Question

Lester, Torres, and Hearst are members of Arcadia Sales, LLC, sharing income and losses in the ratio of 2:2:1, respectively. The members decide to liquidate the limited liability company. The members’ equity prior to liquidation and asset realization on August 1 are as follows:

Lester	$48,630
Torres	65,630
Hearst	26,190
Total	$140,450

In winding up operations during the month of August, noncash assets with a book value of $140,060 are sold for $152,400, and liabilities of $24,270 are satisfied. Prior to realization, Arcadia Sales has a cash balance of $24,660.

	Required:
a.	Prepare a statement of LLC liquidation.
b.	Provide the journal entry for the final cash distribution to members on August 31. Refer to the Chart of Accounts for exact wording of account titles.
c.	What is the role of the income- and loss-sharing ratio in liquidating a LLC?

Chart of Accounts

CHART OF ACCOUNTS
Arcadia Sales, LLC
General Ledger
ASSETS 110 Cash 111 Petty Cash 112 Accounts Receivable 113 Allowance for Doubtful Accounts 114 Interest Receivable 115 Notes Receivable 116 Inventory 117 Office Supplies 118 Store Supplies 119 Prepaid Insurance 120 Land 123 Equipment 124 Accumulated Depreciation-Equipment 129 Asset Revaluations 133 Patent LIABILITIES 210 Accounts Payable 211 Salaries Payable 213 Sales Tax Payable 214 Interest Payable 215 Notes Payable EQUITY 310 Lester, Member Equity 311 Lester, Drawing 312 Torres, Member Equity 313 Torres, Drawing 314 Hearst, Member Equity 315 Hearst, Drawing	REVENUE 410 Sales 610 Interest Revenue EXPENSES 510 Cost of Merchandise Sold 520 Salaries Expense 521 Advertising Expense 522 Depreciation Expense-Equipment 523 Delivery Expense 524 Repairs Expense 529 Selling Expenses 531 Rent Expense 533 Insurance Expense 534 Office Supplies Expense 535 Store Supplies Expense 536 Credit Card Expense 537 Cash Short and Over 538 Bad Debt Expense 539 Miscellaneous Expense 710 Interest Expense

Statement of LLC Liquidation

a. Prepare a statement of LLC liquidation. Refer to the list of Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter negative numbers (balance deficiencies, payments, cash distributions, divisions of loss), use a minus sign. If there is no amount to be reported for sale of assets, payment of liabilities, receipt of deficiency, or cash distribution rows, the cell can be left blank. However, in the balance rows, a balance of zero MUST be indicated by entering "0".

ARCADIA SALES, LLC

Statement of LLC Liquidation

For the Period August 1–31

1		Cash +	Noncash Assets =	Liabilities +	Member Equity, Lester (2/5) +	Member Equity, Torres (2/5) +	Member Equity, Hearst (1/5)
2
3
4
5
6
7
8

Journal

b. Provide the journal entry for the final cash distribution to members on August 31. Refer to the Chart of Accounts for exact wording of account titles.

PAGE 10

JOURNAL

ACCOUNTING EQUATION

	DATE	DESCRIPTION	POST. REF.	DEBIT	CREDIT	ASSETS	LIABILITIES	EQUITY
1
2
3
4

Final Question

c. What is the role of the income- and loss-sharing ratio in liquidating a LLC? Select the best answer to complete the two sentences below.

1. The income- and loss-sharing ratio is

a) never used in a Limited Liability Company liquidation.

b) only used to distribute the gain or loss on the realization of asset sales.

c) often used for the final distribution.

2. After all gains and losses on realization have been divided and any member deficiencies have been paid or allocated, the final distribution is based upon

a) the credit balances in the member equity accounts.

b) the income- and loss-sharing ratio.

c) the partners’ wishes.

Answer 1

Answer :

*Note :

(Difference between $152,400 & 140,060 distributed in ration 2:2:1)

Part B : Journal Entry on cash distribution
Particulars	Debit (in $)	Credit (in $)
Lester, Member Equity	53,566
Torres, Member Equity	70,566
Hearst, Member Equity	28,658
Cash		1,52,790

Part C : Role of  income- and loss-sharing ratio in liquidating a LLC :

1) The income- and loss-sharing ratio is :

Option B :  only used to distribute the gain or loss on the realization of asset sales.

2) After all gains and losses on realization have been divided and any member deficiencies have been paid or allocated, the final distribution is based upon :

Option A : the credit balances in the member equity accounts.

Conclusion : The income and loss sharing ratio is used for the distribution of loss or gain on realization of assets. However, the final distribution is based upon the credit balances in the members' equity account

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