Multiple choice

A, B and C are partners sharing profits in the ratio of 3 : 2 : 3, their capitals on 30th June, 2014 are A Rs. 10,000, B Rs. 5,000 and C Rs. 6,000 (Dr.). C becomes insolvent and loss due to his insolvency will be shared by A and B in:

  1. equal ratio

  2. the ratio of 3 : 2

  3. the ratio of 2 : 1

  4. the ratio of 1 : 2
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

According to the Garner vs Murray rule, solvent partners bear the loss of an insolvent partner in their capital ratio. The capital ratio of A and B is 10000:5000, which simplifies to 2:1.

AI explanation

When a partner becomes insolvent, the solvent partners bear the resulting capital deficiency in their effective capital ratio. A's effective capital is his Rs 10,000 credit balance minus C's debit impact, but here we directly compare A's Rs 10,000 to B's Rs 5,000 capital. We must account for C's Rs 6,000 debit capital balance, which creates a total realized capital for the solvent partners of Rs 9,000. A and B will share the loss in their effective capital ratio, which is calculated by dividing the total realized capital of Rs 9,000 in their original profit sharing ratio of 3:2, resulting in a new ratio of 2:1.

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