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

In the piecemeal distribution of a dissolved firm's cash, the highest relative capital method is applied. Under the order of application in Section 48(b) of the Indian Partnership Act, 1932, how is a partner's loan (advance) to the firm treated?

A partner's loan is paid rateably among lending partners after third-party debts but before any capital is repaid, as Section 48(b) provides. Only then is the cash applied to capital, ranked by the highest relative capital method, and the residue is shared in the profit ratio.

  1. APaid after capital, since capital has priority
  2. BPaid together with capital in proportion to the balances
  3. CPaid rateably to the partners lending, after third-party debts and before capital is repaidCorrect
  4. DPaid in the profit-sharing ratio after capital is repaid

Explanation

Section 48(b) applies the firm's assets first to the debts of third parties, then to each partner rateably for advances as distinguished from capital, then to each partner rateably for capital, with any residue divided in the profit ratio. So the loan is cleared before the relative-capital ranking begins. The other options reverse or blend this order.

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