Phil Smith and Kate Jones formed the 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, 2019 balance sheet and December 31, 2020 trial balance (both prepared for tax purposes) contain the following information:
| Balance Sheet | Trial Balance | |||
| 12/31/2019 | 12/31/2020 | |||
| 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 | ||
| Recourse notes payable (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) (2) |
3,500 | |||
| Salary expense (5) | 110,000 | |||
| Rent expense | 12,000 | |||
| Interest expense | 16,600 | |||
| Tax expense (property and payroll) | 13,800 | |||
| Repair expense | 5,800 | |||
| MACRS depreciation | 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 | |||
| Total | 176,000 | 176,000 | 464,600 | 464,600 |
Notes:
- The investment account consists of marketable securities of U.S. corporations and U.S. Treasury Bonds. All of the dividends are considered qualified dividends.
- Equipment was sold May 12, 2020 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.
- New equipment was purchased March 1, 2020 with $5,000 cash and a $45,000 three-year note payable. The first note payment is March 1, 2021. (Note: the correct amount of tax depreciation is included in the depreciation expense account in the trial balance).
- Notes payable are long-term except for $20,000 of the recourse notes to be paid next year.
- Salary expense is composed of salary of $30,000 each to Phil and to Kate and $50,000 to unrelated employees.
- Health insurance premiums paid were for unrelated employees.
Task:
Prepare a 2020 Form 1120-S. Complete all pages, including responses to all questions. If any necessary information is missing in the problem, assume a logical answer and record it.
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