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 3:2. 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.

a. Determine the division of $148,000 net income for the year.
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.
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?

Answer 1

Martin Farley and Ashley Clark Share of Profits

Martin'S share of profits $148,000 0.60 $88,800.00

Ashley's share of profits $148,000 0.40 $59,200.00

Journal Entries

CR Sales $668,000

DR Receivables/Cash $668,000

CR Trade payable/Cash $520,000

DR Expenses $520,000

Drawings

DR Partners' salaries $222,000

CR Drawings $222,000

DR Profit or loss(share of profit) $148,000

CR Drawings $148,000

DR Drawings $222,000

CR Partners' bank accounts $222,000

Step-by-step explanation:

If net profit is below salaries. it would be fair to share the profits using the salaries amounts as the ratio for sharing such profit amounts so as to achieve fairness and equity