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 $200,000, $40,000, and $160,000, respectively. WLKT Partners contributed an additional $50,000 to Marvel Media, LLC, on June 1, 20Y2. Madison Sanders received an annual salary allowance of $55,000 during 2012. 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 4:33 among the three members. The revenues, expenses, and net income for Marvel Media, LLC, for 20Y2 were $1,260,000, $900,000, and $360,000, respectively. Amounts equal to the salary and interest allowances were withdrawn by the members. a. Determine the division of income among the three members. Answer b. Prepare the journal entry to close the revenues, expenses, and withdrawals to the individual member equity accounts. 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.

Observer Newspaper, LLC Total Salary allowance. Interest allowance... Remaining income (4:3:3)...... Net income. WLKT Madison Partners Sanders $ 55,000 $ 55,000 $ 20,000 1 4.000 2 106,000 79,500 $126,000 $138,500 $16.000 3 79,500 $95,500 40,000 265,000 $360,000 1 10% < $200,000 2 10% $40,000 3 10% < $160,000

b.   

20Y2

Dec. 31 Revenues 1,260,000

Expenses 900,000

WLKT Partners, Member Equity 126,000

Madison Sanders, Member Equity 138,500

Observer Newspaper, LLC,

Member Equity 95,500

20Y2

Dec. 31 WLKT Partners, Member Equity 20,000

Madison Sanders, Member Equity* 59,000

Observer Newspaper, LLC,

Member Equity 16,000

WLKT Partners, Drawing 20,000

Madison Sanders, Drawing 59,000

Observer Newspaper, LLC,

Drawing 16,000

* $55,000 + $4,000

c.

MARVEL MEDIA, LLC

Statement of Members’ Equity

For the Year Ended December 31, 20Y2

Observer

WLKT Madison Newspaper, Total LLC
Partners Sanders LLC Capital   

Balances,

January 1, 20Y2 $200,000 $ 40,000 $160,000 $400,000

Capital additions 50,000 50,000

Net income for the year 126,000 138,500 95,500 360,000

Member withdrawals (20,000) (59,000) (16,000) (95,000)

Balances,

December 31, 20Y2 $356,000 $119,500 $239,500 $715,000

d.   

An income-sharing agreement provides flexibility and fairness. Without an income-sharing agreement, each member would be credited with an equal proportion of the total earnings, or one-third each. However, the members provide different capital and effort to the LLC. WLKT is a large contributor of capital (funds), while Madison Sanders is providing ongoing effort and expertise. These separate contributions should be acknowledged in the income-sharing formula. Thus, the agreement credits member equity for both interest on capital and a salary allowance for Sanders. Any remaining income is credited to capital according to a negotiated allocation, which in this case is not an equal amount to each member.