You have been engaged to do the accounting for the termination and liquidation of the Devi, Smith, and Tavares partnership. Devi has requested an immediate distribution of cash from the partnership that is being questioned by the other partners. Although Devi’s capital account currently has a positive balance, Smith and Tavares are concerned that this might change as the liquidation process unfolds. They argue that Devi should wait before receiving a cash distribution. All of the partners would like you to explain how it is possible that they might develop a deficit in their capital account during the liquidation process.

Required

Write a memorandum to Devi, Smith, and Tavares explaining how a positive capital account balance could develop into a deficit balance during the partnership liquidation process.