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
Answer:A
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