Aman, Baman and Chaman are partners in a firm sharing profits in the ratio of 3:2:1. Daman is admitted into the firm for 1/4th share in profits, which he gets as 1/8th from Aman and 1/8th from Baman. Daman is to bring in cash equivalent to 1/4th of the total capital of the firm as his capital. The capitals of Aman, Baman and Chaman after all adjustments related to revaluation profit, goodwill and reserves, are Rs. 40,000, Rs. 35,000 and Rs. 30,000 respectively. Calculate the capital brought in by Daman on the basis of old partners' capital balances.
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Rs. 35,000
Where the incoming partner’s capital has to be a stated fraction of the total capital of the firm, that total is not given directly. It is worked back from the old partners, whose combined capital stands for the share of the firm they keep.
- Daman takes 1/4, so Aman, Baman and Chaman together keep 3/4 of the profits.
- Their capitals after every adjustment = 40,000 + 35,000 + 30,000 = Rs. 1,05,000, and that represents 3/4 of the firm’s capital.
- Total capital of the firm = 1,05,000 × 4/3 = Rs. 1,40,000
- Daman’s capital = 1/4 × 1,40,000 = Rs. 35,000
The capitals are taken after revaluation profit, goodwill and reserves have been dealt with, because only then does each old partner’s balance stand for what he really holds in the firm.