Question

Martin Farley and Ashley Clark formed a limited liability company with an operating agreement that provided a salary allowance of $38,100 and $29,100 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?

Answer 1

a)

Division of net income

	Farely	Ashley	total
Salary allowance	38100	29100	67200
Remaining income (3:1)	60600	20200	80800
Net income	98700	49300	148000

.

b)

Journal entries

No	Particulars	Debit	credit
1	Revenue	668000
	To expense		520000
	To Martin Farley, members equity		98700
	To Ashley Clark, members equity		49300
	(To close revenue and expense)
2	Martin Farley, members equity	38100
	Ashley Clark, members equity	29100
	To martin Farley drawing		38100
	To Ashley Clark drawing		29100
	(to close drawing account)

.

c)

If the net income of the LLC were less than the sum of salary allowance, both members would still be credited with their salary allowances. The difference between the net income and total salary allowances would be allocated to each partner as deduction according to the income sharing ratio.