Final answer:
Preferred shares with mandatory redemption by a specific date should be classified as debt because they require the company to repay shareholders, much like a bond repayment.
Step-by-step explanation:
Preferred shares that must be redeemed by a certain date have a mandatory redemption feature that makes them function similarly to a bond. They offer a dividend that acts like a coupon rate for a bond, suggesting they possess characteristics of debt rather than equity. By definition, equity represents ownership with no maturity or redemption obligation, while debt includes a repayment of principal at some point.
Since the mandatory redemption of preferred shares requires the company to pay back the amount to preferred shareholders at a specified date, these shares resemble a debt obligation. This redemption obligation resembles a debt repayment, and therefore, the preferred shares should be classified as debt.