Question

Dividing LLC Income

Martin Farley and Ashley Clark formed a limited liability company with an operating agreement that provided a salary allowance of $60,000 and $48,000 to each member, respectively. In addition, the operating agreement specified an income-sharing ratio of 3:5. 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

Answer - a

Schedule of Division of Net Income

	Farley	Clark	Total
Salary allowance	60000	48000	108000
Remaining income	15000	25000	40000
Net Income	75000	73000	148000

Working note:

Remaining income = Net income - Salary Allowance

= 148000 - 108000 = 40000

Farley ratio = 40000 * 3 / 8 = 15000

Clark ratio = 40000 * 5 / 8 = 25000

Answer - b

	Account Title & Explanation	Debit	Credit
1	Revenues	668000
	Expenses		520000
	Farley, Equity		75000
	Clark, Equity		73000
	(to close revenue and expenses)
2	Farley Equity	60000
	Clark Equity	48000
	Farley, Drawings		60000
	Clark, Drawings		48000
	(to close drawing account)

Answer - 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. The difference between the net income and total salary allowances would be allocated to each partner as deduction according to the income sharing ratio.

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