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CMA Intermediate · Financial Accounting · Dissolution of Partnership Firms including Piecemeal Distribution

A, B and C share profits in the ratio 2:2:1. Their capitals are A Rs 60,000, B Rs 40,000 and C Rs 30,000. B has also lent Rs 25,000 to the firm. After paying outside creditors, Rs 85,000 is available for distribution in one instalment. Using the highest relative capital method, what is the total amount A receives?

A receives Rs 32,000. B's Rs 25,000 loan is paid first, leaving Rs 60,000 for capital. A and C, tied at the highest relative capital, get Rs 30,000 between them to reach B's level (A gets Rs 20,000). The last Rs 30,000 is shared 2:2:1, giving A Rs 12,000.

  1. ARs 32,000Correct
  2. BRs 30,000
  3. CRs 34,000
  4. DRs 20,000

Explanation

B's loan of Rs 25,000 is paid before any capital (Section 48(b)). Rs 60,000 remains for capital. Relative capitals are A 30,000, B 20,000 and C 30,000. A and C (3 units) are reduced to 20,000: 10,000 x 3 = Rs 30,000, of which A gets Rs 20,000 and C Rs 10,000. The remaining Rs 30,000 is shared 2:2:1, giving A Rs 12,000. A's total is Rs 32,000. Ignoring the loan would give A only Rs 30,000.

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