Question

Martin Farley and Ashley Clark formed a limited liability company with an operating agreement that provided a salary allowance of $61,000 and $49000 to each member, respectively. In addition, the operating agreement specified an income-sharing ratio of 3:2 . The two members withdrew amounts equal to their salary allowances. Revenues were $668,000 and expenses were $52,000,for a net income of s148,000.
a. Determine the division of $148,000 net income for the year.
b. Provide journal entries to close the (1) revenues and expenses and (2) drawing accounts for the two members. For a compound transaction, if an amount box does not require an entry, leave it blank.
c. If the net income were less than the sum of the salary allowances, how would income be divided between the two members of the LLC?

Answer 1

Answer to Question:

A) Net Income= $ 148,000

Martin                                  Ashley                                  Total

$                                              $                                              $

                Salary Allowance              61,000                                   49,000                                   110,000

                Remaining income 22,800                                   15,200                                   38,000

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                Net Income 83,800                                   64,200 148,000

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                Martin’s Remaining Income: ($148,000-$110,000)X3/5 = $ 22,800

                Ashley’s Remaining Income: ($148,000-$110,000)X2/5 = $ 15,200

B) Journal Entries

Date	Description Closing Entry		Debit $	Credit $
	Income Summary        Martin Farley Capital        Ashley Clark Capital		148,000	83,800 64,200
	Revenue        Income Summary To close the revenue account to income summary		668,000	668,000
	Income Summary        Expenses To close the expenses accounts to income summary		52,000	52,000
	Martin Farley Capital Ashley Clark Capital         Martin Farley withdrawals         Ashley Clark withdrawals To close withdrawals account		61,000 49,000	61,000 49,000

C) If the net income of the LLC were less than the sum of the salary allowances, both members would still be credited with their salary allowances. From this amount, each partner would deduct his or her share of the excess of the total salary allowance over the net income. Thus, the difference between the net income and total salary allowances would be allocated to each partner as a deduction, according to the income-sharing ratio.