Should preferred stock be classified as equity or debt? Explain.

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Should preferred stock be classified as equity or debt? Explain.

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Should preferred stock be classified as equity or debt? Explain.

Explanation & AnswerSolution by a verified expert

Explanation

Preferred stock is considered equity under IFRS or US GAAP.
Debt instruments are obligations of the corporation with defined maturity or payment date and interest rates.
Preferred dividends are not tax deductible to the issuing company, unlike interest on debts.
Nonpayment of dividends cannot force a bankruptcy as it can with bond coupons.

Verified Answer

Preferred stocks are considered equity because they do not have a maturity date.

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