Chapter 19 – Accounting for Estates and Trusts
19-15
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Estate Principal ………………………………………. 820,000
(To record property held by Rose Shields at death.)
1. No entry. Estates do not record liabilities until assets are used in payment.
2. Cash—Principal ……………………………………………….. 5,000
Cash—Income …………………………………………………. 7,000
3. Expenses—Income …………………………………………… 6,000
4. Debts of the Decedent ……………………………………… 80,000
5. Cash—Principal ………………………………………………. 19,000
Investments in Stocks and Bonds ……………. 16,000
6. Cash—Principal ………………………………………………. 2,000
Cash—Income …………………………………………………. 12,000
7. Legacy—Jim Arness ……………………………………….. 6,000
8. Cash—Principal ………………………………………………. 200,000
Life Insurance Receivable ……………………….. 200,000
(Collection is made from life insurance policy.)
Education.
19-17
Education.
38. (45 Minutes) (Prepare charge and discharge statement for an estate)
ESTATE OF GINA PURCELL
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
Estate principal:
Cash ……………………………………………………………….. $ 422,000
Investments ……………………………………………………… 45,000
Balance as to income:
Cash ……………………………………………………………….. $11,000
39. (30 Minutes) (Prepare journal entries for an estate)
Chapter 19 – Accounting for Estates and Trusts
19-18
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 receivable (payable to estate) ………….. 300,000
b. Cash ……………………………………………………………………. 7,000
Interest receivable ……………………………………………. 6,000
Estate income interest ……………………………………… 1,000
c. Funeral expenses ………………………………………………….. 20,000
Cash …………………………..…………………………………….. 20,000
No entry for discovery of additional debts. Debts are only recorded by an
estate when paid.
i. Legacy—Thomas Thorne ………………………………………. 150,000
Cash …………………………..……………………………………. 150,000
40. (60 Minutes) (Prepare journal entries for an estate and a charge and discharge
statement)
19-19
Education.
1. Cash ……………………………………………………………………. 19,000
Certificates of deposit …………………………..………………. 90,000
2. Cash ……………………………………………………………………. 450,000
Life insurance receivable — payable to estate …… 450,000
3. Cash …………………………..……………………………………….. 4,000
4. No entry. Debts are only recorded by an estate when paid.
5. Legacy—Sue Pope ………………………………………………… 470,000
Residence and personal effects ………………………… 470,000
6. Land ……………………………………………………………………. 15,000
Assets subsequently discovered ………………………. 15,000
11. Funeral and administrative expenses …………………….. 16,000
Cash …………………………..……………………………………. 16,000
12. Legacy—Harwood Pope …………………………..…………….. 81,000
Cash …………………………..…………………………………….. 81,000
Chapter 19 – Accounting for Estates and Trusts
Part b.
ESTATE OF LENNIE POPE
Charge and Discharge Statement
As to principal and income
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
Ned Pope ………………………………….. 110,000
Harwood Pope ………………………….. 81,000 661,000
Total credits ………………………………………………… 816,000
Balance on hand …………………………………………………… $ 410,000
As:
41. (30 Minutes) (Prepare journal entries for a trust)
a. Cash—Principal ……………………………………………………. 300,000
Investments in Stocks …………………………………………… 200,000
Rental Property …………………………………………………….. 150,000
Trust Principal …………………………………………………. 650,000
b. Investments in Bonds ……………………………………………. 260,000
Chapter 19 – Accounting for Estates and Trusts
19-21
Education.
e. Insurance Expense—Income …………………………………. 2,000
Cash—Income ………………………………………………….. 2,000
Chapter 19 – Accounting for Estates and Trusts
19-22
Education.
42. (20 Minutes) (Prepare journal entries for a trust)
Land ……………………………………………………………………. 320,000
Trust—Principal ………………………………………………… 320,000
Cash—Income ……………………………………………………… 60,000
Trust—Income …………………………………………………. 60,000
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 is also likely necessary to
indicate that this payment has been made from income rather than principal.)
Cash—Income ………………………………………………….. 30,000
Chapter 19 – Accounting for Estates and Trusts
19-23
Education.
Develop Your Skills (60 Minutes)
Research Case 1
This case is designed to help the student experience how the Internet can be
used to research practical accounting issues in a quick way. Here, a client wants
to know about a Minor’s Section 2503(c) Trust. Perhaps no one currently with this
CPA firm knows much about this type of trust. However, a significant amount of
information is readily available using the Internet.
The student is directed to www.finaid.org. This particular website provides
extensive information about a variety of financial strategies that can be utilized to
finance a college education. A search of the term “Minor’s Section 2503(c) Trust”
includes:
▪ Gifts can be held in this type of trust until the child reaches the age of 21.
▪ In 2008, up to $12,000 that was given by each person to the trust could be
excluded from any gift tax consideration. In 2009, this amount was
$13,000. In 2013 this amount was $14,000 and that amount has not yet
time of the 21st birthday.
▪ The trustee can use the money in the trust to pay for the recipient’s college
costs (that is obviously why it is being covered on this particular website).
▪ Some trusts of this type are set up so that the recipient can only withdraw
the undistributed assets for a short period after the person’s 21st birthday.
Chapter 19 – Accounting for Estates and Trusts
▪ Income earned by the trust is taxed at trust income rates unless distributed
and the possibility of causing the recipient problems trying to qualify for
other types of college financial aid.
▪ The website suggests considering the Uniform Gift/Transfer to Minor’s Act
as a good alternative to the Minor’s Section 2503(c) Trust.
As can be seen, this website does not make the reader an expert in this type of
student’s grasp for the depth of information now available electronically.
Research Case 2 (60 Minutes)
Students often believe that all answers can be found in textbooks or the needed
information is simply a part of every CPA’s basic knowledge. However, in real life,
most issues are resolved by research. Here, the CPA firm is faced with a tax
document. The link for the 1041 instructions can be located at:
http://www.irs.gov/pub/irs-pdf/i1041.pdf
“The income distribution deduction allowable to estates and trusts for amounts
paid, credited, or required to be distributed to beneficiaries is limited to
distributable net income (DNI). This amount, which is figured on Schedule B, line
Chapter 19 – Accounting for Estates and Trusts
19-25
Education.
From the above quote as well as from the table of contents for these instructions,
the student can determine that Schedule B is used to compute the amount of
distributable net income. Therefore, the student can scroll down through these
instructions (about 15-20 pages) and come upon over a page of actual guidance
Research Case 3 (45 Minutes)
This research case requires the student to use a legal or commercial search
engine to locate a specific state’s probate code. Every state has a probate
statutory scheme. Approximately twenty (20) states have adopted a version of
the uniform probate code, in an attempt to utilize a consistent asset distribution
student’s familiarity, it may be prudent for the professor to provide the link for the
student and evaluate the student’s answer based on the student’s application of
the statute.
This statue, which is similar to the statutes of the other states which have
adopted the uniform probate code, provides the following:
(a) to the decedent’s descendants by representation;
(b) if there is no surviving descendant, to the decedent’s parents equally if
both survive or to the surviving parent;
(c) if there is no surviving descendant or parent, to the descendants of the
decedent’s parents or either of them by representation;
(II) the surviving paternal grandparent; or
Chapter 19 – Accounting for Estates and Trusts
19-26
Education.
paternal or the maternal side, the entire estate to the decedent’s relatives on the
other side in the same manner as the half;
(e) if there is no surviving descendant, grandparent, or descendant of a
grandparent, to the person of the closest degree of kinship with the decedent.
Except as provided in subsection (2), if more than one person is of that closest
Section 72-2-113–1(c) will provide that Ms. Voga’s cousins could inherit from her
grandmother through Ms. Voga’s great grandparents, if in fact Ms. Voga’s
grandmother had no decendants. Clearly the grandmother has at least one
decendant – Ms. Voga. However, the prudent professional should explain this
process to the client as there is no guarantee that Ms. Voga will outlive her
grandmother.
Analysis Case 1 (45 Minutes)
Included in the information about GRATs at this suggested link and at many other
links is the following:
▪ It can be used to transfer profitable and quickly appreciating property to a
donee, such as the donor’s child(ren), in such a way as to minimize gift and
beneficiary.
Chapter 19 – Accounting for Estates and Trusts
Education.
▪ For gift tax purposes, the conveyed value is the value when the trust was
created less the value of the annuity interest that the original owner retains.
▪ The reduced value limits or eliminates any potential gift tax effects.
▪ Consequently, income is retained by the original owner while conveying
the property to the eventual recipient at a lower set value as a way to
reduce the amount taken by the government in taxes.
This trust is, thus, advantageous when an individual wishes to transfer wealth to
subsequent generations while also minimizing the transfer taxes. It is particularly
useful if the transferor can identify and transfer rapidly appreciating assets.
Analysis Case 2 (45 Minutes)
In setting the value of an estate, the executor has the option to choose an
alternate date for valuation purposes if that decision will reduce the taxes to be
paid. This case was created to help the student obtain additional information
about this decision if ever encountered in the real world.
Because this is a tax issue, the student is being directed to make use of the
directly to the index at the back of these instructions, the student can locate
information on the topic of “alternate valuation.”
The information provided in the instructions discusses the basic issues
concerning valuation at death versus the option of either six-months after death
or the date of transfer whichever comes first. Within that coverage, special issues
Chapter 19 – Accounting for Estates and Trusts
19-28