Question

Martin Farley and Ashley Clark formed a limited liability company with an operating agreement that provided a salary allowance of $41,800 and $32,100 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.

Note: The reduction in members’ equity from withdrawals would be disclosed on the statement of members’ equity.

	Required:
A.	Determine the division of $148,000 net income for the year.
B.	On December 31, provide journal entries to close the (1) revenues and expenses and (2) drawing accounts for the two members. Refer to the Chart of Accounts for exact wording of account titles.
C.	If the net income was less than the sum of the salary allowances, how would income be divided between the two members of the LLC?

Answer 1

Part A

Schedule of division of income

	Farley	clark	total
Salary allowance	41800	32100	73900
Remaining income	55575	18525	74100
Net income	97375	50625	148000

Remaining income= net income- salary allowance= 148000-73900 = 74100

Farley = 74100*3/4= 55575

Clark= 74100*1/4 = 18525

Part B

Revenue and expenses

No.	General journal	debit	credit
1	income summary	148000
	Martin Farley, member equity		97375
	Ashley clark, member equity		50625

Drawings

No.	General journal	debit	credit
2.	Martin Farley, member equity	41800
	Ashley clark, member equity	32100
	Martin Farley, Drawing		41800
	Ashley clark, Drawing		32100

Part c

Both members would be still credited

allocates to each partner as a deduction according to the income-sharing ratio