When the remaining partners adjust their capital contributions in their new profit sharing ratio after the retirement or death of a partner, the sum of balances in the capitals of continuing partners..............

Treated as the total capital of the firm, unless specified otherwise

The correct answer is option 3- Treated as the total capital of the firm, unless specified otherwise.

At the time of retirement or death of a partner, the remaining partners may decide to adjust their capital contributions in their profit sharing ratio. In such a situation, the sum of balances in the capitals of continuing partners may be treated as the total capital of the new firm, unless specified otherwise. Then, to ascertain the new capital of the continuing partners, the total capital of the firm is divided amongst the remaining partners as per the new profit sharing ratio, and the excess or deficiency of capital in the individual capital account’s may be worked out. Such excess or shortage shall be adjusted by withdrawal of contribution in cash, as the case may be, for which the following journal entries will be recorded.

(i) For excess capital withdrawn by the partner:
Partners’ Capital A/c
      To Cash / Bank A/c Dr.

(ii) For amount of capital to be brought in by the partner:
Cash / Bank A/c
      To Partners’ Capital A/c