidate its assets to pay off the loan.
All the directors believe that there is no action needed with regards to the financial statements in connection with the above. Explain in detail whether or not the directors are right. Also show the relevant journal entries if any or any other information that should be included.