91Ó°ÊÓ

Ellis, Roane, and Clausen are members of City Signs, LLC, sharing income and losses in the ratio of \(2: 2: 1\), respectively. The members decide to liquidate the limited liability corporation (LLC). The members' equity prior to liquidation and asset realization on March 1, 2006, are: \begin{tabular}{lr} Ellis & \(\$ 28,000\) \\ Roane & 45,000 \\ Clausen & 12,000 \\ Total & \(\$ 85,000\) \\ \hline \hline \end{tabular} In winding up operations during the month of March, noncash assets with a book value of \(\$ 125,000\) are sold for \(\$ 96,000\), and liabilities of \(\$ 44,000\) are satisfied. Prior to realization, City Signs has a cash balance of \(\$ 4,000\). a. Prepare a statement of LLC liquidation. b. Provide the journal entry for the final cash distribution to members.

Step by step solution

01

Calculate Gain or Loss on Asset Sale

The noncash assets were sold for \(\\( 96,000\) but had a book value of \(\\) 125,000\). This results in a loss of \(\$ 29,000\) from the sale of these assets. This loss will affect the members' capital accounts according to their income and loss sharing ratio.

02

Distribute the Loss Among Members

The income and loss sharing ratio is \(2:2:1\) for Ellis, Roane, and Clausen, respectively. - Ellis and Roane each bear \(2/5\) of the \(\\( 29,000\) loss, which amounts to \(\\) 11,600\).- Clausen bears \(1/5\) of the loss, which amounts to \(\$ 5,800\). Subtract these amounts from each member's equity balance.

03

Update Members' Equity Balances

Adjust the members' equity balances by the loss:- Ellis' equity: \(\\( 28,000 - \\) 11,600 = \\( 16,400\)- Roane's equity: \(\\) 45,000 - \\( 11,600 = \\) 33,400\)- Clausen's equity: \(\\( 12,000 - \\) 5,800 = \$ 6,200\)

04

Calculate Total Cash Available for Distribution

City Signs has an initial cash balance of \(\\( 4,000\). Add the proceeds from the asset sale, \(\\) 96,000\), and subtract the liabilities of \(\\( 44,000\) that need to be paid off:\[\\) 4,000 + \\( 96,000 - \\) 44,000 = \$ 56,000\] This is the total cash available for final distribution.

05

Final Cash Distribution to Members

The total cash available (\(\\( 56,000\)) should be distributed in proportion to their adjusted equity balances:- Ellis receives \(\frac{16,400}{56,000} \times 56,000 = \\) 16,400\)- Roane receives \(\frac{33,400}{56,000} \times 56,000 = \\( 33,400\)- Clausen receives \(\frac{6,200}{56,000} \times 56,000 = \\) 6,200\)

06

Record Journal Entry for Cash Distribution

The journal entry for the final cash distribution involves debiting each member's capital account and crediting the cash account:- Debit Ellis' Capital: \(\\( 16,400\)- Debit Roane's Capital: \(\\) 33,400\)- Debit Clausen's Capital: \(\\( 6,200\)- Credit Cash: \(\\) 56,000\)

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Statement of Liquidation

When a Limited Liability Corporation (LLC) decides to wind up its operations, it goes through a process known as liquidation. Part of this process includes creating a statement of liquidation. This statement is crucial.
The statement of liquidation details all pertinent information regarding the company's assets, liabilities, and members' equity as the business dissolves.

• It provides a record of the company's financial standing before liquidation begins.
• Subsequently, it is updated to reflect any transactions and adjustments made during the liquidation process.
• Finally, it shows the distribution of any remaining assets to the members.

In the example provided, the statement would reflect initial equity positions, the sale of noncash assets for less than their book value, and final cash distribution after paying off all liabilities. This offers transparency and clarity to all members about the financial outcomes of the liquidation process.

Journal Entry

Once the LLC is in the final stages of liquidation, a journal entry records the last transactions, especially the distribution of cash to members. A journal entry helps in ensuring that all financial activities are recorded accurately in the accounting records.
Here’s how to create the journal entry for the final distribution:

• First, debit each member's capital account, reducing it to zero as cash is distributed to them based on their adjusted equity.
• Second, credit the cash account to reflect outgoing cash.

For City Signs, LLC:

• Ellis’ Capital: Debit $16,400.
• Roane’s Capital: Debit $33,400.
• Clausen’s Capital: Debit $6,200.
• Cash: Credit $56,000.

Thus, this entry captures the final cash movements and displays the conclusion of all financial obligations to the members.

Members' Equity

Members' equity is the value of the members' ownership in the LLC. It includes the capital contributions made by each member, along with accumulated profits and reduced by any losses or withdrawals. Prior to liquidation, it shows what each member would be entitled to if the LLC were liquidated at that moment.

During liquidation, members' equity accounts are adjusted to reflect any loss from asset sales and other final accounting measures.

• Initially, City Signs, LLC's members' equity stood as follows: Ellis ($28,000), Roane ($45,000), and Clausen ($12,000).
• After the asset sale resulted in a loss, these balances needed to be adjusted according to their income and loss sharing ratio, which altered each member's final entitlement.

Ultimately, accurate adjustments to members' equity ensure fair and equitable distribution of the LLC's remaining assets.

Income and Loss Sharing Ratio

The income and loss sharing ratio is a predetermined agreement among LLC members about how they would share profits and bear the losses. This ratio is crucial during liquidation as it influences how losses from asset sales are allocated to each member's equity account.

For City Signs, LLC, the agreed ratio is 2:2:1 for Ellis, Roane, and Clausen, respectively.

• This means that each partner experiences the impact of the LLC's profit or loss based on this ratio.
• In our example, the loss of $29,000 from asset liquidation is divided according to this ratio, with Ellis and Roane sharing a greater burden than Clausen.

Understanding and applying the income and loss sharing ratio ensures that each member is treated fairly, according to prior agreements. This clarity is essential for maintaining trust and fairness during the challenging process of liquidation.