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How long has the LLC been in existance.
Are you keeping "retained earnings" separate from members capital interests.
Has the LLC made any distributions.
Because this is a partnership there is no stock or retained earnings only members capital accounts. All increases and decreases run thru the same account(s) The journal entry is easy, the explanation is difficult.
Debit Distributions $10,000
Credit Cash $10,000.
I have attached a spreadsheet that generally discribes what happened.
The outgoing member should receive his/her portion of the income/loss thru the date of redemption. This is normally done using total annual income times % ownership interest times number of days as member divided by 365. $20,000 * 40% * 274/365 = $6005.
It is probably easier for you to review the spreadsheet and then ask questions vs me trying to explain the entire spreadsheet.
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Normally the distribution account, contribution account (if any) and retained earnings account are rolled into the partners capital accounts at the beginning of the following year.
For the K-1 information, there are a variety of ways to handle the reclass. 1. Captial contribution by outgoing, distribution to remaining. 2. Other increases on M-2 for outgoing and Other decreases for remaining. Description outgoing other info on K-1 distribution in excess of basis. Other info remaining allocation of dist in excess of basis to outgoing. I'd suggest the second to put the outgoing on notice of the gain situation.
The loan amount are included in basis for purposes of utilizing income/loss. They are not part of his capital acccount. His K-1 will have $-0- debt allocated. His personal return is where he will determine his net gain or loss based on whatever he deducted there.
You may want to consider talking to a tax professional in your area where you can provide the full details to be sure all aspects of the transaction are handled correctly.