During the dissolution of a firm, what is the resulting position when all its external liabilities have been paid?

Correct answer: External liabilities are extinguished

Once the firm's external liabilities are paid during dissolution, no amount remains payable against them, so they are treated as extinguished. The payment itself does not automatically increase realisation profit; profit or loss depends on the comparison between the book values, sale proceeds of assets, and settlement of liabilities. Exam tip: payment of a liability reduces the firm's obligation; it does not increase an asset.