Martin Farley and Ashley Clark formed a limited liability company with an operat
ID: 2521893 • Letter: M
Question
Martin Farley and Ashley Clark formed a limited liability company with an operating agreement that provided a salary allowance of $61,000 and $49000 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 $52,000,for a net income of s148,000.
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?
Explanation / Answer
Answer to Question:
A) Net Income= $ 148,000
Martin Ashley Total
$ $ $
Salary Allowance 61,000 49,000 110,000
Remaining income 22,800 15,200 38,000
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Net Income 83,800 64,200 148,000
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Martin’s Remaining Income: ($148,000-$110,000)X3/5 = $ 22,800
Ashley’s Remaining Income: ($148,000-$110,000)X2/5 = $ 15,200
B) Journal Entries
Date
Description
Closing Entry
Debit
$
Credit
$
Income Summary
Martin Farley Capital
Ashley Clark Capital
148,000
83,800
64,200
Revenue
Income Summary
To close the revenue account to income summary
668,000
668,000
Income Summary
Expenses
To close the expenses accounts to income summary
52,000
52,000
Martin Farley Capital
Ashley Clark Capital
Martin Farley withdrawals
Ashley Clark withdrawals
To close withdrawals account
61,000
49,000
61,000
49,000
C) If the net income of the LLC were less than the sum of the salary allowances, both members would still be credited with their salary allowances. From this amount, each partner would deduct his or her share of the excess of the total salary allowance over the net income. Thus, the difference between the net income and total salary allowances would be allocated to each partner as a deduction, according to the income-sharing ratio.
Date
Description
Closing Entry
Debit
$
Credit
$
Income Summary
Martin Farley Capital
Ashley Clark Capital
148,000
83,800
64,200
Revenue
Income Summary
To close the revenue account to income summary
668,000
668,000
Income Summary
Expenses
To close the expenses accounts to income summary
52,000
52,000
Martin Farley Capital
Ashley Clark Capital
Martin Farley withdrawals
Ashley Clark withdrawals
To close withdrawals account
61,000
49,000
61,000
49,000
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