Question

Assertion (A): On dissolution, ‘Loan by firm to a Partner’ is not transferred to Partner’s Capital Account but is recovered from him.

Reason (R): Such a loan is an asset of the firm and hence this amount is recovered from the partner so that it is utilised to make payment of third party liabilities of the firm.

In the context of the above two statements, which of the following is correct?

Options

• Both (A) and (R) are correct and (R) is the correct reason of (A).

• Both (A) and (R) are correct but (R) is not the correct reason of (A).

• Only (R) is correct.

• Both (A) and (R) are wrong.

Answer 1

Both (A) and (R) are correct and (R) is the correct reason of (A).

Explanation:

On dissolution, “loan by firm to a partner” is an asset of the firm and not transferred to the partner’s capital account. Instead, it is recovered from the partner as it is used to make payments to third-party liabilities of the firm before settling capital accounts. This treatment is because such loan is considered an asset of the firm and is utilized to pay third-party liabilities first, aligning with the assertion and reason provided.