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Liabilities and Owners Equity

1. Discuss the difficulties in accounting for estimated liabilities. Does accounting for estimated liabilities create problems or opportunities for financial statement prepares? Explain.

2. Define what is meant by contingent liability? Why do contingent liabilities create such difficult problems for financial statement users and prepares?

3. Identify the differences between common stock and preferred stock. As a manager, what are the factors that you might consider in deciding to raise capital by issuing capital stock versus issuing preferred stock? As an investor, would you invest in a firm's common stock or preferred stock? Explain.

4. What makes accounting for convertible bonds and convertible preferred stock so controversial? Do you think that convertible bonds should be accounted for as debt or as equity? Explain.

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Estimated liabilities are the services of the obligation which the business or organization has to pay but the amount of the ...

Solution Summary

Estimated liabilities are the services of the obligation which the business or organization has to pay but the amount of the obligation is not known but that can be reasonably estimated. For example, taxes, which needs to be paid by the company, but the actual amount that need to be paid is not known. It has to be estimated and accounted for in the books as an estimate.
FASB statement 5 states that an estimated liability may be accrued if both the following conditions exist:

Detailed answer attached.

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