 Hello, and welcome to this session in which we will issue common stock in exchange for retiring preferred stock. Simply put, we have some preferred stock. We are going to exchange the preferred, convert the preferred, or exchange the preferred into common stock. Let's go ahead and get started. ARM Corporation issued 1,000 shares of $10 power value stock. Upon the conversion of $2,205 preferred, simply put the preferred is going out and we'll replace it with the common. The preferred stock was originally issued at $60. Well, the common is trading at $32 at the time of the conversion, record the conversion of the preferred stock. So the first thing you want to be aware of is when you convert preferred stock into common stock, there is no gain and no loss. What does that mean? It means they are giving you the price of the common stock. Well, the price of the common stock is not relevant for me. The reason is I am not going to record again or a loss by conversion. Therefore, because I am exchanging into common, it doesn't make any sense. Therefore, just the common stock trading is irrelevant. Because when you exchange one class of equity into another class of equity, there is no justification from a theoretical perspective to either record again or a loss. Therefore we would use the book value when we conduct this transaction. Before we proceed any further, I have a public announcement about my company, farhatlectures.com. Farhat Accounting Lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions, as well as exercises. Go ahead, start your free trial today, no obligation, no credit card required. Action. Now we are giving the preferred stock original issuance of $60. Now this is important because we want to know how much preferred stock we have on the books because we are going to retire those preferred stock. So let's go ahead and get started. We had 2,200 of preferred stock and they were originally issued at $60. So if we take 2,200 times 60, that gave us $132,000 in cash when we originally issued the preferred stock. Then we are going to credit preferred stock, 2,200 times the power value of 5, 2,200 times 5, that's 11,000, that's the preferred stock that we have on the books now. And the remainder is additional paid in capital preferred stock which is 21,000. So this is how much we got when we issued those preferred stock. So on the books, on the balance sheet right now we have 121,000 in APIC preferred stock and 11,000 in preferred stock. Now what are we going to do? We are going to eliminate those preferred stock and in return issue common stock. Well let's start with the simple part of it. Let's eliminate the preferred stock. Well we are going to have to debit the preferred stock 11,000 to make it go down to zero. We are going to have to debit preferred stock APIC 121 bring it down to zero. Now what we did is we removed the preferred stock. Well we are not done yet, we are half way through. We removed the preferred, now we need to issue the common. How to issue the common stock? Well we need to know that when you credit common stock it's the number of shares times the power value that's giving. So the number of shares in this example is 1,000 shares times the power value of a ten dollar. Therefore we will get for common stock 10,000. Now the last entry is the additional paid in capital common stock which is a plug. Plug figure to make sure it balances. So this is the last entry that we will make in this transaction. So all what we did is we took out the preferred issued common stock. There is no gain and no loss. Now if you want to you can compute whether there is a gain or a loss but you cannot book a gain or a loss by exchanging your own common stock just like when you sell and buy your own stock as treasury stock you cannot book a gain or a loss. Simply put the general rule is this unless you are Enron when you deal with your own equity buying and selling your equity you cannot book a gain or a loss. It cannot be seen as a transaction that goes on the income statement. What should you do now go to far hat lectures look at additional resources that's going to help you whether you are an accounting student or a CPA candidate CMA candidate or any other certification accounting certification or professional certification you're studying for invest in yourself invest in your career good luck study hard and stay safe.