Issue of redeemable preference shares

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Example

A company issues 2 million redeemable preference shares of $1 each that will be redeemed after five years. The holders of the preference shares are entitled to an annual dividend of 5%. The issue price was at par and issue costs were $100,000.

The shares will be redeemed at par after five years, and redemption costs will be $34,000.

It has been calculated that the effective annual interest rate for this financial liability is 6.5% per annum.

Required
Outline the treatment of the shares over the 5-year period.
 

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