Question

How is preferred stock accounted for where an investor has a choice of cash redemption?

Answer 1

Redeemable means that the business has to buy back (redeem) the stock at some future date. The redemption might be at the discretion of the stockholder or can sometimes be mandatory. Since the business can be forced to redeem the preferred equity stock it is usually considered to be more a form of debt than equity.

Example:

The business will receive 1,000 x 105 = 105,000 in cash and issues stock with a par value of 1,000 x 100 = 100,000. The premium of 5,000 will be posted to the additional paid in capital (APIC) account with the following journal entry:

Account	Debit	Credit
Cash	105,000
Preferred shares		100,000
APIC – Preferred shares		5,000
Total	105,000	105,000

When the same above preferred shares are been redeemed for cash at 108 per stock ,Then the journal entry will be

Account	Debit	Credit
Preferred shares	100,000
APIC – Preferred shares	5,000
Retained earnings	3,000
Cash		108,000
Total	108,000	108,000