Question

Martin Farley and Ashley Clark formed a limited liability company with an operating agreement that provided a salary allowance of $36,500 and $30,300 to each member, respectively. In addition, the operating agreement specified an income-sharing ratio of 3:1. The two members withdrew amounts equal to their salary allowances. Revenues were $668,000 and expenses were $520,000, for a net income of $148,000.

Note: The reduction in members’ equity from withdrawals would be disclosed on the statement of members’ equity.

	Required:
A.	Determine the division of $148,000 net income for the year.
B.	On December 31, provide journal entries to close the (1) revenues and expenses and (2) drawing accounts for the two members. Refer to the Chart of Accounts for exact wording of account titles.
C.	If the net income was less than the sum of the salary allowances, how would income be divided between the two members of the LLC?

Journal

A. Determine the division of $148,000 net income for the year.

	Farley	Clark	Total
Salary allowance
Remaining income
Net income

B. On December 31, provide journal entries to close the (1) revenues and expenses and (2) drawing accounts for the two members. Refer to the Chart of Accounts for exact wording of account titles.

How does grading work?

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JOURNAL

ACCOUNTING EQUATION

Score: 37/99

	DATE	DESCRIPTION	POST. REF.	DEBIT	CREDIT	ASSETS	LIABILITIES	EQUITY
1		Closing Entries
2	Text entry invalid
3
4
5					✔
6
7		✔		✔				✔
8
9

Answer 1

a)Division of $148000 of Net Income for the year.

	Farley	Clark	Total
Salary Allowance	$36500	$30300	$$66800
Remaining Income(Ratio of 3:1)	$60900	$20300	$81200
Net Income	$97400	$50600	$148000

b)December 31st, Journal Entries to close 1)revenue & expenses and 2)drawing accounts for the two members.

	Date	Description	Post Ref.	Debit	Credit	Assets	Liabilities	Equity
1	Dec 31st	Revenue Income Summary (Revenue transferred to Income Summary)		$668000	$668000			Income summary t/f to Equity (Increases Equity)
2	Dec 31st	Income Summary Expenses (Expenses transferred to Income Summary)		$520000	$520000			Income summary t/f to Equity(Decreases Equity)
3	Dec 31st	Income Summary Martin Farley's Capital Ashley Clark's Capital (Division of Income amongst members)		$148000	$97400 $50600
4	Dec 31st	Martin Farley's Capital Ashley Clark's Capital Drawings (Salary withdrew by members)		$36500 $30300	$66800			Reduction In members Equity

c)Distribution when Net Income less than Salary Allowances:

If Net Income is less than Salary allowances determined as per the operating agreement, then the deficiency is treated as Net Loss divided amongst the partners in their income sharing ratio.

If this case if Net Income is less than Salary Allowance of $66800, the deficiency is shared amongst Farley and Clark in the ratio of 3:1.