Preferred stockholders have priority when a company issues dividends; however, this type of stock is redeemable at any time. Thus, the corporation can require stockholders to sell a portion of their shares of preferred stock back to the company if the company needs extra revenue. Corporations must account for outstanding shares of redeemable stock in their accounting ledgers and financial statements.
1. Record the shares of stock sold at their par value. For example, if you sell $100,000 worth of preferred stock, record a debit of $100,000 to your cash account and a credit of $100,000 to your preferred stock account.
2. List the value of preferred stock as a current asset on the balance sheet. Use this figure when calculating the corporation's ratio of working capital to total capital.
3. Increase the company's equity balance by the value of the stock sold. List the new equity balance on the company's equity statement.
Items you will need
- Accounting ledgers
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