The conversion of preferred stock into common stock requires that any excess of the par value of the common shares issued over the carrying amount of the preferred being converted should be

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Any excess of the par value of the common shares issued over the carrying amount of the preferred being converted is treated as a direct reduction of retained earnings. This is because preferred stock is recorded in the equity section of the balance sheet, and when it is converted to common stock, the equity section is adjusted accordingly. Retained earnings are reduced by the excess because this represents a reduction in the overall value of the equity section.

The Conversion of Preferred Stock into Common Stock Requires That