Refer to the facts in Problem C:11-36, and prepare Form 1120-S, Schedule K based on these facts.

Data from Problem C:11-36
Mike and Nancy are equal shareholders in MN Corporation, an S corporation. The corporation, Mike, and Nancy are calendar year taxpayers. The corporation has been an S corporation during its entire existence and thus has no accumulated E&P. The shareholders have no loans to the corporation. The corporation incurred the following items in the current year:
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $300,000
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  140,000
Dividends on corporate investments  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  10,000
Tax-exempt interest income  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000
Sec. 1245 gain (recapture) on equipment sale  . . . . . . . . . . . . . . . . . . . . . . . . . 22,000
Sec. 1231 gain on equipment sale  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  12,000
Long-term capital gain on stock sale  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  8,000
Long-term capital loss on stock sale  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,000
Short-term capital loss on stock sale  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  6,000
Depreciation  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  . . . . . . . . . . . . . .  18,000
Salary to Nancy  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  . . . . . . . . . . . . 20,000
Business meals expenses  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  . . . .  2,200

Interest expense on loans allocable to:

Business debt  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  . . . . . . . . . . . . . . 32,000
Stock investments  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  . . . . . . . . . . .  6,400
Tax-exempt bonds  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,800
Principal payment on business loan  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,000
Charitable contributions  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000
Distributions to shareholders ($15,000 each) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000

a. Compute the S corporation’s ordinary income and separately stated items. 

b. Show Mike’s and Nancy’s shares of the items in Part a.

c. Compute Mike’s and Nancy’s ending stock bases assuming their beginning balances are $100,000 each. When making basis adjustments, apply the adjustments in the order outlined on pages C:11-25 and C:11-26 of the text.

Data from C:11-25:

Williams Corporation has operated as a C corporation for the last seven years. The corporation has assets with a $450,000 adjusted basis and an $800,000 FMV. Liabilities amount to $100,000. Dan Williams, who uses a calendar year as his tax year, owns all the Williams Corporation stock. The corporation uses the accrual method of accounting and a June 30 year-end. Dan’s CPA has suggested that he convert the corporation to S corporation status to reduce his total corporate/personal federal income tax liability. Dan would like to complete the conversion on the last day of the corporation’s tax year. What tax issues should Dan and his CPA consider with respect to the S election?

Data from C:11-26:

Peter owns 50% of Air South Corporation, an air charter service. His S corporation stock basis at beginning of the year is $100,000. Air South has not done well this year and will report an ordinary loss of $375,000. What tax issues should Peter consider with respect to the loss?