91Ó°ÊÓ

Gilley, Hughes, and Moussa 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 company (LLC). The members' equity prior to liquidation and asset realization on March 1, 2008, are as follows: \begin{tabular}{lr} Gilley & \(\$ 19,000\) \\ Hughes & 54,000 \\ Moussa & 32,000 \\ Total & \(\$ 105,000\) \\ \hline \end{tabular} In winding up operations during the month of March, noncash assets with a book value of \(\$ 126,000\) are sold for \(\$ 146,000\), and liabilities of \(\$ 35,000\) are satisfied. Prior to realization, City Signs has a cash balance of \(\$ 14,000\). 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 Total Cash after Liquidation

First, we need to determine the total cash available after selling the noncash assets and satisfying the liabilities. The noncash assets had a book value of \(\\( 126,000\) and were sold for \(\\) 146,000\), generating a gain of \(\\( 20,000\). Before realization, there was already \(\\) 14,000\) in cash. Adding the proceeds from asset sales to the existing cash gives \(14,000 + 146,000 = \\( 160,000\). After paying off liabilities of \(\\) 35,000\), the remaining cash is \(160,000 - 35,000 = \$ 125,000\).

02

Record Gain on Asset Sale

The gain of \(\\( 20,000\) from selling noncash assets is distributed according to the income and loss sharing ratio (2:2:1). Thus, Gilley and Hughes each get \((2/5) \times 20,000 = \\) 8,000\) and Moussa gets \((1/5) \times 20,000 = \$ 4,000\). Add these amounts to their initial equity balances.

03

Adjust Members' Equity

Adjust the members' equity based on the gain distribution: \[\begin{align*} \text{Gilley}: & \ 19,000 + 8,000 = \\( 27,000 \ \text{Hughes}: & \ 54,000 + 8,000 = \\) 62,000 \ \text{Moussa}: & \ 32,000 + 4,000 = \$ 36,000 \ \end{align*}\]

04

Total Equity Matches Available Cash

Verify that the total equity \(27,000 + 62,000 + 36,000 = \\( 125,000\) matches the remaining cash of \\) 125,000\. Since it matches, the cash can be distributed based on adjusted equity amounts.

05

Prepare Journal Entry for Cash Distribution

The cash distribution follows the adjusted equity: \[ \begin{align*} \text{Debit: Members' Capital Equity (Gilley)} & \quad \\( 27,000 \ \text{Debit: Members' Capital Equity (Hughes)} & \quad \\) 62,000 \ \text{Debit: Members' Capital Equity (Moussa)} & \quad \\( 36,000 \ \text{Credit: Cash } & \quad \\) 125,000 \ \end{align*}\] This journal entry closes out the capital accounts to zero after distributing all cash.

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Key Concepts

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

Income and Loss Sharing Ratio

In a Limited Liability Company (LLC) like City Signs, income and losses are often shared among members according to a predefined ratio. This ratio determines how profits and losses are divided among the members of the LLC. In our case, the income and loss sharing ratio is set at 2:2:1 for Gilley, Hughes, and Moussa, respectively. This means:

• Gilley receives two-fifths of any profit or bears two-fifths of any loss.
• Hughes shares two-fifths as well, identical to Gilley’s portion.
• Moussa takes on one-fifth of the income or loss, which is smaller compared to the others.

Understanding this concept is crucial when it comes to the distribution of liquidation gains, as each member's share of profits is directly attributed based on these ratios. In situations involving liquidation of assets like in our exercise, the gain from sold assets needs allocation proportionally according to these predetermined percentages. This ensures a fair distribution that respects the original agreement among LLC members.

Journal Entry

In accounting, a journal entry is a record of a financial transaction in a company's bookkeeping system. For the liquidation of an LLC, journal entries are crucial to tracking the movement of funds and the settling of accounts. In our scenario:

• The realization of noncash assets impacts the LLC’s cash account and must be recorded.
• Once liabilities are settled, the remaining cash is ready for distribution to members according to their adjusted capital balances.

The final journal entry in the liquidation process reflects the distribution of cash to the LLC members. It involves debits to the members' capital equity accounts and a credit to the cash account:

• Debit Gilley’s Equity: \(27,000\)
• Debit Hughes’s Equity: \(62,000\)
• Debit Moussa’s Equity: \(36,000\)
• Credit Cash: \(125,000\)

This entry effectively zeros out the members' capital accounts, having distributed all available cash according to the updated equity sharing.

Members' Equity

Members' equity in an LLC is essentially the net value held by each member, based on their contributions and the accumulated earnings or losses. Prior to liquidation, City Signs LLC members had differing equity levels:

• Gilley: \\(19,000
• Hughes: \\)54,000
• Moussa: \\(32,000

During liquidation, the gain from selling noncash assets needs allocation based on the agreed income and loss sharing ratio. This allocation results in an adjustment of the members' equity as follows:

• Gilley’s equity is increased by \\)8,000, totaling \\(27,000.
• Hughes receives an additional \\)8,000, summing up to \\(62,000.
• Moussa’s equity rises by \\)4,000, reaching \$36,000.

When the equity matches the available cash, it ensures proper liquidation as funds can be distributed in line with these final values. This alignment is crucial for a smooth winding up of the LLC's affairs.

Noncash Asset Realization

The realization of noncash assets refers to converting them into cash, usually by selling them. For City Signs LLC, noncash assets originally valued at \\(126,000 were realized by selling them for \\)146,000, resulting in a gain of \$20,000. This process involves:

• Identifying and assessing the value of noncash assets.
• Selling the assets for a fair market price.
• Recording the gain or loss resulting from the sale.

The gain from these noncash assets is then distributed among the members based on the specified income and loss sharing ratio, impacting their capital accounts. Noncash asset realization is a vital step in liquidating an LLC, providing the necessary cash to pay off liabilities and ultimately distribute the remaining funds to the entities involved. The accurate conversion of noncash assets underscores effective liquidation management, steering the distribution process through correct financial record-keeping.