EX 12-7 Dividing LLC income
Joshua Richards and Taylor Clark formed a limited liability company with an operating agreement that provided a salary allowance of $60,000 and $50,000 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.
a. Determine the division of $152,000 net income for the year.
b. Provide journal entries to close the (1) income summary and (2) drawing accounts for the two members.
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:
a. Net income: $152,000 Richards Clark Total Salary allowance...................................... $60,000 $50,000 $110,000 Remaining income................................... 25,200 16,800 42,000 Net income............................................... $85,200 $66,800 $152,000 Richards remaining income: ($152,000 – $110,000) × 3/5 Clark remaining income: ($152,000 – $110,000) × 2/5
b. (1)
Income Summary.......................................................... 152,000 Joshua Richards, Member Equity.......................... 85,200 Taylor Clark, Member Equity.................................. 66,800
(2) Joshua Richards, Member Equity............................... 60,000 Taylor Clark, Member Equity....................................... 50,000 Joshua Richards, Drawing..................................... 60,000 Taylor Clark, Drawing............................................. 50,000
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.
a. Determine the division of $152,000 net income for the year.
b. Provide journal entries to close the (1) income summary and (2) drawing accounts for the two members.
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:
a. Net income: $152,000 Richards Clark Total Salary allowance...................................... $60,000 $50,000 $110,000 Remaining income................................... 25,200 16,800 42,000 Net income............................................... $85,200 $66,800 $152,000 Richards remaining income: ($152,000 – $110,000) × 3/5 Clark remaining income: ($152,000 – $110,000) × 2/5
b. (1)
Income Summary.......................................................... 152,000 Joshua Richards, Member Equity.......................... 85,200 Taylor Clark, Member Equity.................................. 66,800
(2) Joshua Richards, Member Equity............................... 60,000 Taylor Clark, Member Equity....................................... 50,000 Joshua Richards, Drawing..................................... 60,000 Taylor Clark, Drawing............................................. 50,000
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.
