Martin Farley and Ashley Clark formed a limited liability company with an operat

Question

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

Explanation / Answer

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:-

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

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