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

question 36

Multiple Choice

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

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Definitions:

Net Credit Sales

The total value of sales made on credit minus any returns or allowances, indicating the actual revenue generated from credit transactions.

Allowance Method

An accounting technique used to adjust accounts receivable for debts that are expected not to be collected.

Uncollectible Receivables

Accounts receivable that are considered irrecoverable and unlikely to be collected, leading to their removal from the accounts.

Allowance for Doubtful Accounts

An estimate of the amount of credit sales that are expected not to be collected.