Question

Dividing LLC Income

Martin Farley and Ashley Clark formed a limited liability company with an operating agreement that provided a salary allowance of $65,000 and $52,000 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.

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

Schedule of Division of Net Income
	Farley	Clark	Total
Salary allowance	$	$	$
Remaining income
Net income	$	$	$

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.

(1)
(2)

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?

If the net income of the LLC were less than the sum of the salary allowances, ______ 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 ______ , according to the______ratio.

Answer 1

Part A

Schedule of division of income

	Farley	clark	total
Salary allowance	65000	52000	117000
Remaining income	23250	7750	31000
Net income	$88250	$59750	$148000

Remaining income= net income- salary allowance= 148000-117000 = 31000

Farley = 31000*3/4= 23250

Clark= 31000*1/4 = 7750

Part B

Revenue and expenses

No.	General journal	debit	credit
1	income summary	148000
	Martin Farley, member equity		88250
	Ashley clark, member equity		59750

Drawings

No.	General journal	debit	credit
2.	Martin Farley, member equity	65000
	Ashley clark, member equity	52000
	Martin Farley, Drawing		65000
	Ashley clark, Drawing		52000

Part C

Both members would be still credited

allocates to each partner as a deduction according to the income-sharing ratio