Question

Marvel Media, LLC, has three members: WLKT Partners, Madison Sanders, and Observer Newspaper, LLC. On January 1, 20Y2, the three members had equity of $207,400, $43,000, and $165,200, respectively. WLKT Partners contributed an additional $49,800 to Marvel Media, LLC, on June 1, 20Y2. Madison Sanders received an annual salary allowance of $50,700 during 20Y2. The members’ equity accounts are also credited with 10% interest on each member’s January 1 capital balance. Any remaining income is to be shared in the ratio of 4:3:3 among the three members. members. The revenues, expenses, and net income for Marvel Media, LLC, for 20Y2 were $1,186,500, 858,700 and $327,800 respectively. Amounts equal to the salary and interest allowances were withdrawn by the members.

	Required:
A.	Determine the division of income among the three members.
B.	Prepare the journal entries to close the net income and withdrawals to the individual member equity accounts. Refer to the Chart of Accounts for exact wording of account titles.
C.	Prepare a statement of members’ equity for 20Y2.
D.	What are the advantages of an income-sharing agreement for the members of this LLC?

Answer 1

(A) -- Determine the division of income among the three members.

Answer -

Schedule of Division of Income

		WLKT Partners ($)	Madison Sanders ($)	Observer Newspaper, LLC ($)	Total ($)
	Salary allowance	-	50700	-	50700
I.	Interest allowance	20740 [$207400*10%]	4300 [$43000*10%]	16520 [$165200*10%]	41560
II.	Remaining income (4:3:3)	94216 [$235540*(4/10)]	70662 [$235540*(3/10)]	70662 [$235540*(310)]	235540
Net income [I + II]		114956	125662	87182	327800

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(B) -- Prepare the journal entries to close the net income and withdrawals to the individual member equity accounts.

Answer -

No.	Particulars	Debit ($)	Credit ($)
1.	Income Summary WLKT Partners, Member Equity Madison Sanders, Member Equity Observer Newspaper, LLC, Member Equity	327800 - - -	- 114956 125662 87182
2.	WLKT Partners, Member Equity Madison Sanders, Member Equity [$50700+$4300] Observer Newspaper, LLC, Member Equity WLKT Partners, Drawing Madison Sanders, Drawing Observer Newspaper, LLC, Drawing	20740 55000 16520 - - -	- - - 20740 55000 16520

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(C) -- Prepare a statement of members’ equity for 20Y2.

Answer -

Marvel Media, LLC

Statement of Members' Equity For the Year Ended December 31, 20Y2

		WLKT Partners ($)	Madison Sanders ($)	Observer Newspaper, LLC ($)	Total ($)
I.	Balances, January 1, 20Y2	207400	43000	165200	415600
II.	Capital additions	49800	-	-	49800
III.	[I + II]	257200	43000	165200	465400
IV.	Net income for the year [refer answer-(A) for calculations]	114956	125662	87182	327800
V.	[III + IV]	372156	168662	252382	793200
VI.	Member withdrawals [refer answer-(B) for calculations]	(20740)	(55000)	(16520)	(92260)
Balances, December 31, 20Y2 [V - VI]		351416	113662	235862	700940

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(D) -- What are the advantages of an income-sharing agreement for the members of this LLC?

Answer -

Without an income-sharing agreement, each member would be credited with an equal proportion of the total earnings, or one-third each. Separate contributions can be acknowledged in the income-sharing formula.