The following excerpts are taken from the annual report of J. Crew Group, Inc.
At January 29, 2005 and January 28, 2006, 92,800 shares of Series A preferred stock and 32,500 shares of Series B preferred stock were issued and outstanding. Dividends compound to the extent not paid in cash. . . . On October 17, 2009, Group is required to redeem the Series B preferred stock and to pay all accumulated but unpaid dividends on the Series A preferred stock.
[Under current GAAP, the company is required to classify as] long-term debt the liquidation value of Group Series B preferred stock and the related accumulated and unpaid dividends and the accumulated and unpaid dividends related to the Series A preferred stock since these amounts are required to be redeemed in October 2009. The preferred dividends related to . . . the Series B preferred stock and to the accumulated and unpaid dividends of the Series A and Series B preferred stock . . . are included in interest expense. The Series A preferred stock is only redeemable in certain circumstances (including a change in control at Group) and does not qualify for classification under SFAS No. 150. Accordingly, the dividends related to the Series A preferred stock are deducted from stockholders’ deficit.
1. Explain why it makes sense that J. Crew Group is required to include its Series B preferred stock among long-term debt on the balance sheet.
2. Where on J. Crew’s balance sheet was this debt shown before the current GAAP guidance on mandatorily redeemable preferred stock were issued?
3. Explain why it makes sense to include the dividends paid on Series B preferred stock as part of interest expense.
4. Where is the Series A preferred stock shown on the company’s balance sheet?
5. Why does J. Crew use a different accounting treatment for Series A preferred stock and
Series B preferred?
6. What impact (if any) has current GAAP guidance had on the popularity of mandatorily redeemable preferred stock as a corporate financing device?