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Question(s) / Instruction(s):

The capital account balances for Donald & Hanes LLP on January 1, 2008, were as follows:

Donald, Capital     $200,000

Hanes, Capital      $100,000

Donald and Hanes shared net income and losses in the ratio of 3:2, respectively. The partners agreed to admit May to the partnership with a 35% interest in partnership capital and net income. May invested $100,000 cash and no goodwill was recognized.

Which of the following could be used as a basis to allocate profits among partners who are active in the management of the partnership?

1) Allocation of salaries.

2) The number of years with the partnership.

3) The amount of time each partner works.

4) The average capital invested.

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