Question

Dividing LLC Income

Martin Farley and Ashley Clark formed a limited liability company with an operating agreement that provided a salary allowance of $62,000 and $50,000 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)	Revenues
	Expenses
	Martin Farley, Member Equity
	Ashley Clark, Member Equity
(2)	Martin Farley, Member Equity
	Ashley Clark, Member Equity
	Martin Farley, Drawing
	Ashley Clark, Drawing

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

Solution a:

Schedule of division of net income
Particulars	Farley	Clark	Total
Salary allowance	$62,000.00	$50,000.00	$112,000.00
Remaining income	$27,000.00	$9,000.00	$36,000.00
Net Income	$89,000.00	$59,000.00	$148,000.00

Solution b:

Journal Entries
Event	Particulars	Debit	Credit
1	Revenue Dr	$668,000.00
	To Expenses		$520,000.00
	To Martin Farley, Member Equity		$89,000.00
	To Ashley Clark, Member Equity		$59,000.00
	(To close revenue and expenses)
2	Martin Farley, Member Equity Dr	$62,000.00
	Ashley Clark, Member Equity Dr	$50,000.00
	To Martin Farley, Drawing		$62,000.00
	To Ashley Clark, Drawing		$50,000.00
	(To close drawing account)

Solution 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.