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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Convertible Preferred Stock and Warrants

The shareholders’ equity of a corporation may include both preferred stock and common stock. Preferred stock may (1) be convertible into common stock or (2) be issued with warrants attached enabling the acquisition of common stock.

Required:

Discuss the following three items:

  1. 1. The similarities and differences between these types of preferred stock.
  2. 2. Theoretically, the appropriate accounting treatment for the proceeds from the issuance of both types of preferred stock.
  3. 3. Which accounting treatment is generally acceptable for each type and why? In your answer, you may want to make an analogy to the accounting for convertible bonds and bonds issued with attached common stock warrants that were discussed in Chapter 14.

1.

To determine

Explain the similarities and differences between given types of preferred stock.

Explanation

Preferred stock: The stock that provides a fixed amount of return (dividend) to its stockholder before paying dividends to common stockholders is referred as preferred stock.

Convertible preference shares: This feature allows preferred shareholder to exchange preferred shares for common shares at predetermined conversion ratio.

Preference shares with stock warrants: this feature allows the preferred shareholders to purchase additional shares of common stock at a predetermined price over some future period.

The similarities and differences between given types of preferred stock:

Both types of preferred shares are having the following similarities:

  • Shareholders having a right to dividend on preferred stock...

2.

To determine

Explain the appropriate accounting treatment for the proceeds from the issuance of both types of preferred stock.

3.

To determine

Explain the accounting treatment which is generally acceptable for each type of stock and reasons for the same.

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