Accounting – Preferred Stock Versus Bonds

Accounting – Preferred Stock Versus Bonds

Accounting for stock transactions is important in business. Understanding the accounting for the sale of stock, dividends, and treasury stock is important in understanding the equity of a business. In this Discussion, you will look at how businesses finance operations through equity.

This week’s Discussion focuses on Activity 8-4 located on page 318 of your textbook, which reads as follows:

Living Smart has decided to expand its operations to owning and operating long term health care facilities. The following is an excerpt from a conversation between the chief executive officer, Mark Vierra, and the vice president of finance, Jolin Kilcup.

Mark: Jolin, have you given any thought to how we’re going to finance the acquisition of St. George Health Care?

Jolin: Well, the two basic options, as I see it, are to issue either preferred stock or bonds. The equity market is a little depressed right now. The rumor is that the Federal Reserve Bank’s going to increase the interest rate either this month or next.

Mark: Yes, I’ve heard the rumor. The problem is that we can’t wait around to see what’s going to happen. We’ll have to move on this next week if we want any chance to complete the acquisition of St. George.

Jolin: Well, the bond market is strong right now. Maybe we should issue debt this time around.

Mark: That’s what I would have guessed as well. St. George’s financial statements look pretty good, except for the volatility of its income and cash flows. But that’s characteristic of the industry.

Discuss the advantages and disadvantages of issuing preferred stock versus bonds.

Solution Preview

Bonds and preferred stocks are how many companies raise their capital. Preferred bonds are similar to bonds and common stocks in that like a bond they pay fixed dividends while in the event of liquidation proceedings they take lowered precedence than bonds.

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