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?

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Under U.S. GAAP, the 4% preferred stock should be initially recorded as equity, but reclassified as a liability when the triggering event occurs (i.e. prevailing interest rates on 5-year certificates of deposit exceed 4%). The reclassification is necessary because the redemption feature gives shareholders an enforceable right to demand repayment of their investment. Thus, until the triggering event occurs, the 4% preferred stock should be reported as part of equity, and any dividends paid on the stock should be classified as a reduction of retained earnings.

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