Excellent question. That is a very good Dynamics problem. It requires a good sense of the details involved. Simplifying assumptions should be made if the error introduced is negligible.
Clearly, Friction cannot be neglected - the ball will stop moving relatively quickly when moving atop water. Therefore, Conservation Of Energy does not apply.
The Work-Energy principle is very useful here: Ti = Tf + U, where Ti, Tf = initial and final kinetic energy; U = Work exerted on the system (the ball).
Kinematics of the ball itself can be challenging to deal with. We have angular velocity/acceleration as the ball rolls on the ground about the instantaneous point of contact on the floor; we also have translation of the ball, as it moves forward in a linear fashion.
Notice that as ball 2 moves you have two possibilities:
1. The ball rotates due to friction. No slipping occurs, and static friction is present
2. The ball slips on the water, and kinetic friction is present. No rolling occurs while the ball is slipping.
Additionally, because water is very deformable - and even the small deformations present during skillful ball-throwing may have a significant effect on the friction force developed. It's easy to understand Friction has a strong impact on the duration of movement, and thus on the total distance covered, since both are intimately related. However, for the accuracy you need, it seems this is one assumption you can ignore. It's wasteful to spend unnecessary time and effort to produce an unneeded accuracy level.
All said, it is not as hard as you might be led to believe. The Work-Energy and the Impulse-Momentum principles are very useful in analyzing complex vectorial problems in a relatively simple (but not simplistic) way. Through them you can determine the direction and magnitude of the velocities of both balls after impact (and ball 1 does not necessarily immediately stop). Realize, though, that Dynamics is one of the most challenging Applied-Mechanics courses (THE most challenging in many college students' opinions), and it takes one full semester of continuous work to build the conceptual skills more complex problems require. That is to say that it may be tougher for somebody else to visualize the problem.
Good question. Dynamics does not end with the kinematics equations we all study in a typical Physics class. Forces - such as Friction - must be considered. Conservation of energy does not hold, concepts such as the Work-Energy thm and the Impulse-Momentum thm become very useful.