Marvel Media, LLC, has three members: WLKT Partners, Madison Sanders, and Observer Newspaper, LLC. On January 1, 2014, the three members had equity

Marvel Media, LLC, has three members: WLKT Partners, Madison Sanders, and Observer Newspaper, LLC. On January 1, 2014, the three members had equity of $200,000, $40,000, and $160,000, respectively. WLKT Partners contributed an additional $50,000 to Marvel Media, LLC, on June 1, 2014. Madison Sanders received an annual salary allowance of $55,000 during 2014. 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 Marvel Media, LLC, for 2014 was $360,000. Amounts equal to the salary and interest allowances were withdrawn by the members.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 2014.
d. What are the advantages of an income-sharing agreement for the members of this LLC?


Answer:


























































a.
WLKT
Partners
Madison
Sanders
Observer
Newspaper,
LLC Total
Salary allowance……………… $ 55,000 $ 55,000
Interest allowance…………… $ 20,0001 4,000 2 $16,0003 40,000
Remaining income (4:3:3)… 106,000 79,500 79,500 265,000
Net income…………………… $126,000 $138,500 $95,500 $360,000
1 10% × $200,000
2 10% × $40,000
3 10% × $160,000
b. 2014
Dec. 31 Income Summary 360,000
WLKT Partners, Member Equity 126,000
Madison Sanders, Member Equity 138,500
Observer Newspaper, LLC,
Member Equity 95,500
2014
Dec. 31 WLKT Partners, Member Equity 20,000
Madison Sanders, Member Equity* 59,000
Observer Newspaper, LLC,
Member Equity 16,000
WLKT Partners, Drawing 20,000
Madison Sanders, Drawing 59,000
Observer Newspaper, LLC,
Drawing 16,000

* $55,000 + $4,000
c. MARVEL MEDIA, LLC
Statement of Members’ Equity
For the Year Ended December 31, 2014
WLKT
Partners
Madison
Sanders
Observer
Newspaper,
LLC Total
Members’ equity,
January 1, 2014 $200,000 $ 40,000 $160,000 $400,000
Additional investment
during the year 50,000 50,000
$250,000 $ 40,000 $160,000 $450,000
Net income for the year 126,000 138,500 95,500 360,000
$376,000 $178,500 $255,500 $810,000
Withdrawals during
the year 20,000 59,000 16,000 95,000
Members’ equity,
December 31, 2014 $356,000 $119,500 $239,500 $715,000


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 provide different capital and effort to the LLC. WLKT is a large contributor of capital (funds), while Madison Sanders 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 Sanders. Any remaining income is credited to capital according to a negotiated allocation, which in this case is not an equal amount to each member.