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ACCA Applied Skills · Corporate and Business Law (Global) · Partnerships

A partnership of Faisal, Grace and Hui has been dissolved and its assets are being realised. The assets raise 90,000 and the partnership owes 60,000 to trade suppliers and 20,000 to Faisal as a loan he made to the firm. The partners' capital contributions total 30,000. Which is the correct order of applying the 90,000?

Outside creditors are paid first (60,000), then Faisal's loan (20,000), and the remaining 10,000 goes towards returning partners' capital. On winding up, external debts rank before partners' loans, and loans rank before capital, with any surplus then shared as profit.

  1. APay Faisal's 20,000 loan first, then the suppliers' 60,000, then return capital
  2. BPay the suppliers' 60,000, then Faisal's 20,000 loan, then return capital with the remaining 10,000Correct
  3. CReturn the 30,000 capital to the partners first, then pay the suppliers and Faisal's loan from the 60,000 left

Explanation

On winding up, assets are applied first to outside creditors, then to partners' loans (advances), then to return capital, and any surplus is shared as profit. So the suppliers' 60,000 is paid first, then Faisal's 20,000, leaving 10,000 towards capital. The first option wrongly prefers a partner's loan over outside creditors, and the third pays capital before debts.

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