The correct answer is: B. in profit sharing ratio
In case of insolvency of a partner, any balance in Reserve Fund or Profit and Loss A/c is distributed among the remaining partners in their profit sharing ratio. This is because the liability of the partners is joint and several, which means that each partner is liable for the debts of the partnership even if they have not personally incurred those debts. Therefore, in the event of insolvency, the remaining partners are responsible for paying off the debts of the partnership, including the debts of the insolvent partner.
The profit sharing ratio is the ratio in which the partners share the profits and losses of the partnership. It is usually agreed upon at the time the partnership is formed and is based on the partners’ contributions to the partnership. In the event of insolvency, the profit sharing ratio is used to determine how the remaining partners will share the debts of the partnership.
The following are the options with brief explanations:
- A. equally: This option is incorrect because the remaining partners are not liable for the debts of the insolvent partner equally. They are only liable for the debts of the partnership in their profit sharing ratio.
- B. in profit sharing ratio: This option is correct because the remaining partners are liable for the debts of the partnership in their profit sharing ratio.
- C. in the ratio of their capital: This option is incorrect because the capital of the partners is not relevant in determining their liability for the debts of the partnership. The only thing that matters is the profit sharing ratio.
- D. none of the above: This option is incorrect because option B is the correct answer.