An unsettled question in accounting for stock is this: Should preferred stock be recognized as a

liability, or should it be considered equity? Under International Financial Reporting Standards,

preferred stock $($preference shares$)$ often is reported as debt with the dividends reported in the

income statement as interest expense. Under U$.$S$.$ GAAP, that is the case only for "mandatorily

redeemable" preferred stock.

Two opposing viewpoints are:

View $1$: Preferred stock should be considered equity.

View $2$: Preferred stock should be reported as a liability.

In considering this question, focus on conceptual issues regarding the practicable and

theoretically appropriate treatment, unconstrained by GAAP.

Required:

Which view do you favor? Develop a list of arguments in support of your view prior to the

class session for which the case is assigned.

In class, your instructor will pair you $($and everyone else$)$ with a classmate $($who also has

independently developed an argument$).$

a$.$ You will be given three minutes to argue your view to your partner. Your partner likewise

will be given three minutes to argue his or her view to you. During these three$-$minute

presentations, the listening partner is not permitted to speak.

b$.$ Then after each person has had a turn attempting to convince his or her partner, the two

partners will have a three$-$minute discussion in which they will decide which view is more

convincing and arguments will be merged into a single view for each pair.

After the allotted time, a spokesperson for each of the two views will be selected by the

instructor. Each spokesperson will field arguments from the class in support of that view's

position and list the arguments on the board. The class then will discuss the merits of the

two lists of arguments and attempt to reach a consensus view, though a consensus is not

necessary.