Mel and Dav created a partnership to own and operate a health-food store.

The partnership agreement provided that

Mel receive a salary of $10,000 and Dav a salary of $5,000 to recognize their relative time spent in operating the store.
Remaining profits and losses were divided 60:40 to Mel and Dav, respectively. Income of $13,000 for 2016, the first
year of operations, was allocated $8,800 to Mel and $4,200 to Dav.
On January 1, 2017, the partnership agreement was changed to reflect the fact that Dav could no longer devote any
time to the store’s operations. The new agreement allows Mel a salary of $18,000, and the remaining profits and losses
are divided equally. In 2017, an error was discovered such that the 2016 reported income was understated by $4,000.
The partnership income of $25,000 for 2017 included this $4,000 related to 2016.

Mel Dav
Income Deviden 2017
(25.000 - 4.000) 21,000
Salary to Mel -18,000 18,000
Reminder To Deviden 3,000
Deviden Equally -3,000 1,500 1,500
0

2016 Income Understatement 4,000

Deviden in the 2016 40:60 ratio 4,000 2,400 1,600
0 21,900 3,100
eement provided that
in operating the store.
0 for 2016, the first

o longer devote any

aining profits and losses
nderstated by $4,000.