Question: Preferred stock has characteristics of both liabilities and stockholders' equity. Convertible bonds are another example of a financing arrangement that blurs the line between liabilities and stockholders' equity. Items like these have led some to conclude that the present distinction between liabilities and equity should be eliminated. Under this approach, liabilities and equity would be combined into one category that includes both creditor and owner claims to resources.
Required: 1. Define liabilities and stockholders' equity.
2. Provide arguments in support of maintaining the distinction between liabilities and stockholders' equity in the balance sheet.
3. Provide arguments in support of eliminating the distinction between liabilities and stockholders' equity in the balance sheet.
4. Which do you recommend? Why?