Under U.S. GAAP, if an entity issues 4% preferred stock that gives shareholders the right to redeem the shares if the prevailing interest rates on 5-year certificates of deposit exceed 4%, how should this stock be accounted for on the books of the entity?
A) Initially as equity and then reclassified as a liability when the triggering event occurs
B) As a liability since the chances are more likely than not that the triggering event will occur
C) As equity or a liability at the option of the entity
D) As a permanent part of equity, to be debited as shares are redeemed

Question

Quizplus · Accepted Answer

According to U.S. GAAP, the 4% preferred stock should be initially recorded as equity. However, if the triggering event occurs and the shareholders redeem their shares, the stock should be reclassified as a liability on the books of the entity. Therefore, choice A is the best answer.

Under US GAAP, If an Entity Issues 4% Preferred Stock That