Which of the following securities must be reported as a liability because they have the characteristics of both liabilities and equity, but the liability characteristic is dominant?
A) Redeemable preferred stock.
B) Stock options issued with a debt security.
C) Detachable stock options.
D) Mandatorily redeemable preferred stock.

Question

Quizplus · Accepted Answer

Mandatorily redeemable preferred stock must be reported as a liability because of its mandatory redemption feature, which makes the liability characteristic dominant. While preferred stock typically has equity characteristics, the mandatory redemption feature means that the company is required to redeem the shares at a future date, similar to a debt obligation. Redeemable preferred stock (A) also has a redemption feature, but it is not mandatory, so the equity characteristic is dominant. Stock options issued with a debt security (B) and detachable stock options (C) are both derivatives that may have equity-like characteristics, but they do not have the mandatory redemption feature that would make them a liability.

Which of the Following Securities Must Be Reported as a Liability