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 Allen and Daniel agree that some of the inventory is obsolete.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?

Question

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Before David is admitted, the total capital of the partnership is $140,000 + $40,000 = $180,000. Let x be the amount of inventory that is considered obsolete and written off from the accounts.
After the adjustment, the total capital is still $180,000, but the capital ratio has changed to 3:1:1 (because David invests $40,000 for a one-fifth interest).
So we can set up the equation: 
3x + 140,000 = 1/5 (x + 40,000) + 1/5 ($180,000 - x - 40,000) + 1/5 ($180,000 - x - 40,000)
Solving for x, we get x = $20,000.
Then, Allen's new capital balance is $140,000 - $20,000 = $120,000, and Daniel's new capital balance is $40,000 - $20,000 = $20,000.
Therefore, the answer is choice B.

In the AD Partnership, Allen's Capital Is $140,000 and Daniel's