{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

89 p122 concluded c since 50000 shares have been

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Debt/Equity = ($250,000 + $100,000) ÷ $330,000 = 1.06 c. If management classifies the stock as stockholders' equity, then the company will not be in violation of its debt agreement. However, if management classifies the stock as debt, then the company will be in violation of its debt agreement. Since violating debt agreements can be quite costly to both the company and managers, managers have incentives to classify the stock as stockholders' equity. The terms of the preferred stock make it appear to be more similar to debt than to equity. For example, the stock has a specified rate, does not participate in the benefits of ownership (i.e., does not vote and does not participate in profits), and has a fixed life. Based upon these factors, it appears that the stock is in substance actually debt and should be classified as such. Auditors will typically be guided by generally accepted accounting principles (GAAP) in deciding how to report an item. However, in most cases, GAAP does not provide clear­cut gu...
View Full Document

{[ snackBarMessage ]}

Ask a homework question - tutors are online