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 of $160,000 is deducted from the total bond outstanding of $3,600,000, resulting in a liability of $3,440,000. When the bonds are converted into common stock, the liability decreases by $3,440,000, and the stockholders' equity increases by the same amount. Therefore, choice C is correct.