Question

Using the codification

In this case, convertible preferred stock has the following characteristics: stated redemption date and also would require the issuer to settle the face amount of the instrument in cash upon exercise of the conversion option. Using the codification, explain how the accountant classifies this type of convertible preferred stock on the financial statement

Answer 1

Preferred security

It's a types of security to raise fund for business organization. It has the features of both debt and equity. So it's a type of hybrid security.

There are different types of preferred securities.

 

Callable and non callable preferred stock :

The issuer of this stock has the right to redeem the issued stock before the maturity date at are set price. They receiving a call premium to compensate for investment risk.

In non callable issuer doesn't have the right to redeem the stock.

 

Participatory preferred stock.

It's a type of stock that give the holder to receive dividend equal to specified rate that the preferred dividends are paid to preferred share holders.

 

Cumulative preferred stock

In this case it also a type of stock which says that if any dividend payment have been missed in the past the dividend owned must be paid out to cumulative preferred shareholders first.

 

Convertible preferred stock

It given an option to the holder for converting the shares in to a fixed number of common shares after a predetermined date. Which means To participate in common stock price appreciation. It's value is based on the performance of common stock.

 

Non convertible preferred stock

The share holders doesn't get the right to convert his preferred share into fixed number of common stock after a predetermined date.