Yes, you did this correctly. To have converted the entire gross distribution you would have to have substituted other funds for the $2,500 that was withheld for taxes and completed that portion as an indirect conversion within 60 days of the distribution. Since you did not make that substitution, you converted only $57,500 and cashed out $2,500 for a total of $60,000 taxable.
You get the best benefit for a Roth conversion by converting the entire amount and using other funds to pay the taxes.
