Merliss Company (a specialty bike-accessory manufacturer) is expecting growth in sales of some products targeted to the low-price market. Merliss is contemplating a preference share issue to help finance this expansion in operations. The company is leaning toward preference shares because ownership will not be diluted, but the investors will get an extra dividend if the company does well. The company management wants to be certain that its reporting of this transaction is transparent to its current shareholders and wants you to research the disclosure requirements related to its capital structure.

Instructions If your school has a subscription to the FASB Codification, go to http://aaahq.org/ascLogin.cfm to log in and prepare responses to the following. Provide Codification references for your responses.

(a) Identify the authoritative literature that addresses disclosure of information about shareholders equity.

(b) Find definitions of the following:

(1) Securities.

(2) Participation rights.

(3) Preferred stock.

(c) What information about securities must companies disclose? Discuss how Merliss should report the proposed preferred stock issue.