Question

Mandatorily redeemable preferred stock (preference shares) is reported as debt with the dividends reported in the income statement as interest expense using:

A) Historical Cost Method
B) Fair Value Method
C) Equity Method
D) Amortized Cost Method

Answer 1

Mandatorily redeemable preferred stock is reported as debt, and dividends on such stock are treated as interest expense using the D) Amortized Cost Method, which allocates costs over the redemption period.

Step-by-step explanation:

Mandatorily redeemable preferred stock, often considered to carry characteristics of both equity and debt, is reported as debt in financial statements, suggesting that the dividends paid are to be treated similar to interest expenses associated with debt. The most appropriate reporting method for these financial instruments would typically be the Amortized Cost Method, as it enables the issuer to allocate the cost of the preferred stock over the redemption period, akin to how bonds are amortized.

Applying the Amortized Cost Method provides an accurate reflection of the financial commitment pertaining to mandatorily redeemable preferred stock on the company's income statement over time.