Martin Farley and Ashley Clark formed a limited liability company with an operating agreement that provided a salary allowance of $59,000 and $47,000 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.
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 and Explanation:

The computation is shown below:

a. The determination of the division net income for the year is shown below:

Particulars             Martin Farley            Ashley Clark             Total

Salary allowance  $59,000                   $47,000                     $106,000

Remaining income  $31,500                 $10,500                       $42,000

Net income            $90,500                   $57,500                     $148,000    

The remaining income is come from

= $148,000 - $106,000

= $42,000

And the $42,000 is distributed in 3:1 sharing ratio

b. The closing entries are as follows

1. Income Summary  $148,000

      Martin Farley Capital    $90,500

      Ashley Clark Capital     $57,500

(Being the capital is closed)

Revenue  $668,000

      Income Summary  $668,000

(Being the revenue account is closed)

Income Summary  $520,000

      Expenses  $520,000

(Being the expense account is closed)

2. Martin Farley Capital  $59,000

Ashley Clark Capital  $49,000

       Martin Farley withdrawals  $59,000

       Ashley Clark withdrawals  $49,000

(Being the closing of withdrawals account  is recorded)

c. If the LLC's net income is less than the amount of the salary allowances, all members will still have their salary allowances paid. Each partner will subtract its share of the excess of the overall salary allowance over net income . Therefore, according to the profit-sharing ratio, the difference between the net benefit and the total salary allowances will be distributed to each partner as a deduction.

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