Question

Martin Farley and Ashley Clark formed a limited liability company with an operating agreement that provided...

Martin Farley and Ashley Clark formed a limited liability company with an operating agreement that provided a salary allowance of $40,000 and $30,000 to each member, respectively. In addition, the operating agreement specified an income-sharing ratio of 3:2. 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. Note: The reduction in members’ equity from withdrawals would be disclosed on the statement of members’ equity.

Chart of Accounts Copied and Pasted Below

CHART OF ACCOUNTS
Farley and Clark
General Ledger
ASSETS
110 Cash
111 Petty Cash
112 Accounts Receivable
113 Allowance for Doubtful Accounts
114 Interest Receivable
115 Notes Receivable
116 Inventory
117 Office Supplies
118 Store Supplies
119 Prepaid Insurance
120 Land
123 Equipment
124 Accumulated Depreciation-Equipment
129 Asset Revaluations
133 Patent
LIABILITIES
210 Accounts Payable
211 Salaries Payable
213 Sales Tax Payable
214 Interest Payable
215 Notes Payable
EQUITY
310 Martin Farley, Member Equity
311 Martin Farley, Drawing
312 Ashley Clark, Member Equity
313 Ashley Clark, Drawing
REVENUE
410 Revenues
610 Interest Revenue
EXPENSES
510 Cost of Merchandise Sold
520 Salaries Expense
521 Advertising Expense
522 Depreciation Expense-Equipment
523 Delivery Expense
524 Repairs Expense
529 Expenses
531 Rent Expense
533 Insurance Expense
534 Office Supplies Expense
535 Store Supplies Expense
536 Credit Card Expense
537 Cash Short and Over
538 Bad Debt Expense
539 Miscellaneous Expense
710 Interest Expense

Homework Answers

Answer #1

As in question nothing is specified we have calculated the division of salary allowance and income distribution to both the partners:-

As per IRS, partner in LLC cannot receive any salary except the share of income. However, they can receive guaranteed payments for the services provided by them. So, any salary paid is merely the profir distribution.

So, profit distribution to them will be:-

Partners Name Martin Farley Ashley Clark
Salary Allowance 40,000 30,000
Profit distribution 46,800 31,200
Total Income 86,800 61,200

Also, the withdrawal by the partners will be reduced from the respective drwaing accounts. Journal entries for the same will be:-

Particulars Debit Credit
Martin Farley, Drawing Account 40,000
Ashley Clark, Drawing Account 30,000
Cash Account 70,000
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