On dissolution of a firm, partner's loan account is transferred to:

Bank Account

The correct answer is option 1- Bank Account.

On dissolution of a firm, partner's loan account is transferred to Bank Account.

At the time of dissolution of a partnership firm, any loan from a partner is treated as a liability and is paid off after paying outside liabilities but before settlement of partners’ capital accounts. Partners' outstanding loans are repaid in proportion to their loan balances, using the remaining cash in the Realization Account. So, The amount realized from assets along with contribution from partners, if required, shall be utilized 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 following journal entry is passed for this-

Partner’s Loan A/c Dr.
     To Bank A/c