Question

When is a partnership considered to be insolvent?

1) I. When the total of all partners' capital accounts results in a debit balance.
2) II. When at least one of the partners is personally insolvent.

Answer 1

Insolvency in a partnership can be determined by the total of all partners' capital accounts resulting in a debit balance and when at least one partner is personally insolvent.

Step-by-step explanation:

In a partnership, insolvency can be determined in two ways:

1. When the total of all partners' capital accounts results in a debit balance: If the partnership's capital accounts show a negative balance, it indicates that the partners have collectively contributed less capital than what is owed by the partnership. This can be an indication of insolvency.
2. When at least one of the partners is personally insolvent: If one or more partners are unable to pay their share of the partnership's debts, it can affect the partnership's ability to meet its financial obligations, potentially leading to insolvency.

It is important to note that insolvency in a partnership does not always indicate that the partners' personal assets are at risk. The extent of personal liability depends on the type of partnership and its legal structure.