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The title of each problem is followed by the estimated time in minutes required for completion and by a
difficulty rating. The time estimates are applicable for students using the partially filled-in working papers.
Ex. 15–2 a. Depreciation of building should be charged against trust income, unless the trustor has
indicated that the income beneficiaries are to receive the full cash-basis income of the trust.
b. Legal fees for managing trust property are charged against trust income.
c. Special assessment tax levied on real property for street improvements generally is
considered a capital expenditure and is charged against trust principal. If the tax were
considered to be of primary benefit to the income beneficiaries, it would be charged against
trust income.
d. Interest on mortgage note payable accrued on the date that the trust was created is charged
against trust principal; interest accrued after that date is charged against trust income.
e. Loss on disposal of trust investments is charged against trust principal.
f. Major repairs to real property prior to disposal of the property are charged against trust
principal.
Ex. 15–3 Distribution of property of Estate of Allen Baker, Deceased, Apr. 30, 2006:
Administrative costs (cash) $40,000*
Specific devise to Barbara Baker (Southeastern Airlines 7% bonds) 21,120
General devise to Carl Baker (BBM Company common stock) [($9,900 –
$5,020) x ½] 2,440
General devise to Danielle Baker (BBM Company common stock) [($9,900
– $5,020) x ½] 2,440
Residuary devise to Edie Baker 0
Total estate property $66,000
*Cash in checking account ($13,860), plus cash from matured bank certificate of deposit
($21,120), plus cash from disposal of part of BBM Company common stock ($5,020).
First, as to Principal
I charge myself as follows:
Inventory of estate property, June 18, 2006 $150,000
Property discovered 20,000
Gain on disposal of principal property 1,000 $171,000
I credit myself as follows:
Liabilities paid $ 40,000
Devises distributed 125,000
Administrative costs 6,000 171,000
Balance, Dec. 18, 2006 $ -0-
Second, as to Income
I charge myself as follows:
Interest revenue $ 10,000
Dividend revenue 15,000 $ 25,000
I credit myself as follows:
Distributions of income 25,000
Balance, Dec. 18, 2006 $ -0-
Second, as to Income
I charge myself as follows:
Interest revenue $ 3,590
I credit myself as follows:
Distributions to income beneficiaries $ 2,000
Expenses chargeable to income 1,100 3,100
Balance, Feb. 10, 2006 (income cash) $ 490
Ex. 15–10 Closing entry for executor of will of William Wardlow, Deceased, June 30, 2006:
Estate Principal Balance 324,484
Property Discovered 36,000
Interest Revenue 110
Dividend Revenue 3,000
Loss on Disposal of Principal Property 274
Liabilities Paid 7,844
Devises Distributed 347,366
Administrative Costs 5,000
Distributions to Income Beneficiaries 3,110
To close estate of William Wardlow in accordance with Probate
Court authorization.
Ex. 15–11 a. Journal entries for executor of will of Gina Adams, Deceased, June 30, 2006:
Devises Distributed 220,000
Distributions to Income Beneficiaries 6,750
Principal Cash 115,000
Income Cash 6,750
Marketable Securities 105,000
To record distribution of residuary devise to trustee.
Estate Principal Balance 265,000
Property Discovered 13,000
Gain on Disposal of Principal Property 12,000
Interest Revenue 4,000
Dividend Revenue 4,500
Administrative Costs 5,400
Liabilities Paid 16,000
Devises Distributed 268,600
Distributions to Income Beneficiaries 6,750
Expenses Chargeable to Income 1,750
To close accounting records of estate.
b. Journal entry for trustee, June 30, 2006:
The McGraw-Hill Companies, Inc., 2006
172 Modern Advanced Accounting, 10/e
Principal Cash 115,000
Income Cash 6,750
Marketable Securities 105,000
Trust Principal Balance 220,000
Trust Income Balance 6,750
To open accounting records of trust.
Ex. 15–12 Closing entry for Wilson Woodrow Trust, Apr. 30, 2006:
Trust Principal Balance 1,700
Trust Income Balance 1,200
Interest Revenue 1,600
Administrative Costs 1,700
Distributions to Income Beneficiary 2,000
Expenses Chargeable to Income 800
To close nominal accounts of trust.
CASES
Case 15–1 Carl Roberts's partners should not approve Roberts's serving as executor of the Hopps' wills
and trustee of the Hopps’ trusts. If Roberts acted in those capacities, despite the propriety of
his activities in those roles, he and his partners would benefit financially from the fees he
generated as executor and trustee. Such a benefit would constitute a conflict of interest. The
ethics codes of the IMA and AICPA specifically prohibit conflicts of interest by their members,
as do many state board of accountancy rules. Perhaps Roberts might advise Albert Hopp to
select a bank trust department to serve as executor and trustee, with the proviso that the
department retain Roberts & Webb, LLP for tax services for the estate and trust.
Case 15–2 a. (1) Sand Company 12% bonds due June 16, 2016, at current fair value, and interest
accrued to April 16, 2006, constitute principal property. Any interest earned and
received after April 16, 2006, constitutes income of the estate. The amounts to be
included in an inventory of estate property on the date of Mary Carr's death are as
follows:
Current fair value of bonds $103,500
Accrued interest to April 16, 2006 ($100,000 x 0.12 x 4/12) 4,000
(2) Palko Corporation common stock and dividend of $1 a share declared payable to
stockholders of record April 14, 2006, are principal property. Any dividends declared
subsequently, and before final settlement of the estate or distribution of the stock in the
residuary devise, would be income of the estate. Both the common stock of Palko and
the $5,000 dividend receivable are included in the inventory of estate property, with
the stock valued at the current fair value of $68,000 on April 16, 2006.
(3) Palko Corporation 8%, $100 par, cumulative preferred stock is principal property at
the current fair value of $97,500 on April 16, 2006. No dividend is included as
principal because it had not been declared as of the date of Carr's death. Any
subsequent declarations and payments of dividends would be income of the estate until
such time as the stock is distributed to the residuary devisee and the estate is closed.
b. If there were dividends in arrears on the Palko Corporation 8%, $100 par, cumulative
preferred stock, the answer in a might have to be changed with respect to dividend
declarations subsequent to April 16, 2006. Extraordinary dividends are handled in various
ways under state laws. The general principle to be followed is that the estate principal
should be maintained. When the dividends in arrears are declared and paid, allocation
between principal and income is made based on laws that apply in a specific state.
Case 15–3 The 10,000 shares of MP Company common stock transferred to the trust constitute the
principal of the trust and are held for the remainderman.
Second, as to Income
I charge myself as follows:
Dividend revenue $ 1 4 2 0 0
Interest revenue 1 8 5 0 0 $ 3 2 7 0 0
Second, as to Income
I charge myself as follows:
Interest revenue $ 4 1 0 0
Dividend revenue 1 4 0 0 $ 5 5 0 0
Second, as to Income
I charge myself as follows:
Income collected (Exhibit 6) $ 2 3 0 0 0
Income accrued, July 1, 2007 (Exhibit 7) 8 0 0 0 $ 3 1 0 0 0
Second, as to Income
I charge myself as follows:
Receipt of income (Exhibit 7) $ 1 2 3 0 0