Question

In the AD partnership, Allen's capital is $140,000 and Daniel's is $40,000 and they share income in a 3:1 ratio, respectively. They decide to admit David to the partnership. Each of the following questions is independent of the others.
Refer to the information provided above. Allen and Daniel agree that some of the inventory is obsolete. The inventory account is decreased before David is admitted. David invests $40,000 for a one-fifth interest. What are the capital balances of Allen and Daniel after David is admitted into the partnership?
Allen Daniel
A) 140000 40000
B) 125000 35000
C) 120000 36000
D) 137000 39000

A. Option A
B. Option B
C. Option C
D. Option D

Answer 1

Answer: Option (B) is correct.

Explanation:

Capital contribution by David = $40,000

Interest of David in partnership = $\frac{1}{5}$

Total capital of the partnership after the admission of new partner:

= $\frac{40,000}{\frac{1}{5} }$

= $200,000

Total capital of partnership before decreasing of obsolete inventory:

= $140,000 + $40,000 + $40,000

= $220,000

Therefore, value of decrease in inventory:

= Total capital before decrease - Total capital after decrease

= $220,000 - $200,000

= $20,000

The reduction in value of inventory will be distributed in old partners in ratio of 3:1

Hence,

Capital balance of Allen after admission of David:

= $140,000 - 20,000\times\frac{3}{4}$

= $125,000

Capital balance of Daniel after admission of David:

= $40,000 - 20,000\times\frac{1}{4}$

= $35,000