The partnership firm of A, B & C was dissolved on 31st March 2021. B demands that his loan of ₹50,000 should be paid before the payment of capital of the partners. But A & C demand that capital should be paid before B's loan. Who is correct?

B

The correct answer is option 2- B.

B is right as loan is paid before capital. B's loan of ₹50,000 is considered a liability of the firm, and must be repaid before capital is returned to any of the partners.

The assets of the firm, including any sum contributed by the partners to make up deficiencies of capital, shall be applied in the following manner and order:
(i) In paying the debts of the firm to the third parties;
(ii) In paying each partner proportionately what is due to him/her from the firm for advances as distinguished from capital (i.e. partner’ loan);
(iii) In paying to each partner proportionately what is due to him on account of capital; and
(iv) the residue, if any, shall be divided among the partners in their profit sharing ratio