how does one handle the increase in redemption price 347097

Week 2 Case Study 3: FROSTY LTD FROSTY LTDFFROSTY LTD Issues to be addressed: Are the preference shares debt or equity, or are there component parts? Are the dividends an expense, or a distribution of profits? How does one handle the increase in redemption price ie. the extra 50c per share? 1. Define liabilities, equity, and expenses under the Conceptual Framework 2010, as well as the essential characteristics of each. Begin with liabilities. To determine whether the $2 000 000 preference shares meet the definition of a liability or equity, it is necessary to see if they exhibit the essential characteristics of a liability: a. existence of a present obligation, either legal equitable or constructive b. a sacrifice in the future, either on demand, or on the happening of a specified event, or on a specified date c. existence of a past event. Preference shares: There are signs of a liability a present obligation to pay back $2.50 per share after 5 years, at the option of the holder. As they are exercisable at the option of the holder, the debt is not controlled by the company; given the company’s current situation, is it likely that the holders will want their money redeemed? Yes. Hence there is a sacrifice requiring settlement on the happening of a specified event. Even though no interest of any fixed nature is chargeable year by year, the holders have the right to call on the company’s assets for their original investment plus a reasonable return. Dividends also are cumulative, which supports the liability classification in that they must be paid if sufficient profits are earned. Are the preference shareholders in the nature of residual holders, or owners ? No, because they rank ahead of owners in the refund of their money. Other approaches to the definition of equity, as discussed in Section 3.1.5 of the chapter, could also be discussed in this context. For instance, do the preference shares to be issued by Frosty Ltd qualify as equity under…