Individuals Phil Smith and Kate jones formed P&K Corporation on March 1, 1996 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 24-3897625, 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 403-16-5110 for Phil and 518-72-9147 for Kate.

The Calendar year, cash basis corporation’s December 31, 2014 balance sheet and December 31, 2015 trial balance contain the following information.

Balance sheet 12/31/2014 Trial Balance 12/31/2015

Debit Credit Debit Credit

Cash.......................................... $ 12,000 $ 22,000

Investments(1).............................. 14,000 14,000

Equipment (2,3)......................... 150,000 190,000

Accumulated depreciation........... $ 38,000 $ 63,500

Notes Payable (3,4)...................... 94,000 117,200

Capital stock................................. 10,000 10,000

Accumulated adjustments account............... 34,000 34,000

Cash distributed to Phil....................... 25,440

Cash distributed to Kate.................. 16,960

Revenues...................... 235,000

Dividend income (1)................... 1,000

Interest income (1)...................... 400

Section 1245 gain (depreciation recapture).......... 3,500

Salary expenses (5).............. 110,000

Rent expense............................. 12,000

Interest expence...................... 16,600

Tax expense (propert & 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 contributions............... 500

Totals..................... $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 the dividends are considered qualified dividends.

2. Equipment was sold May 12,2015 for 9,800. It was purchased new on May 1 of prior year for $10,000 and its basis when sold was $6,300.

3. New equipment was purchased on March 1,2015 with $ 5,000 cash and a $ 45,000 three year note payable. The first note payable is March 1, 2016

4. Notes payable are long-term except for $20,000 of the note 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 unrelated employees.

Prepare Form 1120S (including Schedules K, L, and M), and schedule K-1 for Phil. Complete all six 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 now.