Rex Baker and Ty Farney are forming a partnership to which Baker will devote one-half time and Farney will devote…

Rex Baker and Ty Farney are forming a partnership to which Baker will devote one-half 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 $21,000 for Baker and $31,500 for Farney; (b) in proportion to the time devoted to the business; (c) a salary allowance of $3,000 per month to Farney and the balance in accordance with the ratio of their initial capital investments; or (d) a salary allowance of $3,000 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, $18,000 net loss; year 2, $45,000 net income; and year 3, $75,000 net income.