The shareholders’ equity of a corporation may include both preferred stock and common stock.
Preferred stock may (1) be convertible into common stock or (2) be issued with warrants attached enabling the acquisition of common stock.
Required:
Discuss the following three items:
1. The similarities and differences between these types of preferred stock.
2. Theoretically, the appropriate accounting treatment for the proceeds from the issuance of both types of preferred stock.
3. Which accounting treatment is generally acceptable for each type and why? In your answer, you may want to make an analogy' to the accounting for convertible bonds and bonds issued with attached common stock warrants that was discussed in Chapter 14.