Question

In case of insolvency of a partner, any balance in reserve fund or profit and loss accounts is distributed to all the partners ______________.

• A. Equally
• B. In the profit sharing ratio
• C. In the ratio of capitals
• D. In sacrificing ratio

Answer 1

The correct option is B In the profit sharing ratio

In general, unless otherwise agreed upon, the partnership is dissolved upon the insolvency of a partner. In some cases, partnership agreements are made to ensure that if a partner becomes insolvent, there are clear guidelines on how the partnership continues.

The following rules shall be observed subject to agreement by the partners:

• All the losses of the company including deficiencies of capital shall be paid out of profits first, then out of the capital and lastly if necessary by the partners individually in proportions to which they are entitled to share profits.
• All the assets of the company including all the sums contributed by the partners shall be applied in the following manner:
• In paying all the debts of the firm to the third parties
• in paying each partner rateable what is due to him from the firm for advances as distinguished from capital
• in paying to each partner rateable what is due to him on account of capital
• The residue shall be divided among the partners in the proportions in which they were entitled to share profits.