Company C issues preference shares to Company D, the terms of which entitle Company D to redeem the preference shares for cash if Company C's revenues fall below a specified level. From Company C's perspective, the preference shares are:
A) a financial liability.
B) an equity instrument.
C) a compound financial instrument.

Question

Quizplus · Accepted Answer

The fact that Company D has the right to redeem the preference shares for cash based on a specified level of revenues of Company C makes the preference shares a liability for Company C. Therefore, the correct choice is A.

Company C Issues Preference Shares to Company D, the Terms