The correct answer is: B. In the ratio of their capital balances.
When a firm is dissolved, the partners share the profit or loss on the realization in the ratio of their capital balances. This is because the capital balances represent the partners’ investment in the firm, and it is fair that they should share the proceeds of the sale of the firm’s assets in proportion to their investment.
Option A is incorrect because the partners do not necessarily share the profit or loss equally. The profit or loss is shared in the ratio of their capital balances.
Option C is incorrect because the profit or loss is not shared in the profit-sharing ratio. The profit-sharing ratio is used to determine how the partners share the profits of the firm while it is operating. When the firm is dissolved, the profit or loss is shared in the ratio of their capital balances.
Option D is incorrect because there is no such thing as the ratio laid down in Garner vs Murray.