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MequonCPA
MequonCPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2323
Experience:  CPA, Over 30 yrs experience w/individuals and small businesses. Masters in Tax.
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I need help with journal entries for an LLC issue. I am ...

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I need help with journal entries for an LLC issue. I am trying to figure out the accounting and partnership returns for a multi-member llc where one member was bought out by the llc in October of a Jan-Dec accounting cycle. 4 partners, 1000 shares of stock issued, original shares issued were 400/400/130/70 at $1/share, 1 member (400 shares) decided to leave, llc bought his shares for $10,000, shares then distributed to other members according to ownership portion. Accounting is cash basis.
Submitted: 6 years ago.
Category: Tax
Expert:  MequonCPA replied 6 years ago.
What was the balance in the departing member's capital account after allocation of income but before payment.
Customer: replied 6 years ago.
Reply to Steve's Post: The departing member paid $400 for his 400 shares of stock. No income has been paid to any member. Retained earnings for 2006 was ($1033) split according to shares. Departing member account is at ($413.20). The net profit for 2007 before this buyout is about $20,000.

No entries have been made to increase/decrease any capital accounts in 2007.

Let me know if you need additional info.

Thanks,

Jeff
Expert:  MequonCPA replied 6 years ago.

How long has the LLC been in existance.

Are you keeping "retained earnings" separate from members capital interests.

Has the LLC made any distributions.

Customer: replied 6 years ago.
Reply to Steve's Post: Started in July 2006. Retained earnings has its own account, it is negative $1033 (from 2006). No member capital accounts set up, all $1000 received for stock is in a common stock account on balance sheet. No other member capital was received by business. There are two small short term loans of $7722 & $4158 remaining from start up. No distributions have been made until this member left.

If this does not make sense or you need more let me know. I can email you a balance sheet and profit & loss if this would help you get me on the right track.

Let me know. Sorry I have made this so complicated. I appreciate your help.
Expert:  MequonCPA replied 6 years ago.

DearCustomer-

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.

-ABCD Total
Number of Units400400170301,000
Capital Contribution 400 400 170 30 1,000
2006 Inc/Loss (413) (413) (176) (31) (1,033)
12/31/2006 Balance (13) (13) (6) (1) (33)
Income 1/1 - 9/30 6,000 6,000 2,550 450 15,000
Capital Account at date of redemption 5,987 5,987 2,544 449 14,967
Distribution (10,000) (10,000)
Unadjusted Capital Accounts (4,013) 5,987 2,544 449 4,967
Allocated cap on ptnr withdrawal 4,013 (2,675) (1,137) (201) -
Adjusted Capital Accounts (0) 3,311 1,407 248 4,967
Income 10/1 - 12-31 - 3,333 1,417 250 5,000
Capital Account 12/31/07 (0) 6,645 2,824 498 9,967

Customer: replied 6 years ago.
That is an easy entry. Does the distributions account remain forever? Does it get adjusted at year end? Additional question is in adjusting capital accounts since member was paid more than what he had in his account. It looks like I just credit his account and debit the others accordingly, is that correct? Also, how will the partnership returns look to account for the departing members tax liability? Would it also include the portion of the short term loans that were his responsibility (40%) that were forgiven and taken on by the remaining members?

By the way, I am adding more funds to my account today so I can pay some extra for this detailed answer.
Expert:  MequonCPA replied 6 years ago.

DearCustomer-

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.

MequonCPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2323
Experience: CPA, Over 30 yrs experience w/individuals and small businesses. Masters in Tax.
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