Final answer:
Preferred shares with a mandatory redemption date are classified as debt because they require the corporation to pay back the investment on a future date, akin to a liability similar to bonds.
Step-by-step explanation:
If preferred shares must be redeemed by a certain date, they exhibit characteristics similar to debt instruments rather than equity. This contrasts with typical equity investments, where there is no obligation to return the investor's principal at a future date. Preferred shares with a redemption feature require the corporation to pay back the principal amount (similar to the repayment of a loan), often at a fixed date in the future, which aligns with the nature of debt.
In accounting and financial reporting, such redeemed preferred shares are classified on the balance sheet as a liability rather than equity because of their mandatory redemption feature. This is akin to how bonds are treated; with bonds, the issuing entity has a contractual obligation to pay coupon rate interest and return the principal on the maturity date. Thus, redeemed preferred shares with a specific redemption date are considered a form of debt as they represent an obligation of the firm to return capital to investors.