Under USGAAP,if an Entity Issues 4% Preferred Stock That Gives Shareholders

question 21

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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