Question

State the following statement is true:

Gain on the dissolution of a firm is divided in the capital ratio.

Answer 1

This statement is false.

Explanation:

When a firm is dissolved, any gain (such as from the sale of assets above their book value) is actually divided in the profit-sharing ratio, not the capital ratio. The capital ratio reflects each partner’s investment or ownership in the firm, while the profit-sharing ratio determines how the firm’s profits and gains (including dissolution gains) are distributed among the partners. Therefore, gains from dissolution are distributed according to the profit-sharing ratio agreed upon in the partnership agreement.