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:

a) reflected currently in income

b) reflected currently in income as a discontinued operations item

c) treated as a prior period adjustment

d) treated as a direct reduction of retained earnings. <------------------- answer

Can someone help me with this question? I know the answer is "d" but I'm confused as to why... If possible can you provide a journal entry example of it? That would really help since I'm a visual learner. Thanks in advance!