At the time of dissolution of firm, 'Loan of partners' (Loans given by partners to the firm) is paid out of the amount realised on sale of assets after...............
Answer & explanation
Correct answer: option 1
The correct answer is option 1- After making the payment of loans given by third party.
At the time of dissolution of firm, 'Loan of partners' (Loans given by partners to the firm) is paid out of the amount realised on sale of assets after making the payment of loans given by third party.
Thus, the amount realised from assets along with contribution from partners, if required, shall be utilised first to pay off the outside liabilities of the firm such as creditors, loans, bank overdraft, bill payables, etc. (it may be noted that secured loans have precedence over the unsecured loans); the balance should be applied to repay loans made by the partners to the firm. (in case the balance amount is not adequate enough to pay off such loans and advances, they are to be paid proportionately). The amount left thereafter is utilised in settlement of capital account balances. Then the surplus if any is divided among partners in their profit sharing ratio