EX 12-8 Dividing LLC net income and statement of members’ equity
Macro Media, LLC, has three members: WLKT Partners, Amanda Nelson, and Daily Sentinel Newspaper, LLC. On January 1, 2012, the three members had equity of $250,000, $50,000, and $140,000, respectively. WLKT Partners contributed an additional $50,000 to Macro Media, LLC, on June 1, 2012. Amanda Nelson received an annual salary allowance of $88,700 during 2012. The members’ equity accounts are also credited with 10% interest on each member’s January 1 capital balance. Any remaining income is to be shared in the ratio of 4:3:3 among the three members. The net income for Macro Media, LLC, for 2012 was $720,000. Amounts equal to the salary and interest allowances were withdrawn by the members.
a. Determine the division of income among the three members.
b. Prepare the journal entry to close the net income and withdrawals to the individual member equity accounts.
c. Prepare a statement of members’ equity for 2012.
d. What are the advantages of an income-sharing agreement for the members of this LLC?
Answer:
a.
Daily Sentinel WLKT Amanda Newspaper, Partners Nelson LLC Total
Salary allowance.................. $ 88,700 $ 88,700 Interest allowance ............... $ 25,0001 5,0002 $ 14,0003 44,000 Remaining income (4:3:3)... 234,920 176,190 176,190 587,300 Net income........................... $259,920 $269,890 $190,190 $720,000 110% × $250,000 210% × $50,000 310% × $140,000
b. Dec. 31, 2012 Income Summary...................................... 720,000 WLKT Partners, Member Equity......... 259,920 Amanda Nelson, Member Equity........ 269,890 Daily Sentinel Newspaper, LLC, Member Equity............................... 190,190
Dec. 31, 2012 WLKT Partners, Member Equity.............. 25,000 Amanda Nelson, Member Equity............. 93,700* Daily Sentinel Newspaper, LLC, Member Equity..................................... 14,000 WLKT Partners, Drawing .................... 25,000 Amanda Nelson, Drawing................... 93,700 Daily Sentinel Newspaper, LLC, Drawing........................................... 14,000
*$88,700 + $5,000
c. MACRO MEDIA, LLC Statement of Members’ Equity For the Year Ended December 31, 2012 Daily Sentinel WLKT Amanda Newspaper, Partners Nelson LLC Total Members’ equity, January 1, 2012 $250,000 $ 50,000 $140,000 $ 440,000 Additional investment during the year ..................................... 50,000 50,000 $300,000 $ 50,000 $140,000 $ 490,000 Net income for the year................... 259,920 269,890 190,190 720,000 $559,920 $319,890 $330,190 $1,210,000 Withdrawals during the year........... 25,000 93,700 14,000 132,700 Members’ equity, December 31, 2012..................... $534,920 $226,190 $316,190 $1,077,300
d. An income-sharing agreement provides flexibility and fairness. Without an income-sharing agreement, each member would be credited with an equal proportion of the total earnings, or one-third each. However, the members have very different contributions to the LLC. WLKT is a large contributor of capital (funds), while Amanda Nelson is providing ongoing effort and expertise. These separate contributions should be acknowledged in the income-sharing formula. Thus, the agreement credits member equity for both interest on capital and a salary allowance for Nelson. Any remaining income is credited to capital according to a negotiated allocation, which in this case is not equal.
a. Determine the division of income among the three members.
b. Prepare the journal entry to close the net income and withdrawals to the individual member equity accounts.
c. Prepare a statement of members’ equity for 2012.
d. What are the advantages of an income-sharing agreement for the members of this LLC?
Answer:
a.
Daily Sentinel WLKT Amanda Newspaper, Partners Nelson LLC Total
Salary allowance.................. $ 88,700 $ 88,700 Interest allowance ............... $ 25,0001 5,0002 $ 14,0003 44,000 Remaining income (4:3:3)... 234,920 176,190 176,190 587,300 Net income........................... $259,920 $269,890 $190,190 $720,000 110% × $250,000 210% × $50,000 310% × $140,000
b. Dec. 31, 2012 Income Summary...................................... 720,000 WLKT Partners, Member Equity......... 259,920 Amanda Nelson, Member Equity........ 269,890 Daily Sentinel Newspaper, LLC, Member Equity............................... 190,190
Dec. 31, 2012 WLKT Partners, Member Equity.............. 25,000 Amanda Nelson, Member Equity............. 93,700* Daily Sentinel Newspaper, LLC, Member Equity..................................... 14,000 WLKT Partners, Drawing .................... 25,000 Amanda Nelson, Drawing................... 93,700 Daily Sentinel Newspaper, LLC, Drawing........................................... 14,000
*$88,700 + $5,000
c. MACRO MEDIA, LLC Statement of Members’ Equity For the Year Ended December 31, 2012 Daily Sentinel WLKT Amanda Newspaper, Partners Nelson LLC Total Members’ equity, January 1, 2012 $250,000 $ 50,000 $140,000 $ 440,000 Additional investment during the year ..................................... 50,000 50,000 $300,000 $ 50,000 $140,000 $ 490,000 Net income for the year................... 259,920 269,890 190,190 720,000 $559,920 $319,890 $330,190 $1,210,000 Withdrawals during the year........... 25,000 93,700 14,000 132,700 Members’ equity, December 31, 2012..................... $534,920 $226,190 $316,190 $1,077,300
d. An income-sharing agreement provides flexibility and fairness. Without an income-sharing agreement, each member would be credited with an equal proportion of the total earnings, or one-third each. However, the members have very different contributions to the LLC. WLKT is a large contributor of capital (funds), while Amanda Nelson is providing ongoing effort and expertise. These separate contributions should be acknowledged in the income-sharing formula. Thus, the agreement credits member equity for both interest on capital and a salary allowance for Nelson. Any remaining income is credited to capital according to a negotiated allocation, which in this case is not equal.
