11-44: Individuals Phil Smith and Kate Jones formed P&K Corporation on March 1, 1998, to provide computer consulting services. The company has been an S corporation since its formation, and the stock ownership is divided as follows: 60% to Phil and 40% to Kate. The business code and employer identification numbers are 514519 and 70-3897625, respectively. The business office is located at 3010 East Apple Street, Atlanta, Georgia 30304. Phil and Kate live nearby at 1521 South Elm Street and 3315 East Apple Street, respectively. Their Social Security numbers are 403-00-5110 for Phil and 518-00-9147 for Kate.

The calendar year, cash basis corporation's December 31, 2020, balance sheet and December 31, 2021, trial balance contain the following information:

Balance Sheet 12/31/2020Trial Balance 12/31/2021 DebitCreditDebitCreditCash $12,000 $22,000 Investments (1) 14,000 14,000 Equipment (2, 3) 150,000 190,000 Accumulated depreciation $38,000 $63,500Notes payable (3, 4) 94,000 117,200Capital stock 10,000 10,000Accumulated adjusted account 34,000 34,000Cash distributed to Phil 25,400 Cash distributed to Kate 16,960 Revenues 235,000Dividend income (1) 1,000Interest income (1) 400Section 1245 gain (depreciation recapture) 3,500Salary expense (5) 110,000 Rent expense 12,000 Interest expense 16,600 Tax expense (property and payroll) 13,800 Repair expense 5,800 Depreciation expense 29,200 Health insurance expense (6) 1,600 Property insurance expense 1,500 Office supplies expense 3,000 Utility expense 2,200 Charitable contribution 500 Total $176,000$176,000$464,600$464,600

1. The investment account consists of marketable securities of U.S. corporations and U.S. Treasury Bonds. All of the dividends are considered qualified dividends.
2. Equipment was sold May 12, 2021, for $9,800. It was purchased new on May 1 of the prior year for $10,000, and its basis when sold was $6,300.
3. New equipment was purchased March 1, 2021, with $5,000 cash and a $45,000 three-year note payable. The first note payment is March 1, 2022. (Note: The correct amount of tax depreciation is included in depreciation expense account in the trial balance.)
4. Notes payable are long-term except for $20,000 of the new to be paid next year.
5. Salary expense is composed of salary of $30,000 each to Phil and to Kate and $50,000 to unrelated employees.
6. Health insurance premiums paid were for the related employees.

Prepare Form 1120S (including Schedule K, L, and M), and Schedule K-1 for Phil. Complete all 6 pages, including responses to all questions. If any necessary information is missing in the problem, assume a logical answer and record it. Do not prepare Schedule K-1 for Kate or other required supplemental forms at this time.