Accounting for Estates and Trusts

Updated Sixth Edition

CHAPTER 19 ACCOUNTING FOR ESTATES AND TRUSTS

ANSWERS TO QUESTIONS

1. The term "testate" refers to a decedent who had prepared a valid will. "Intestate" indicates an individual who has died without having written a valid will.

2. When an individual dies without having prepared a valid will, state inheritance laws become applicable. Normally, these laws are written to correspond with the most common methods used in distributing property. Such laws are referred to as "laws of descent" when they describe the appropriate conveyance of real property. "Laws of distribution" specify the methods that are used for conveying personal property.

3. Probate laws are state laws that govern wills and estates. These laws provide an orderly structure for this process. The objectives of probate laws are

—To gather and preserve all of the decedent's property, — To discover the decedent's intent for the property held at death and then follow those wishes if possible, and —To carry out an orderly and fair settlement of all debts and distribution of property.

4. The executor (or administrator if an executor is not named in the will or is unable to serve) must first ensure that all applicable laws are satisfied. Second, the executor must attempt to learn the decedent's wishes and then carry them out, if possible.

5. Estate assets are reported at fair market value since historical cost (if known) would not be important in paying debts or making distributions.

6. Since an executor must satisfy (if possible) all of the claims against an estate, an adequate search for these claims must be made. In most states, a public notice has to be placed in an appropriate newspaper at least one time per week for three weeks. All claims must then be received by the executor within a reasonable period of time, frequently four months from the date of the first notice.

7. Because of the possibility that estate assets may be insufficient to satisfy all debts and claims, probate laws usually specify the following order of priority. Thus, if a shortage of assets does occur, the claims at the top of this list are paid first followed by the second level and so on.

—Expenses of administering the estate. —Funeral expenses and the medical expenses of any last illness. —Debts and taxes given preference under federal or state laws. —All other claims.

8. An estate that was heavily in debt could possibly leave the members of the decedents immediate family with nothing. This potential hardship is viewed by probate law as unfair. Therefore, a small homestead allowance is allowed to a surviving spouse and/or minor and dependent children prior to the payment of claims against the estate. In addition, a monthly family allowance is provided (for up to one year) while the estate is being settled.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2001 Advanced Accounting, Updated 6/e 19-1 Consequently, family members are entitled to a relatively small amount of money from every estate prior to the payment of debts and expenses.

9. A devise is a gift of real property such as land or a building. In contrast, a legacy (or bequest) is the conveyance of personal property such as an automobile or cash.

10. —A specific legacy is the conveyance of an identified piece of personal property. The gift of a car, for example, or shares of corporate stock would be viewed as a specific legacy. — A demonstrative legacy is a cash gift that is made from a specific source. The gift of $6,000 from a savings account in a local bank would be deemed a demonstrative legacy. —A general legacy is a cash gift where the source is not identified. The gift of $6,000 in cash would be a general legacy. —A residual legacy is simply a gift of any property that remains in an estate after all other legacies have been fulfilled.

11. The process of abatement is utilized if an estate has insufficient resources to satisfy all of the legacies spelled out in a will. This guideline dictates the reductions that must be made to each of the legacies during the distribution process. The process of abatement is also relevant if specified property or cash from a particular source was no longer available at the time of the decedent’s death to fulfill specific or demonstrative legacies.

12. The federal estate tax is an excise tax on the right to convey property. Thus, the value of the decedent's property at death is the basis for this assessment although an alternative valuation date (six months after death or at the date of distribution, whichever comes first) can be chosen by the executor. The value of estate assets is then reduced by a series of costs, debts, and distributions including:

—funeral expenses, —estate administration expenses, —liabilities —casualties and thefts during the administration of the estate, —charitable bequests, —marital deduction for property conveyed to spouse.

The federal estate tax is computed on the net value of the estate using graduated rates. The estate is then allowed to reduce the amount of net assets based on an exemption that is $675,000 in 2001 and gradually increases until the federal estate tax is eliminated completely in 2010. These changes were mandated by the Tax Relief Reconciliation Act of 2001.

13. The Tax Relief Reconciliation Act of 2001 had several provisions that affected the conveyance of property. First, the amount of assets that could be conveyed tax free by a decedent was increased gradually from $1 million in 2002 to $3.5 million in 2009. In 2010, the federal estate tax will be eliminated although Congress must pass new legislation to extend the repeal beyond that one year. During this same period, the highest tax rate to be paid on taxable estates was reduced. The generation-skipping tax will also be abolished along with the federal estate tax.

The federal gift tax will continue but with a $1 million lifetime exclusion. Starting in 2010, the maximum gift tax rate will be the maximum individual tax rate.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2001 19-2 Solutions Manual From 2002 until 2004, there is a repeal for federal estate tax purposes on taking a credit for any amounts paid as state inheritance taxes.

14. Individuals are allowed to make gifts of up to $10,000 per person per year (the amount is $20,000 if given by a married couple) without worrying about gift taxes. Despite passage of the Tax Relief Reconciliation Act of 2001, the federal gift tax will not be eliminated completely. Instead, an individual will be allowed a $1 million lifetime exclusion.

15. Distributions to a spouse directly decrease the taxable value of an estate and, hence, reduce the amount of federal estate taxes. However, when the spouse eventually dies, a large estate may be left creating a significant tax liability. Thus, estate planners often attempt to devise methods to reduce the future value of the spouse's estate. One approach that is popular is the creation of a credit shelter trust fund at the time of the first death.

If an individual’s unified transfer credit has not been previously decreased in order to avoid taxation of gifts, an estate of a certain size is tax free. For 2001 an estate of $675,000 or less could be conveyed without creating a tax effect. Because of the Tax Relief Reconciliation Act of 2001, that number will gradually increase until the estate tax is removed entirely. Hence, if all other property is conveyed to the decedent’s spouse or to charity, a trust fund of the appropriate amount can be created (usually with the trust income going to the spouse until death) without incurring an estate tax. Four results occur:

1. no estate taxes are paid on the first decedent’s estate, 2. the income of the trust fund assets can still be used for the benefit of the spouse, 3. the assets of the trust fund can be directed to a chosen recipient at the spouse’s eventual death, and 4. the estate of the spouse is reduced by a considerable amount of assets, creating a large savings in estate taxes at the second spouse’s death.

16. Several deductions are allowed in the computation of estate income taxes:

—A personal exemption of $600, —Amounts of income conveyed to charities, and —Amounts of income conveyed currently to the beneficiaries.

17. The distinction between principal and income is of paramount importance especially if they are to be conveyed to different parties. Assets held at the decedent's death comprise the principal of an estate whereas any earnings thereafter are income. Unfortunately, in reality, drawing a distinction may be quite difficult for a number of specific transactions. Therefore, in the decedent's will, instructions as to the impact that transactions have on principal and on income should be specified. If the decedent has not provided guidance In this area, state laws apply. The answer to question 18 gives examples of the typical method by which this assignment is made.

18. The following are examples of the usual method by which the distinction between the principal and income of an estate are established:

Adjustments to principal: gains and losses on the sale of securities, debts incurred prior to death, funeral expenses, major improvements to rental property, and dividends declared prior to death even if received after death. Adjustments to income: property taxes, repair expenses, utilities, insurance, and management expenses.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2001 Advanced Accounting, Updated 6/e 19-3 19. For federal estate tax purposes, the value of an estate at the date of the decedent's death should be determined. An alternative valuation date may be chosen by the executor if this decision will reduce the estate taxes to be paid. The alternative date is the earlier of six months after death or the date of conveyance.

20. The executor is given the responsibility of locating, valuing, and distributing all estate assets. Therefore, the reporting process emphasizes the value of all assets being held and their ultimate disposition. Liabilities, expenses, and distributions are only recorded at the time that they reduce estate assets.

21. The charge and discharge statement of an estate is produced for several purposes. It lists the assets originally included in the estate. The statement also reports the assets that have been distributed to date to satisfy debts, expenses, or the stipulations of the decedent's will. Finally, the charge and discharge statement lists the value of assets still being held and indicates whether they are attributed to principal or income.

22. A trust fund is comprised of assets that have been conveyed to a fiduciary who will manage and distribute them as specified by the party (the trustor) creating the fund. Trust funds have become popular as a means of reducing the size of a decedent's estate. Thus, they serve to decrease the amount that must be paid to the government in estate taxes. Furthermore, they are often created so that professional managers will oversee a decedent's assets and ensure that these assets are used as that person intended.

23. An inter vivos trust is simply one that is started by a living individual whereas a testamentary trust is created by a will.

24. —QTIP Trust (Qualified Terminable Interest Property Trust)—The income of the trust (and possibly some of the principal) is conveyed to a party (frequently a spouse) for a period of time. After that time, the remaining principal goes to a different party.

— GRATs (Grantor Retained Annuity Trusts)—The trustor continues to collect fixed payments from the trust fund assets. After a stated period, the principal is conveyed to a named beneficiary.

—Charitable Remainder Trust—All income is paid to one or more beneficiaries until death or for a stated period. The principal is then given to a named charity.

25. The distinction between principal and income is especially important in accounting for a trust because in many cases they are to be given to different parties. Many trusts are created so that one group of beneficiaries is to collect income for a period of time with the principal then going to a different group of beneficiaries. Only by keeping principal and income balances separate can all parties receive the amounts that are appropriate.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2001 19-4 Solutions Manual ANSWERS TO PROBLEMS

1. B (the laws of distribution apply)

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2001 Advanced Accounting, Updated 6/e 19-5 23.A

28.B (1,400,000 - 700,000 - 420,000 - 50,000 - 20,000 - 110,000)

29.A (Rental income less $600 exemption)

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2001 19-6 Solutions Manual 30.(30 Minutes) (Define terms used in estate accounting)

 Will—the instructions given by an individual to direct the distribution to be made of the person's property after death.

 Estate—the legal entity that holds title to all of a decedent's property until those assets are properly distributed.

 Intestate—refers to the death of an individual who has not prepared a valid, legal will.

 Probate laws—the state laws that govern and regulate wills and estates.

 Trust—a fund of assets that has been conveyed to a fiduciary who will manage and then distribute those assets according to the specifications of the individual who created the trust.

 Inter vivos trust—a trust fund created by a living person rather than as a result of the specifications of a will.

 Charitable remainder trust—a trust fund where the income is paid to one or more beneficiaries for a specified period (or until their death). After that point in time, the principal is conveyed to a named charity.

 Remainderman—a beneficiary of a trust who is entitled to receive a principal balance but only after a specified time. Until then, the income is distributed to a different beneficiary (often for the life of that person).

 Executor—an individual who oversees an estate in a stewardship capacity. The person must follow any applicable laws, locate all assets, discover and satisfy all valid claims against the estate, and uncover and follow (if possible) the intent of the decedent for any remaining property.

 Homestead allowance—a cash amount that is provided to a decedent's surviving spouse and/or minor and dependent children before claims against the estate are paid. This allowance ensures that (if assets are available) some amount is given to the immediate family regardless of the amount of debt incurred by the decedent.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2001 Advanced Accounting, Updated 6/e 19-7 31.(25 Minutes) (Discussion of questions about estates)

 Probate laws are the state laws that govern wills and estates. These laws provide an orderly structure for this process. The Uniform Probate Code has been adopted by many states so that laws are consistent, at least between those particular states. The general objectives of probate laws are: —To gather and preserve all of the decedent's property held at death, —To locate and provide a fair settlement for all debts, and —To discover the decedent's intent for any remaining property and to follow those wishes if possible.

 The executor must locate and preserve all of the assets owned by the decedent at death, discover and satisfy (if sufficient assets are available) all valid claims against the estate, determine the wishes of the decedent as to any remaining property, comply with all laws, and distribute assets according to the intentions of the decedent.

 All property of value should be included in an inventory of estate assets. Thus, cash, investments, receivables, and other valuables should all be listed. In some states, real property (such as land) is conveyed directly to a beneficiary at death so that it is not included in the estate. However, even this real property is assumed to be part of the estate for estate tax purposes.

 The order of priority for paying claims against an estate are as follows: (1)—expenses of administering the estate, (2)—funeral expenses and the medical expenses of any last illness, (3)—debts and taxes given preference under federal or state laws, (4)—all other claims.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2001 19-8 Solutions Manual 32.(10 Minutes) (Identify parties in connection with will) a. Howard Amadeus has been designated to receive the principal of the trust fund after Lucy Van Jones's death and is, therefore, referred to as the remainderman. b. Victor Laslo has established the trust fund and is known legally as the trustor. c. A demonstrative legacy is a cash gift from a particular source. The gift of all money from the First Savings Bank to Richard Blaine is a demonstrative legacy. d. Since the $9,000 cash gift to Nelson Tucker does not come from a designated source, it is known as a general legacy. e. The gift of the antique collection to Ilsa Lunn is a specific legacy because it is a gift of specified personal property. f. Lucy Van Jones will receive the income from the trust fund for the remainder of her life, a position known as a life tenant.

33.(20 Minutes) (Distribution to be made of an estate) a. 800 shares of Coca-Cola Co. stock are given to Cindy Cheng. Title to the house goes to Dennis Davis.

$41,000 cash in the First National Bank goes to Jack Abrams.

$16,000 cash in the New Hampshire Savings and Loan still remains. To that amount, more cash must be added. Either the Xerox stock or the other property (or both) must be liquidated in order to give Suzanne Benton $18,000.

Any remaining property is conveyed to Wilbur N. Ed. b. 1,000 shares of Coca-Cola Co. stock are given to Cindy Cheng. $50,000 cash in the First National Bank goes to Jack Abrams.

$5,000 cash remains in the First National Bank along with $6,000 in the New Hampshire Savings and Loan. To this total, more cash must be added. Either the Xerox stock, the remaining Coca-Cola stock, and/or the other remaining property must be liquidated In order to give Suzanne Benton a total of $18,000.

Any remaining property is conveyed to Wilbur N. Ed.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2001 Advanced Accounting, Updated 6/e 19-9 34.(5 Minutes) (Compute the taxable estate valued)

Value of estate assets ...... $2,300,000 Conveyed to spouse ...... (1,000,000) Conveyed to charities ...... (260,000) Funeral expenses ...... (23,000) Administrative expenses ...... (41,000) Debts ...... (246,000 ) Taxable estate ...... $ 730,000

35.(15 Minutes) (Determine taxable estate value and the effect of the Unified Transfer Credit.) a. Gross Estate (fair market value) ...... $1,441,000 Funeral Expenses ...... $ 20,000 Administration Expenses ...... 10,000 Charity Bequests ...... 60,000 Marital Deduction ...... 430,000 (520,000 ) Taxable Estate ...... $ 921,000 b. The Economic Growth and Tax Relief Reconciliation Act of 2001 creates two gradual effects on federal estate taxes. First, the tax exempt exclusion increases from $1 million in 2002 to $3.5 million in 2009 before the federal estate tax is eliminated in 2010. Second, the highest tax rate decreases almost every year until the 2010 repeal. Thus, the amount of estate taxes to be paid will vary based upon the year of death. This difference is especially significant between 2008 and 2009 because of the differences in exemption amounts and tax rates.

36.(10 Minutes) (Computation of income tax on an estate)

Rental income ...... $ 9,000 Interest income ...... 6,000 Dividend income ...... 5,000 Total income ...... $20,000 Personal exemption ...... (600) Gift to charity ...... (1,200) Distributed to beneficiary ...... (6,000) Taxable income ...... $12,200

Income Tax: 15% of first $1,750 ...... $262.50 28% on next $2,300 ...... 644.00 31% on next $2,150 ...... 666.50 36% on next $2,250...... 810.00 39.6% on remaining $3,750...... 1,485 .00

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2001 19-10 Solutions Manual Federal income tax ...... $3,868 .00

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2001 Advanced Accounting, Updated 6/e 19-11 37.(50 Minutes) (Record journal entries for an estate and prepare charge and discharge statement.) a. –– Cash - Principal ...... 300,000 Life Insurance Receivable ...... 200,000 Investment in Stocks and Bonds...... 100,000 Rental Property ...... 90,000 Personal Property ...... 130,000 Estate Principal ...... 820,000 (To record property held by Wilbur Stone at death.)

–– No entry. Estates do not record liabilities until assets are used in payment.

–– Cash - Principal ...... 5,000 Cash - Income ...... 7,000 Assets Subsequently Discovered ...... 5,000 Estate Income ...... 7,000 (To record receipt of interest income. The $5,000 earned prior to the decedent's death was not included in original listing of estate assets.)

— Expenses - Income ...... 6,000 Cash - Income ...... 6,000 (Ordinary repair expenses are made to rental property.)

— Debts of the Decedent ...... 80,000 Cash - Principal ...... 80,000 (To pay liabilities and obligations of the decedent.)

— Cash - Principal ...... 19,000 Investments In Stocks and Bonds ...... 16,000 Gain on Sale of Stocks ...... 3,000 (To record sale of stocks.)

— Cash - Principal ...... 2,000 — Cash - Income ...... 12,000 Assets Subsequently Discovered ...... 2,000 Estate Income ...... 12,000 (To record receipt of rental income. The $2,000 earned prior to the decedent's death was not included in original listing of estate assets.)

— Legacy - Jim Arness ...... 6,000 Cash - Income ...... 6,000 (Payment is made to income beneficiary.)

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2001 19-12 Solutions Manual — Cash - Principal ...... 200,000 Life Insurance Receivable ...... 200,000 (Collection is made from life insurance policy.)

— Legacy - Amanda Blake ...... 200,000 Cash - Principal ...... 200,000 (Payment is made of proceeds from life insurance policy.)

— Funeral Expenses ...... 10,000 Cash—Principal...... 10,000 (To record cost of decedent's funeral.) b. ESTATE OF WILBUR STONE Charge and Discharge Statement

As to Principal

I charge myself with: Assets per original Inventory ...... $820,000 Assets subsequently discovered: Interest receivable ...... $ 5,000 Rental income receivable ...... 2,000 7,000 Gain on sale of stocks ...... 3,000 Total charges ...... 830,000

I credit myself with: Debts of decedent ...... 80,000 Funeral expenses ...... 10,000 Legacy: Amanda Blake (proceeds of life insurance) ...... 200,000 290,000 Estate principal ...... $540,000

Estate principal: Cash ...... $236,000 Investments in stocks and bonds ...... 84,000 Rental property ...... 90,000 Personal property ...... 130,000 Estate principal ...... $540,000

I charge myself with: Interest income ...... $ 7,000 Rental income ...... 12,000 $19,000

I credit myself with: Repair expenses ...... $ 6,000 Legacy: Jim Arness ...... 6,000 12,000 Balance as to Income ...... $ 7,000

Balance as to income: Cash ...... $ 7.000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2001 19-14 Solutions Manual 38.(25 Minutes) (Prepare charge and discharge statement for an estate)

(Note: No method is specified in this problem for allocating the $12,000 in executor fees between principal and income. Since 1.5% of the other cash outflows relate to income, that percentage is used here for allocation purposes. However, other methods [or even an equal allocation] can be proposed.)

ESTATE OF JAMES COOPER Charge and Discharge Statement

As to Principal I charge myself with: Assets per original inventory ...... $1,204,000 Assets subsequently discovered: Rental income receivable ...... $ 4,000 Dividends receivable ...... 2,000 6,000 Gain on sale of Polaroid stock ...... 3,000 Total charges ...... $1,213,000

I credit myself with: Debts of decedent ...... $ 81,000 Funeral and executor expenses ...... 32,820 Legacy: Charitable remainder trust ...... 300,000 Transfer of Compaq stock ...... 32,000 445,820 Estate principal ...... $ 767,180

Estate principal: Cash ...... $ 422,180 Investments ...... 45,000 Rental property ...... 300,000 Estate principal ...... $ 767,180

As to Income I charge myself with: Rental income ...... $ 7,000 Dividend income ...... 10,000 $17,000

I credit myself with: Repair expenses ...... 2,000 Executor fees ...... 180 Legacy: income to beneficiary ...... 4,000 6,180 Balance as to income ...... $10,820

Balance as to income: Cash ...... $10,820

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2001 Advanced Accounting, Updated 6/e 19-15 39.(30 Minutes) (Prepare journal entries for an estate.)

Note: Since the income and principal of this estate are both to go to the same beneficiary, no reason exists for separately labeling the assets as being derived from principal and income. a. Cash ...... 80,000 Interest receivable ...... 6,000 Life insurance payable to estate ...... 300,000 Residence ...... 200,000 Investment in Coca-Cola ...... 50,000 Investment in Polaroid ...... 110,000 Investment in Ford...... 140,000 Estate Principal ...... 886,000 b. Cash ...... 7,000 Interest receivable ...... 6,000 Estate income ...... 1,000 c. Funeral and administrative expenses ...... 20,000 Cash...... 20,000 d. No entry. Debts are only recorded by an estate when paid. e. Cash ...... 12,000 Assets subsequently discovered ...... 12,000 f. Legacy - Kevin Simmons ...... 200,000 Residence ...... 200,000 g. Cash ...... 300,000 Life Insurance payable to estate ...... 300,000 h. Debts of the decedent ...... 100,000 Cash ...... 100,000 i. Legacy - Thomas Thorne ...... 150,000 Cash ...... 150,000 j. Cash ...... 112,000 Investment in Polaroid ...... 110,000 Gain on sale ...... 2,000 k. Administrative expenses ...... 10,000 Cash...... 10,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2001 19-16 Solutions Manual 40.(55 Minutes) (Prepare journal entries for an estate and a charge and discharge statement.)

Note: Since the income and principal of this estate are both to go to the same beneficiary, no reason exists for separately labeling the assets as being derived from principal and income. a. Cash ...... 19,000 Certificates of deposit ...... 90,000 Dividend receivable ...... 3,000 Life insurance—payable to estate ...... 450,000 Residence and personal effects ...... 470,000 Investment in Ford Motor Co...... 72,000 Investment in Xerox ...... 97,000 Estate Principal ...... 1,201,000 b. Cash ...... 450,000 Life insurance—payable to estate ...... 450,000 c. Cash ...... 4,000 Dividend receivable ...... 3,000 Estate income ...... 1,000 d. No entry. Debts are only recorded by an estate when paid. e. Legacy—Sue Pope ...... 470,000 Residence and personal effects ...... 470,000 f. Land ...... 15,000 Assets subsequently discovered ...... 15,000 g. Debts of the decedent ...... 108,000 Cash ...... 108,000 h. Funeral and administrative expenses ...... 31,000 Cash ...... 31,000 i. Legacy—Ned Pope ...... 110,000 Cash ...... 110,000 j. Cash ...... 81,000 Investment in Ford Motor Co...... 72,000 Gain on sale ...... 9,000 k. Funeral and administrative expenses ...... 16,000 Cash ...... 16,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2001 Advanced Accounting, Updated 6/e 19-17 l. Legacy—Harwood Pope...... 81,000 Cash...... 81,000

Part b. ESTATE OF LAWRENCE POPE Charge and Discharge Statement

I charge myself with: Assets per original inventory ...... $1,201,000 Assets subsequently discovered: Land...... 15,000 Gain on sale of Ford Motor Co. stock ...... 9,000 Dividend income ...... 1,000 Total charges ...... $1,226,000

I credit myself with: Debts of decedent ...... $108,000 Funeral and administrative expenses...... 47,000 Legacies distributed: Sue Pope ...... $470,000 Ned Pope ...... 110,000 Harwood Pope ...... 81,000 661,000 Total credits ...... 816,000 Estate principal ...... $ 410,000

Estate principal: Cash ...... $208,000 Certificates of deposit ...... 90,000 Land ...... 15,000 Shares of Xerox ...... 97,000 Estate principal ...... $410,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2001 Advanced Accounting, Updated 6/e 19-19 41.(25 Minutes) (Prepare Journal entries for a trust fund.) a. Cash—Principal ...... 300,000 Investments in Stocks ...... 200,000 Rental Property ...... 150,000 Trust Principal ...... 650,000 b. Investments in Bonds ...... 260,000 Cash—Principal ...... 260,000

Commission Expense—Principal ...... 3,000 Cash—Principal ...... 3,000 c. Repair Expense—Principal ...... 7,000 Cash—Principal ...... 7,000 d. Cash—Principal ...... 1,000 Cash—Income ...... 3,000 Trust Principal ...... 1,000 Trust Income—Dividends ...... 3,000 e. Insurance Expense—Income ...... 2,000 Cash—Income ...... 2,000 f. Cash—Income ...... 8,000 Trust Income Rental ...... 8,000 g. Trustee Expense—Principal ...... 2,000 Trustee Expense—Income ...... 2,000 Cash—Principal ...... 2,000 Cash—Income ...... 2,000 h. Equity in Income: Beneficiary ...... 5,000 Cash—Income ...... 5,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2001 19-20 Solutions Manual 42.(20 Minutes) (Prepare Journal entries for a trust.)

Land ...... 320,000 Trust—Principal...... 320,000

Cash—Income ...... 60,000 Trust—Income ...... 60,000

Insurance Expense—Income ...... 4,000 Cash—Income ...... 4,000

Property Taxes Expense—Income ...... 6,000 Cash—Income ...... 6,000

Land Improvements ...... 4,000 Cash—Income ...... 4,000

(This payment for paving is made from cash income because no principal cash is held. The trust agreement should indicate how such payments are to be made and recorded. The following adjustment may be necessary to indicate that this payment has been made from income rather than principal.)

Due from Trust—Principal ...... 4,000 Due to Trust—Income ...... 4,000

Maintenance Expense—Income ...... 8,000 Cash—Income ...... 8,000

Equity in Income: Beneficiary ...... 30,000 Cash—Income ...... 30,000