Zachery Neel and Lauren Tate formed a limited liability company with an operating agreement that provided a salary allowance of $45,000 and $30,000

Zachery Neel and Lauren Tate formed a limited liability company with an operating agreement that provided a salary allowance of $45,000 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.

a. Determine the division of $112,000 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: $112,000
Neel Tate Total
Salary allowance………………… $45,000 $30,000 $ 75,000
Remaining income……………… 22,200 14,800 37,000
Net income………………………… $67,200 $44,800 $112,000
Neel’s remaining income: ($112,000 – $75,000) × 3/5
Tate’s remaining income: ($112,000 – $75,000) × 2/5

b. (1)
Income Summary 112,000
Zachery Neel, Member Equity 67,200
Lauren Tate, Member Equity 44,800
(2)
 Zachery Neel, Member Equity 45,000
Lauren Tate, Member Equity 30,000
Zachery Neel, Drawing 45,000
Lauren Tate, Drawing 30,000

Note: The reduction in members’ equity from withdrawals would be disclosed on the statement of members’ equity.


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.