Why is a retiring partner’s capital balance transferred to a loan account?

Due to insufficient cash to pay immediately

The correct answer is option 3- Due to insufficient cash to pay immediately.

When a partner retires from a firm, the balance in their capital account represents the amount due to them from the firm. This amount usually includes their original capital, Share of accumulated profits, Share of goodwill, Share of revaluation profit/loss, Any other adjustments (e.g., reserves) etc. If the firm does not have sufficient cash to pay this amount immediately, the retiring partner cannot be paid in full. But the firm still owes them this money. The firm records this unpaid amount as a liability by transferring the balance in the partner’s capital account to their loan account. This shows that the firm now owes the amount to the retiring partner as a loan, and will repay it over time (possibly with interest). Journal Entry for this:
Retiring partner's Capital A/c Dr.
      To Retiring Partner’s Loan A/c