If convertible preferred shares are converted into common shares,
A) a gain on conversion must be recorded if the legal capital of the preferred shares is greater than the legal capital of the common shares.
B) a loss on conversion must be recorded if the legal capital of the preferred shares is less than the legal capital of the common shares.
C) a gain or loss on conversion is not recorded.
D) the fair value of the preferred shares on the date of conversion is credited to the Common Shares account.

Question

Quizplus · Accepted Answer

A gain or loss on conversion of convertible preferred shares into common shares is not recorded in the financial statements. The conversion is treated as an equity transaction, and any difference between the book value of the preferred shares and the common shares is adjusted within equity accounts, without recognizing a gain or loss in the income statement.

If Convertible Preferred Shares Are Converted into Common Shares