Great Peaks, Inc., has $3,600,000 of bonds outstanding with an unamortized discount of $160,000 immediately following the last interest payment. At that time, the bonds were converted into $350,000 shares of $10 par common stock. As a result of this conversion:

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The unamortized discount is a contra-liability account that reduces the carrying value of the bonds. When the bonds are converted, the unamortized discount is eliminated and the carrying value of the bonds is increased by the amount of the discount. This results in a decrease in liabilities of $3,440,000 ($3,600,000 - $160,000). The conversion also results in an increase in stockholders' equity of $3,440,000, which is the par value of the common stock issued ($350,000 shares x $10 par value).