Question

Dividing LLC Income

Martin Farley and Ashley Clark formed a limited liability company with an operating agreement that provided a salary allowance of $68,000 and $54,000 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

Answers

• [a]

	Farley	Clark	Total
Salary allowance	$68,000	$54,000	$122,000
Remaining income	$15,600	$10,400	$26,000
Net income	$83,600	$64,400	$148,000

• [b]

	Accounts title	Debit	Credit
1	Revenues	$668,000
	Expenses		$520,000
	Farley, Equity		$83,600
	Clark, Equity		$64,400
	(revenue and expenses closed)
2	Farley, Equity	$68,000
	Clark, Equity	$54,000
	Farley, Withdrawals drawings		$68,000
	Clark, withdrawals drawings		$54,000
	(to close drawing accounts)

• [c]

If the net income of the LLC were less than the sum of the salary allowances,  ALL 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 NET LOSS or DEDUCTION , according to the PROFIT SHARING RATIO  ratio.