Refer to the facts in Tax Form/Return Preparation Problem C:9-58. Now assume the company is an S corporation rather than a partnership. Additional facts are as follows:

• Drs. Bailey and Firth formed the corporation on January 1, 2016, and the corporation immediately elected S corporation status effective at the beginning of 2016.

• Upon formation of the corporation, Dr. Bailey received common stock worth $960,000, and Dr. Firth received common stock worth $2.24 million.

• The balance sheet information is the same as in Table C:9-3 except the equity section is as follows:

• The $120,000 paid to Dr. Bailey is salary constituting W-2 wages (instead of a guaranteed payment). Ignore employment taxes (Social Security, etc.) on Dr. Bailey's salary.

• Ignore the U.S. (domestic) production activities deduction.

• Use book numbers for Schedule Land Schedule M-1 in Form 1120S.

Required: 

Prepare the 2017 S corporation tax return (Form 1120S), including the following additional schedules and forms: ScheduleD, Form 4562, and Schedule K-1. Optional: (1) Complete Schedule M-2 in Form 1120S even though the company has never been a C corporation. For this purpose, the accumulated adjustments account at the beginning of 2017 is $137,088. (2) Prepare a schedule for each shareholder's basis in his or her S corporation stock. For this purpose, Bailey's stock basis at the beginning of 2017 is $1,001,126 and Firth's is $2,028,762.