Reference no: EM13170951

Rex Baker and Ty Farney are forming a partnership to which Baker will devote three-fourth time and Farney will devote full time. They have discussed the following alternative plans for sharing income and loss:

(a) in the ratio of their initial capital investments, which they have agreed will be $32,000 for Baker and $48,000 for Farney;

(b) in proportion to the time devoted to the business;

(c) a salary allowance of $2,250 per month to Farney and the balance in accordance with the ratio of their initial capital investments; or

(d) a salary allowance of $2,250 per month to Farney, 10% interest on their initial capital investments, and the balance shared equally.

The partners expect the business to perform as follows: year 1, $14,000 net loss; year 2, $35,000 net income; and year 3, $58,333 net income.

Year 1
Income (Loss)
-----------------------

Sharing Plan Baker Farney
(a) $ $
(b) $ $
(c) $ $
(d) $ $
--------------------------------------------------------------------------------
Year 2
Income (Loss)
--------------------------------------------------------------------------------
Sharing Plan Baker Farney
(a) $ $
(b) $ $
(c) $ $
(d) $ $
--------------------------------------------------------------------------------
Year 3
Income (Loss)
--------------------------------------------------------------------------------
Sharing Plan Baker Farney
(a) $ $
(b) $ $
(c) $ $
(d) $ $