1.
REQUIRED:
a. Provide the journal entry to record the preferred stock issuance, and compute the resulting debt/equity ratio, assuming that the preferred stock is considered an equity security.
b. Compute the debt/equity ratio, assuming that the preferred stock is considered a debt security.
c. What incentives might the management of Lambert have to classify the issuance as equity instead of debt? Do you think that the issuance should be classified as debt or equity?
What might Lambert's external auditors think?