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Chapter 19 - Accounting for Estates and Trusts

Chapter 19Accounting for Estates and Trusts

Multiple Choice Questions

1. When a person dies without leaving a valid will, how is the distribution of his or her property determined? A. In accordance with federal inheritance laws.B. In accordance with generally accepted accounting principles.C. In accordance with a plan developed by the executor of the estate.D. In accordance with state inheritance laws.E. In accordance with common law.

2. Under what circumstance does an estate have an executor? A. When there is no valid will.B. When the estate exceeds the dollar amount of the estate tax exemption.C. When the will establishes a trust fund.D. When the will is contested.E. When the will names a specific person to administer the estate.

3. When an estate does not have sufficient assets to satisfy all claims against it, what claim has the highest priority? A. Expenses of administering the estate.B. Federal income taxes.C. State income taxes.D. Medical expenses of the final illness.E. Back wages owed to any employees.

4. What is the process of abatement? A. An attempt to determine the deceased's intentions when the terms of the will are unclear.B. A reduction of various bequests when the estate is not adequate to satisfy them completely.C. Selling of assets included in an estate to be able to pay creditors.D. Payment of the claims of creditors.E. The establishment of how the creditors will be paid.

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5. A demonstrative legacy is a A. gift of personal property that is directly identified.B. cash gift from a particular source.C. gift of estate property that remains after carrying out the other provisions of the will.D. gift of real property.E. gift of intangible property.

6. In a will, a devise is a A. gift of personal property that is directly identified.B. cash gift from a particular source.C. gift of estate property that remains after carrying out the other provisions of the will.D. gift of real property.E. gift of intangible property.

7. What guidelines must be followed to classify a transaction as associated with the principal of an estate or as an income transaction? A. Generally accepted accounting principles.B. Federal estate laws.C. State estate laws.D. The Internal Revenue Code.E. The decedent's intentions or state laws.

8. Executor's fees and court costs for settling an estate usually A. must be apportioned between the principal and the income of the estate.B. are adjustments to the principal of the estate.C. are adjustments to the income of the estate.D. are subtracted from life insurance proceeds.E. are ignored.

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9. In an executor's accounting for an estate, debts and other obligations are recorded A. at book value.B. at fair value.C. on the date of payment.D. as soon as they are discovered.E. only if they are past due.

10. A testamentary trust is a trust A. intended to protect the assets of a minor.B. that is managed by the trustor.C. that is managed by an estate.D. established by a living person.E. established by a will.

11. Which of the following is usually accounted for as an adjustment to a trust's principal? A. Repairs expense.B. Rent expense.C. Investment costs and commissions.D. Insurance expense.E. Property taxes.

12. Which of the following is usually not accounted for as an adjustment to a trust's income? A. Ordinary repairs expense.B. Rent expense.C. Investment costs and commissions.D. Insurance expense.E. Property taxes.

13. The trustor is the A. income beneficiary of the trust.B. ultimate recipient of the principal from the trust.C. fiduciary who manages the assets in the trust.D. person who funds the trust.E. person who disposes of the assets in the trust.

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The terms of a will currently undergoing probate are: "A gift to my brother David of $25,000 cash; to my son James, $50,000 from my savings account; and to my Daughter Lila, all of my remaining property." At the time of death, the balance in the savings account was $40,000, and there was additional cash (after payment of funeral expenses and all claims against the estate) of $70,000.

14. The gift to David is a A. general legacy.B. specific legacy.C. demonstrative legacy.D. residual legacy.E. devise.

15. The gift to James is a A. general legacy.B. specific legacy.C. demonstrative legacy.D. residual legacy.E. devise.

16. How much would James have received from the estate? A. $50,000.B. $40,000.C. $25,000.D. $45,000.E. $30,000.

17. How much would Lila have received from the estate? A. $0.B. $40,000.C. $35,000.D. $45,000.E. $30,000.

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The provisions of a will currently undergoing probate are: "Two thousand shares of Dorn stock to my son; $30,000 in cash from my savings account to my brother; $50,000 in cash to my daughter; and any remaining property divided equally between my son and daughter."

18. Assume that, at the time of death, the estate included 1,200 shares of Dorn stock, $60,000 cash in the savings account, and $70,000 in cash from other sources. What would the son have received from the settlement of the estate? A. 1,200 shares of Dorn stock and $35,000 cash.B. 2,000 shares of Dorn stock and $10,000 cash.C. 2,000 shares of Dorn stock and $25,000 cash.D. 1,200 shares of Dorn stock and $10,000 cash.E. 1,200 shares of Dorn stock and $25,000 cash.

19. Assume that the estate included 1,200 shares of Dorn stock, $22,000 cash in the savings account, and $70,000 in cash from other sources. What would the daughter have received from the settlement of the estate? A. $60,000 cash.B. $50,000 cash.C. $55,000 cash.D. $62,000 cash.E. $57,000 cash.

20. Which of the following is not subtracted to arrive at the taxable value of an estate? A. Liabilities.B. Charitable bequests.C. Funeral expenses.D. Estate administration expenses.E. Deduction for property conveyed to children of decedent.

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21. Assume that Bob Smith dies on May 25, 2011. Mr. Smith's assets include the following: ABC Stock costing $30,000 but valued at $40,000; a house costing $280,000 but valued at $620,000; life insurance in the amount of $600,000; and cash from various sources totaling $50,700. Three credit cards in Mr. Smith's name had balances totaling $8,530 on the date of death. The estate paid funeral and final medical expenses in the amount of $50,492. There were no charitable gifts designated by the will, and Mr. Smith was single at the time of his death. What is the amount of the taxable estate? A. $901,678.B. $1,251,678.C. $1,268,738.D. $1,310,700.E. $651,678.

22. What is the amount of the personal exemption on an estate income tax return? A. $0.B. $100.C. $300.D. $500.E. $600.

23. Which of the following is normally viewed as an adjustment to the principal of an estate? A. Ordinary repair expenses.B. Insurance expenses.C. Utility expenses.D. Major repairs to rental property.E. Property taxes.

24. Which of the following is not normally viewed as an adjustment to the principal of an estate? A. Dividends declared prior to death.B. Investment commissions and other costs.C. Funeral expenses.D. Insurance expenses.E. Debts incurred prior to death.

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25. What are the goals of probate laws?(1) Gather and preserve all of the decedent's property;(2) Carry out an orderly and fair settlement of all debts;(3) Discover and follow the decedent's intent for the remaining property A. 1 only.B. 2 only.C. 3 only.D. 1 and 2.E. 1, 2, and 3.

26. After expenses of administering an estate, which claims would be next in a typical order of priority to establish which creditors will get paid?(1) Funeral expenses.(2) Medical expenses of the last illness.(3) Debts and taxes given preference under laws.(4) All other claims. A. 1 and 2.B. 2 and 3.C. 3 and 4.D. 1 and 4.E. 2 and 4.

27. A gift that is specified in a will as "I leave my collection of baseball cards to my son" is a A. general legacy.B. specific legacy.C. demonstrative legacy.D. residual legacy.E. devise.

28. A gift that is specified in a will as "I leave $5,000 in cash from my checking account to my daughter" is a A. general legacy.B. specific legacy.C. demonstrative legacy.D. residual legacy.E. devise.

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29. A gift that is specified in a will as "I leave $5,000 in cash to my son" is a A. general legacy.B. specific legacy.C. demonstrative legacy.D. residual legacy.E. devise.

30. A gift of any remaining estate property is a A. general legacy.B. specific legacy.C. demonstrative legacy.D. residual legacy.E. devise.

The provisions of a will currently undergoing probate are: "One thousand shares of Wal-mart stock to my son; $10,000 in cash from my savings account to my brother; $5,000 in cash to my daughter; and any remaining property divided equally between my son and daughter." At the time of death, the estate included 1,400 shares of Wal-mart stock and $25,000 cash in the savings account.

31. What would the son have received from the settlement of the estate? A. 1,000 shares of Wal-mart stock and $15,000 cashB. 1,000 shares of Wal-mart stock and $0 cashC. 1,000 shares of Wal-mart stock and $10,000 cashD. 1,200 shares of Wal-mart stock and $5,000 cashE. 1,400 shares of Wal-mart stock and $5,000 cash

32. What is the remaining principal to be divided equally between the son and the daughter? A. $10,000 cashB. $15,000 cashC. 400 shares of Wal-mart stock and $10,000 cashD. 400 shares of Wal-mart stock and $15,000 cashE. 1,000 shares of Wal-mart stock and $5,000 cash

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33. The provisions of a will currently undergoing probate are: "One thousand shares of Wal-mart stock to my son; $10,000 in cash from my savings account to my brother; $5,000 in cash to my daughter; and any remaining property divided equally between my son and daughter." At the time of death, the estate included 1,000 shares of Wal-mart stock and $6,000 cash in the savings account. What would the brother have received from the settlement of the estate? A. $0.B. $5,000.C. $6,000.D. $10,000.E. $11,000.

34. The estate of Bobbi Jones has the following provisions: total value of estate assets $2,000,000, amount specified to convey to a spouse $1,000,000, amount specified to convey to children $200,000, total debts 400,000, administrative expenses $50,000, and funeral expenses of $30,000. What is the value of the taxable estate? A. $320,000.B. $520,000.C. $550,000.D. $1,480,000.E. $1,520,000.

35. The party to receive a distribution of principal from an estate is legally called a(n): A. Principal grantee.B. Corpus benefitor.C. Estate receiver.D. Remainderman.E. Estate distributee.

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36. Jim Bowie died on April 1, 2011. The estate has the following gross asset valuation information:

The estate tax will be calculated using: A. $73,000.B. $75,000.C. $76,000.D. $80,000.E. $81,000.

37. An executor will normally carry out all the following tasks except: A. Distribute property to beneficiaries.B. Settle claims against the decedent.C. Inventory property existing at the date of death.D. Prepare estate tax returns.E. Account to the probate court.

38. When there are not enough assets in the estate to satisfy all legacies in the will, the distribution schedule goes through a process of: A. Ademption.B. Amendment.C. Abatement.D. Accretion.E. Aggregation.

39. For which type of trust is the income taxed in the grantor's individual income tax return? A. Inter vivos trust.B. Grantor trust.C. Revocable living trust.D. Family trust.E. Irrevocable life insurance trust.

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40. Which of the following is not a trust used for estate planning? A. Minor's Section 2503(c) trust.B. Alimony trust.C. Credit shelter trust.D. Revocable living trust.E. Grantor retained annuity trust.

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Matching Questions

41. For each of the following situations, select the best answer concerning adjustments to principal and income of an estate. Assume that the will does not specify whether the item is to be classified as principal or income.

1. Adjustment to the principal of the estate Homestead allowance ____ 2. Allocated between the principal and income of the estate determined by existence at date of death Insurance expenses ____ 3. Allocated between the principal and income of the estate in some fair manner Executor's fee ____

4. Adjustment to the principal of the estate Life insurance proceeds when estate is beneficiary ____

5. Adjustment to the principal of the estate Investment commissions ____

6. Adjustment to the income of the estate Debts incurred prior to

death ____

7. Adjustment to the income of the estate Water and other utility

expenses ____ 8. Adjustment to the income of the estate Liquidating dividends ____ 9. Adjustment to the principal of the estate Dividend income ____ 10. Adjustment to the income of the estate Funeral expenses ____ 11. Allocated between the principal and income of the estate determined by existence at date of death

Extraordinary repairs on income-producing property ____

12. Allocated between the principal and income of the estate in some fair manner Attorney fees ____ 13. Adjustment to the principal of the estate Property taxes ____

14. Adjustment to the principal of the estate Gains and losses on the sale

of securities ____ 15. Allocated between the principal and income of the estate in some fair manner Interest income ____ 16. Allocated between the principal and income of the estate in some fair manner Court costs ____

17. Adjustment to the principal of the estate Ordinary repairs on

income-producing property ____ 18. Adjustment to the principal of the estate Accounting fees ____

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Essay Questions

42. What is meant by estate accounting?

43. What is meant by "an individual dies intestate"?

44. In settling an estate, what is the meaning of the term devise?

45. What is the purpose of the Uniform Probate Code?

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46. How may real property be treated in identifying estate property subject to probate?

47. What choices does an executor of an estate have in determining the values of assets included in the estate for tax purposes?

48. What is a remainderman of trust property?

49. What are the three goals of probate laws?

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50. What is the difference between an executor and an administrator?

51. What are the four levels of claims in the order of priority of the Uniform Probate Code?

52. In settling an estate, what is the meaning of the term legacy?

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53. The estate of Kent Talbert reported the following information:

Required:Prepare a schedule to show the amount of the taxable estate.

During the most recent year, an estate generated income of $26,000:

The interest income was conveyed immediately to the beneficiary stated in the decedent's will. Dividends of $1,560 were given to the decedent's church.

54. Prepare a schedule to show the amount of taxable income.

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55. Prepare a schedule to show the amount of federal income tax that must be paid.

56. The executor of the estate of Yelbert Toper recorded the following information:Assets discovered at death (at fair value):

Debts of $22,100 still remain to be paid. The shares of Dell stock were conveyed to the appropriate beneficiary. Executor fees are allocated based on total charges for principal and for income.Required:Prepare a charge and discharge statement for this estate.

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The following information pertains to 11 separate questions.The executor of the Estate of Kate Tweed discovered the following assets (at fair value):

The will of Kate Tweed had the following provisions:$195,000 in cash went to Victor Vickery.All shares of PepsiCo went to Duchess Doyle.The residence went to Louis Tweed.All other estate assets were to be liquidated with the resulting cash going to the Sacred Church of Liberty, Missouri.

57. Prepare the journal entry to record the property of the estate.

58. For the Estate of Kate Tweed, interest of $9,100 was collected.Prepare the journal entry to record the collection.

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59. Funeral expenses of $26,000 were paid.Prepare the journal entry to record the transaction.

60. Debts of $52,000 were discovered.Prepare the journal entry to record the transaction.

61. An additional savings account of $15,600 was located by the executor.Prepare the journal entry to record the transaction.

62. Title to the residence was conveyed to Louis Tweed.Prepare the journal entry to record the transaction.

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63. The life insurance policy was collected. Prepare the journal entry to record the transaction.

64. Additional debts of $78,000 were discovered. Debts totaling $130,000 were paid.Prepare the journal entry to record the transaction.

65. Cash of $195,000 was conveyed to the appropriate beneficiary.Prepare the journal entry to record the transaction.

66. The shares of Kodak were sold for $145,600.Prepare the journal entry to record the transaction.

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67. Administrative expenses of $13,000 were paid.Prepare the journal entry to record the transaction.

68. An inter vivos trust was created by Isaac Posney. Isaac owned a large department store in Juggins, Utah. Adjacent to the store, Isaac also owned a tract of land that was used as an extra parking lot when the store was having a sale or during the Christmas season. Isaac expected the land to appreciate in value and eventually be sold for an office complex or additional stores.Isaac placed the land into a charitable lead trust which would hold the land for ten years until Isaac's son would turn 21. At that time, title would be transferred to the son. The store will pay rent to use the land during the interim. The income generated each year from this usage will be given to a local church. The land was currently valued at $416,000.During the first year of this arrangement, the trustee recorded the following cash transactions:

Required:Prepare all required journal entries for this trust fund including the entry to create the trust.

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69. During the current year, an estate generates the following income amounts: Rental income $10,000, Interest income 4,000, Dividend income 6,000. The rental income is conveyed immediately to the beneficiary stated in the decedent's will. Dividends of $2,000 are donated to the decedent's church. What amount of federal income tax must be paid by the estate?

The executor of Danny Mack's estate has listed the following properties at fair value: Cash $200,000, Life Insurance Receivable $500,000, Investment in Stocks and Bonds $50,000, Rental Property $100,000, and Personal Property $80,000. Additionally, the executor found $100,000 of various debts incurred before the decedent's death. The cost of Danny Mack's funeral was $20,000.


71. Prepare the journal entry for claims of $100,000 made against the estate for various debts incurred before the decedent's death, and $20,000 for funeral expense bills.

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72. Prepare the journal entry to record interest of $5,000 that was earned on the bonds of the estate. Of this amount, $2,000 had been earned prior to death.

73. Prepare the journal entry to record ordinary repairs to the rental property of $5,000.

74. Prepare the journal entry to record the payment of the estate's liabilities for debts incurred prior to the decedent's death.

75. Prepare the journal entry to record the sales of the stocks and bonds for $120,000.

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76. Prepare the journal entry to record the collection of rental income of $10,000. $1,000 had been earned prior to the decedent's death.

77. Prepare the journal entry to record the distribution of $4,000 to Anna Lee, an income beneficiary.

78. Prepare the journal entry to record the collection of the life insurance policy.

79. Prepare the journal entry to record payment of $20,000 in funeral expenses.

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80. Prepare a Charge and Discharge Statement for the estate.

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Chapter 19 Accounting for Estates and Trusts Answer Key

Multiple Choice Questions

1. When a person dies without leaving a valid will, how is the distribution of his or her property determined? A. In accordance with federal inheritance laws.B. In accordance with generally accepted accounting principles.C. In accordance with a plan developed by the executor of the estate.D. In accordance with state inheritance laws.E. In accordance with common law.

AACSB: Reflective thinkingAICPA BB: LegalAICPA FN: ResearchBloom's: KnowledgeDifficulty: EasyLearning Objective: 19-01 Understand the proper methods of accounting for and administering an estate and the corresponding legal terminology.

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2. Under what circumstance does an estate have an executor? A. When there is no valid will.B. When the estate exceeds the dollar amount of the estate tax exemption.C. When the will establishes a trust fund.D. When the will is contested.E. When the will names a specific person to administer the estate.

AACSB: Reflective thinkingAICPA BB: LegalBloom's: KnowledgeDifficulty: EasyLearning Objective: 19-01 Understand the proper methods of accounting for and administering an estate and the corresponding legal terminology.

3. When an estate does not have sufficient assets to satisfy all claims against it, what claim has the highest priority? A. Expenses of administering the estate.B. Federal income taxes.C. State income taxes.D. Medical expenses of the final illness.E. Back wages owed to any employees.

AACSB: Reflective thinkingAICPA BB: LegalBloom's: KnowledgeDifficulty: EasyLearning Objective: 19-01 Understand the proper methods of accounting for and administering an estate and the corresponding legal terminology.

4. What is the process of abatement? A. An attempt to determine the deceased's intentions when the terms of the will are unclear.B. A reduction of various bequests when the estate is not adequate to satisfy them completely.C. Selling of assets included in an estate to be able to pay creditors.D. Payment of the claims of creditors.E. The establishment of how the creditors will be paid.

AACSB: Reflective thinkingAICPA BB: LegalBloom's: KnowledgeDifficulty: EasyLearning Objective: 19-02 Describe the types of estate distributions and identify the process of asset allocations and distributions from an estate.

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5. A demonstrative legacy is a A. gift of personal property that is directly identified.B. cash gift from a particular source.C. gift of estate property that remains after carrying out the other provisions of the will.D. gift of real property.E. gift of intangible property.

AACSB: Reflective thinkingAICPA BB: LegalBloom's: KnowledgeDifficulty: MediumLearning Objective: 19-02 Describe the types of estate distributions and identify the process of asset allocations and distributions from an estate.

6. In a will, a devise is a A. gift of personal property that is directly identified.B. cash gift from a particular source.C. gift of estate property that remains after carrying out the other provisions of the will.D. gift of real property.E. gift of intangible property.


7. What guidelines must be followed to classify a transaction as associated with the principal of an estate or as an income transaction? A. Generally accepted accounting principles.B. Federal estate laws.C. State estate laws.D. The Internal Revenue Code.E. The decedent's intentions or state laws.

AACSB: Reflective thinkingAICPA BB: LegalAICPA FN: ResearchBloom's: KnowledgeDifficulty: EasyLearning Objective: 19-04 Understand and account for the distinction between principal and income in the context of estate and trust accounting.

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8. Executor's fees and court costs for settling an estate usually A. must be apportioned between the principal and the income of the estate.B. are adjustments to the principal of the estate.C. are adjustments to the income of the estate.D. are subtracted from life insurance proceeds.E. are ignored.

AACSB: Reflective thinkingAICPA BB: LegalBloom's: KnowledgeDifficulty: MediumLearning Objective: 19-04 Understand and account for the distinction between principal and income in the context of estate and trust accounting.

9. In an executor's accounting for an estate, debts and other obligations are recorded A. at book value.B. at fair value.C. on the date of payment.D. as soon as they are discovered.E. only if they are past due.

AACSB: Reflective thinkingAICPA BB: LegalAICPA FN: MeasurementBloom's: KnowledgeDifficulty: MediumLearning Objective: 19-01 Understand the proper methods of accounting for and administering an estate and the corresponding legal terminology.

10. A testamentary trust is a trust A. intended to protect the assets of a minor.B. that is managed by the trustor.C. that is managed by an estate.D. established by a living person.E. established by a will.

AACSB: Reflective thinkingAICPA BB: LegalBloom's: KnowledgeDifficulty: EasyLearning Objective: 19-05 Describe the financial statements and journal entries utilized to account for estate and trust transactions.

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11. Which of the following is usually accounted for as an adjustment to a trust's principal? A. Repairs expense.B. Rent expense.C. Investment costs and commissions.D. Insurance expense.E. Property taxes.

AACSB: Reflective thinkingAICPA BB: LegalAICPA FN: MeasurementBloom's: KnowledgeDifficulty: MediumLearning Objective: 19-06 Describe various trusts and their proper use.

12. Which of the following is usually not accounted for as an adjustment to a trust's income? A. Ordinary repairs expense.B. Rent expense.C. Investment costs and commissions.D. Insurance expense.E. Property taxes.

AACSB: Reflective thinkingAICPA BB: LegalAICPA FN: MeasurementBloom's: KnowledgeDifficulty: MediumLearning Objective: 19-06 Describe various trusts and their proper use.

13. The trustor is the A. income beneficiary of the trust.B. ultimate recipient of the principal from the trust.C. fiduciary who manages the assets in the trust.D. person who funds the trust.E. person who disposes of the assets in the trust.


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The terms of a will currently undergoing probate are: "A gift to my brother David of $25,000 cash; to my son James, $50,000 from my savings account; and to my Daughter Lila, all of my remaining property." At the time of death, the balance in the savings account was $40,000, and there was additional cash (after payment of funeral expenses and all claims against the estate) of $70,000.

14. The gift to David is a A. general legacy.B. specific legacy.C. demonstrative legacy.D. residual legacy.E. devise.

AACSB: Reflective thinkingAICPA BB: LegalBloom's: ComprehensionDifficulty: MediumLearning Objective: 19-02 Describe the types of estate distributions and identify the process of asset allocations and distributions from an estate.

15. The gift to James is a A. general legacy.B. specific legacy.C. demonstrative legacy.D. residual legacy.E. devise.


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16. How much would James have received from the estate? A. $50,000.B. $40,000.C. $25,000.D. $45,000.E. $30,000.

AACSB: AnalyticAICPA BB: LegalAICPA FN: MeasurementBloom's: ApplicationDifficulty: MediumLearning Objective: 19-02 Describe the types of estate distributions and identify the process of asset allocations and distributions from an estate.

17. How much would Lila have received from the estate? A. $0.B. $40,000.C. $35,000.D. $45,000.E. $30,000.


The provisions of a will currently undergoing probate are: "Two thousand shares of Dorn stock to my son; $30,000 in cash from my savings account to my brother; $50,000 in cash to my daughter; and any remaining property divided equally between my son and daughter."

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18. Assume that, at the time of death, the estate included 1,200 shares of Dorn stock, $60,000 cash in the savings account, and $70,000 in cash from other sources. What would the son have received from the settlement of the estate? A. 1,200 shares of Dorn stock and $35,000 cash.B. 2,000 shares of Dorn stock and $10,000 cash.C. 2,000 shares of Dorn stock and $25,000 cash.D. 1,200 shares of Dorn stock and $10,000 cash.E. 1,200 shares of Dorn stock and $25,000 cash.

AACSB: AnalyticAICPA BB: LegalAICPA FN: MeasurementBloom's: ApplicationDifficulty: HardLearning Objective: 19-02 Describe the types of estate distributions and identify the process of asset allocations and distributions from an estate.

19. Assume that the estate included 1,200 shares of Dorn stock, $22,000 cash in the savings account, and $70,000 in cash from other sources. What would the daughter have received from the settlement of the estate? A. $60,000 cash.B. $50,000 cash.C. $55,000 cash.D. $62,000 cash.E. $57,000 cash.


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20. Which of the following is not subtracted to arrive at the taxable value of an estate? A. Liabilities.B. Charitable bequests.C. Funeral expenses.D. Estate administration expenses.E. Deduction for property conveyed to children of decedent.

AACSB: Reflective thinkingAICPA BB: LegalAICPA FN: MeasurementBloom's: KnowledgeDifficulty: EasyLearning Objective: 19-03 Understand the federal estate tax and state inheritance tax systems; the corresponding exemptions; and tax planning opportunities.

21. Assume that Bob Smith dies on May 25, 2011. Mr. Smith's assets include the following: ABC Stock costing $30,000 but valued at $40,000; a house costing $280,000 but valued at $620,000; life insurance in the amount of $600,000; and cash from various sources totaling $50,700. Three credit cards in Mr. Smith's name had balances totaling $8,530 on the date of death. The estate paid funeral and final medical expenses in the amount of $50,492. There were no charitable gifts designated by the will, and Mr. Smith was single at the time of his death. What is the amount of the taxable estate? A. $901,678.B. $1,251,678.C. $1,268,738.D. $1,310,700.E. $651,678.

AACSB: AnalyticAICPA BB: LegalAICPA FN: MeasurementBloom's: ApplicationDifficulty: MediumLearning Objective: 19-03 Understand the federal estate tax and state inheritance tax systems; the corresponding exemptions; and tax planning opportunities.

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22. What is the amount of the personal exemption on an estate income tax return? A. $0.B. $100.C. $300.D. $500.E. $600.

AACSB: Reflective thinkingAICPA BB: LegalAICPA FN: MeasurementBloom's: KnowledgeDifficulty: EasyLearning Objective: 19-03 Understand the federal estate tax and state inheritance tax systems; the corresponding exemptions; and tax planning opportunities.

23. Which of the following is normally viewed as an adjustment to the principal of an estate? A. Ordinary repair expenses.B. Insurance expenses.C. Utility expenses.D. Major repairs to rental property.E. Property taxes.

AACSB: Reflective thinkingAICPA BB: LegalAICPA FN: MeasurementBloom's: KnowledgeDifficulty: MediumLearning Objective: 19-04 Understand and account for the distinction between principal and income in the context of estate and trust accounting.

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24. Which of the following is not normally viewed as an adjustment to the principal of an estate? A. Dividends declared prior to death.B. Investment commissions and other costs.C. Funeral expenses.D. Insurance expenses.E. Debts incurred prior to death.

AACSB: Reflective thinkingAICPA BB: LegalAICPA FN: MeasurementBloom's: KnowledgeDifficulty: MediumLearning Objective: 19-04 Understand and account for the distinction between principal and income in the context of estate and trust accounting.

25. What are the goals of probate laws?(1) Gather and preserve all of the decedent's property;(2) Carry out an orderly and fair settlement of all debts;(3) Discover and follow the decedent's intent for the remaining property A. 1 only.B. 2 only.C. 3 only.D. 1 and 2.E. 1, 2, and 3.

AACSB: Reflective thinkingAICPA BB: LegalAICPA FN: ResearchBloom's: ComprehensionDifficulty: MediumLearning Objective: 19-01 Understand the proper methods of accounting for and administering an estate and the corresponding legal terminology.

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26. After expenses of administering an estate, which claims would be next in a typical order of priority to establish which creditors will get paid?(1) Funeral expenses.(2) Medical expenses of the last illness.(3) Debts and taxes given preference under laws.(4) All other claims. A. 1 and 2.B. 2 and 3.C. 3 and 4.D. 1 and 4.E. 2 and 4.


27. A gift that is specified in a will as "I leave my collection of baseball cards to my son" is a A. general legacy.B. specific legacy.C. demonstrative legacy.D. residual legacy.E. devise.

AACSB: Reflective thinkingAICPA BB: LegalBloom's: ComprehensionDifficulty: EasyLearning Objective: 19-02 Describe the types of estate distributions and identify the process of asset allocations and distributions from an estate.

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28. A gift that is specified in a will as "I leave $5,000 in cash from my checking account to my daughter" is a A. general legacy.B. specific legacy.C. demonstrative legacy.D. residual legacy.E. devise.


29. A gift that is specified in a will as "I leave $5,000 in cash to my son" is a A. general legacy.B. specific legacy.C. demonstrative legacy.D. residual legacy.E. devise.


30. A gift of any remaining estate property is a A. general legacy.B. specific legacy.C. demonstrative legacy.D. residual legacy.E. devise.


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The provisions of a will currently undergoing probate are: "One thousand shares of Wal-mart stock to my son; $10,000 in cash from my savings account to my brother; $5,000 in cash to my daughter; and any remaining property divided equally between my son and daughter." At the time of death, the estate included 1,400 shares of Wal-mart stock and $25,000 cash in the savings account.

31. What would the son have received from the settlement of the estate? A. 1,000 shares of Wal-mart stock and $15,000 cashB. 1,000 shares of Wal-mart stock and $0 cashC. 1,000 shares of Wal-mart stock and $10,000 cashD. 1,200 shares of Wal-mart stock and $5,000 cashE. 1,400 shares of Wal-mart stock and $5,000 cash


32. What is the remaining principal to be divided equally between the son and the daughter? A. $10,000 cashB. $15,000 cashC. 400 shares of Wal-mart stock and $10,000 cashD. 400 shares of Wal-mart stock and $15,000 cashE. 1,000 shares of Wal-mart stock and $5,000 cash

AACSB: AnalyticAICPA BB: LegalAICPA FN: MeasurementBloom's: ApplicationDifficulty: HardLearning Objective: 19-02 Describe the types of estate distributions and identify the process of asset allocations and distributions from an estate.

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33. The provisions of a will currently undergoing probate are: "One thousand shares of Wal-mart stock to my son; $10,000 in cash from my savings account to my brother; $5,000 in cash to my daughter; and any remaining property divided equally between my son and daughter." At the time of death, the estate included 1,000 shares of Wal-mart stock and $6,000 cash in the savings account. What would the brother have received from the settlement of the estate? A. $0.B. $5,000.C. $6,000.D. $10,000.E. $11,000.


34. The estate of Bobbi Jones has the following provisions: total value of estate assets $2,000,000, amount specified to convey to a spouse $1,000,000, amount specified to convey to children $200,000, total debts 400,000, administrative expenses $50,000, and funeral expenses of $30,000. What is the value of the taxable estate? A. $320,000.B. $520,000.C. $550,000.D. $1,480,000.E. $1,520,000.


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35. The party to receive a distribution of principal from an estate is legally called a(n): A. Principal grantee.B. Corpus benefitor.C. Estate receiver.D. Remainderman.E. Estate distributee.

AACSB: Reflective thinkingAICPA BB: LegalBloom's: KnowledgeDifficulty: MediumLearning Objective: 19-04 Understand and account for the distinction between principal and income in the context of estate and trust accounting.

36. Jim Bowie died on April 1, 2011. The estate has the following gross asset valuation information:

The estate tax will be calculated using: A. $73,000.B. $75,000.C. $76,000.D. $80,000.E. $81,000.


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37. An executor will normally carry out all the following tasks except: A. Distribute property to beneficiaries.B. Settle claims against the decedent.C. Inventory property existing at the date of death.D. Prepare estate tax returns.E. Account to the probate court.

AACSB: Reflective thinkingAICPA BB: LegalBloom's: KnowledgeDifficulty: MediumLearning Objective: 19-01 Understand the proper methods of accounting for and administering an estate and the corresponding legal terminology.

38. When there are not enough assets in the estate to satisfy all legacies in the will, the distribution schedule goes through a process of: A. Ademption.B. Amendment.C. Abatement.D. Accretion.E. Aggregation.

AACSB: Reflective thinkingAICPA BB: LegalBloom's: KnowledgeDifficulty: MediumLearning Objective: 19-02 Describe the types of estate distributions and identify the process of asset allocations and distributions from an estate.

39. For which type of trust is the income taxed in the grantor's individual income tax return? A. Inter vivos trust.B. Grantor trust.C. Revocable living trust.D. Family trust.E. Irrevocable life insurance trust.


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40. Which of the following is not a trust used for estate planning? A. Minor's Section 2503(c) trust.B. Alimony trust.C. Credit shelter trust.D. Revocable living trust.E. Grantor retained annuity trust.

AACSB: AnalyticAICPA BB: LegalAICPA FN: MeasurementBloom's: AnalysisDifficulty: MediumLearning Objective: 19-06 Describe various trusts and their proper use.

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Matching Questions

41. For each of the following situations, select the best answer concerning adjustments to principal and income of an estate. Assume that the will does not specify whether the item is to be classified as principal or income.

1. Adjustment to the principal of the estate Homestead allowance 1 2. Allocated between the principal and income of the estate determined by existence at date of death Insurance expenses 6 3. Allocated between the principal and income of the estate in some fair manner Executor's fee 3

4. Adjustment to the principal of the estate Life insurance proceeds when estate is beneficiary 1

5. Adjustment to the principal of the estate Investment commissions 1

6. Adjustment to the income of the estate Debts incurred prior to

death 1

7. Adjustment to the income of the estate Water and other utility

expenses 6 8. Adjustment to the income of the estate Liquidating dividends 1 9. Adjustment to the principal of the estate Dividend income 2 10. Adjustment to the income of the estate Funeral expenses 1 11. Allocated between the principal and income of the estate determined by existence at date of death

Extraordinary repairs on income-producing property 1

12. Allocated between the principal and income of the estate in some fair manner Attorney fees 3 13. Adjustment to the principal of the estate Property taxes 6

14. Adjustment to the principal of the estate Gains and losses on the sale

of securities 1 15. Allocated between the principal and income of the estate in some fair manner Interest income 2 16. Allocated between the principal and income of the estate in some fair manner Court costs 3

17. Adjustment to the principal of the estate Ordinary repairs on income-

producing property 6 18. Adjustment to the principal of the estate Accounting fees 3

AACSB: Reflective thinkingAICPA BB: LegalAICPA FN: MeasurementBloom's: ComprehensionDifficulty: MediumLearning Objective: 19-04 Understand and account for the distinction between principal and income in the context of estate and trust accounting.

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Essay Questions

42. What is meant by estate accounting?

Estate accounting refers to the recording and reporting of financial events from the time of a person's death until the ultimate distribution of all property.

AACSB: Reflective thinkingAICPA BB: LegalAICPA FN: MeasurementBloom's: KnowledgeDifficulty: EasyLearning Objective: 19-01 Understand the proper methods of accounting for and administering an estate and the corresponding legal terminology.

43. What is meant by "an individual dies intestate"?

If an individual dies intestate then that person did not create a legal will prior to death. Therefore, there is no executor or executrix and the court will appoint an administrator/administratrix to attend to fiduciary estate responsibilities.

AACSB: Reflective thinkingAICPA BB: LegalBloom's: ComprehensionDifficulty: EasyLearning Objective: 19-01 Understand the proper methods of accounting for and administering an estate and the corresponding legal terminology.

44. In settling an estate, what is the meaning of the term devise?

A devise is a gift of real property such as land or a building.

AACSB: Reflective thinkingAICPA BB: LegalBloom's: ComprehensionDifficulty: EasyLearning Objective: 19-02 Describe the types of estate distributions and identify the process of asset allocations and distributions from an estate.

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45. What is the purpose of the Uniform Probate Code?

The purpose of the Uniform Probate Code is to encourage consistent laws governing wills and estates among the states.

AACSB: Reflective thinkingAICPA BB: LegalAICPA FN: ResearchBloom's: ComprehensionDifficulty: EasyLearning Objective: 19-01 Understand the proper methods of accounting for and administering an estate and the corresponding legal terminology.

46. How may real property be treated in identifying estate property subject to probate?

In some states, real property is conveyed directly to the beneficiary or co-owner at the time of death and would not be included in the inventory of estate.


47. What choices does an executor of an estate have in determining the values of assets included in the estate for tax purposes?

The fair value of property must be determined at the date of death or on the alternative valuation date (six months after death or the date of disposition after death, whichever is earlier), at the option of the executor.

AACSB: Reflective thinkingAICPA BB: LegalAICPA FN: MeasurementBloom's: KnowledgeDifficulty: MediumLearning Objective: 19-03 Understand the federal estate tax and state inheritance tax systems; the corresponding exemptions; and tax planning opportunities.

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48. What is a remainderman of trust property?

A remainderman of trust property is a person who receives the principal from a trust after someone else has received income from the trust for a given period of time.

AACSB: Reflective thinkingAICPA BB: LegalBloom's: KnowledgeDifficulty: EasyLearning Objective: 19-06 Describe various trusts and their proper use.

49. What are the three goals of probate laws?

Probate laws generally are designed to (1) gather, preserve, and account for all of the decedent's property; (2) carry out an orderly and fair settlement of all debts; and (3) discover the decedent's intent for the remaining property held at death and then follow those wishes.


50. What is the difference between an executor and an administrator?

An executor is a specific person named in the will to fulfill the fiduciary responsibilities of satisfying all applicable laws and making certain that the decedent's wishes are achieved, if possible. If the will does not designate an executor, or the named executor is unwilling or unable to serve, an administrator is appointed by the court to fulfill the same responsibilities.

AACSB: Reflective thinkingAICPA BB: LegalBloom's: ComprehensionDifficulty: EasyLearning Objective: 19-01 Understand the proper methods of accounting for and administering an estate and the corresponding legal terminology.

19-47


51. What are the four levels of claims in the order of priority of the Uniform Probate Code?

The order of priority is as follows: (1) expenses of administering the estate, (2) funeral expenses and medical expenses of the last illness, (3) debts and taxes given preference under federal and state laws, and (4) all other claims.


52. In settling an estate, what is the meaning of the term legacy?

A legacy, also called a bequest, is a gift of personal property such as stocks or furniture.


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53. The estate of Kent Talbert reported the following information:

Required:Prepare a schedule to show the amount of the taxable estate.


During the most recent year, an estate generated income of $26,000:

The interest income was conveyed immediately to the beneficiary stated in the decedent's will. Dividends of $1,560 were given to the decedent's church.

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54. Prepare a schedule to show the amount of taxable income.


55. Prepare a schedule to show the amount of federal income tax that must be paid.


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56. The executor of the estate of Yelbert Toper recorded the following information:Assets discovered at death (at fair value):

Debts of $22,100 still remain to be paid. The shares of Dell stock were conveyed to the appropriate beneficiary. Executor fees are allocated based on total charges for principal and for income.Required:Prepare a charge and discharge statement for this estate.

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AACSB: AnalyticAICPA BB: LegalAICPA FN: MeasurementBloom's: ApplicationDifficulty: HardLearning Objective: 19-05 Describe the financial statements and journal entries utilized to account for estate and trust transactions.

The following information pertains to 11 separate questions.The executor of the Estate of Kate Tweed discovered the following assets (at fair value):

The will of Kate Tweed had the following provisions:$195,000 in cash went to Victor Vickery.All shares of PepsiCo went to Duchess Doyle.The residence went to Louis Tweed.All other estate assets were to be liquidated with the resulting cash going to the Sacred Church of Liberty, Missouri.


AACSB: AnalyticAICPA BB: LegalAICPA FN: MeasurementBloom's: ApplicationDifficulty: EasyLearning Objective: 19-04 Understand and account for the distinction between principal and income in the context of estate and trust accounting.

19-53


58. For the Estate of Kate Tweed, interest of $9,100 was collected.Prepare the journal entry to record the collection.


59. Funeral expenses of $26,000 were paid.Prepare the journal entry to record the transaction.


60. Debts of $52,000 were discovered.Prepare the journal entry to record the transaction.

No entry is required, since debts are only recorded by an estate when they are paid.

AACSB: AnalyticAICPA BB: LegalAICPA FN: MeasurementBloom's: ApplicationDifficulty: MediumLearning Objective: 19-04 Understand and account for the distinction between principal and income in the context of estate and trust accounting.

19-54


61. An additional savings account of $15,600 was located by the executor.Prepare the journal entry to record the transaction.


62. Title to the residence was conveyed to Louis Tweed.Prepare the journal entry to record the transaction.


63. The life insurance policy was collected. Prepare the journal entry to record the transaction.


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64. Additional debts of $78,000 were discovered. Debts totaling $130,000 were paid.Prepare the journal entry to record the transaction.


65. Cash of $195,000 was conveyed to the appropriate beneficiary.Prepare the journal entry to record the transaction.


66. The shares of Kodak were sold for $145,600.Prepare the journal entry to record the transaction.


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67. Administrative expenses of $13,000 were paid.Prepare the journal entry to record the transaction.


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68. An inter vivos trust was created by Isaac Posney. Isaac owned a large department store in Juggins, Utah. Adjacent to the store, Isaac also owned a tract of land that was used as an extra parking lot when the store was having a sale or during the Christmas season. Isaac expected the land to appreciate in value and eventually be sold for an office complex or additional stores.Isaac placed the land into a charitable lead trust which would hold the land for ten years until Isaac's son would turn 21. At that time, title would be transferred to the son. The store will pay rent to use the land during the interim. The income generated each year from this usage will be given to a local church. The land was currently valued at $416,000.During the first year of this arrangement, the trustee recorded the following cash transactions:

Required:Prepare all required journal entries for this trust fund including the entry to create the trust.

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AACSB: AnalyticAICPA BB: LegalAICPA FN: MeasurementBloom's: ApplicationDifficulty: MediumLearning Objective: 19-05 Describe the financial statements and journal entries utilized to account for estate and trust transactions.

69. During the current year, an estate generates the following income amounts: Rental income $10,000, Interest income 4,000, Dividend income 6,000. The rental income is conveyed immediately to the beneficiary stated in the decedent's will. Dividends of $2,000 are donated to the decedent's church. What amount of federal income tax must be paid by the estate?


The executor of Danny Mack's estate has listed the following properties at fair value: Cash $200,000, Life Insurance Receivable $500,000, Investment in Stocks and Bonds $50,000, Rental Property $100,000, and Personal Property $80,000. Additionally, the executor found $100,000 of various debts incurred before the decedent's death. The cost of Danny Mack's funeral was $20,000.

19-59




71. Prepare the journal entry for claims of $100,000 made against the estate for various debts incurred before the decedent's death, and $20,000 for funeral expense bills.

No entry needed until liabilities are paid.


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72. Prepare the journal entry to record interest of $5,000 that was earned on the bonds of the estate. Of this amount, $2,000 had been earned prior to death.


73. Prepare the journal entry to record ordinary repairs to the rental property of $5,000.

(Ordinary repair expenses are made to rental property and are generally charged to income rather than principal.)


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74. Prepare the journal entry to record the payment of the estate's liabilities for debts incurred prior to the decedent's death.


75. Prepare the journal entry to record the sales of the stocks and bonds for $120,000.

(To record sale of stocks and to reflect gain on such sale with the additional proceeds becoming part of the estate's principal.)


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76. Prepare the journal entry to record the collection of rental income of $10,000. $1,000 had been earned prior to the decedent's death.

(To record receipt of rental income. The $1,000 earned prior to the decedent's death was not included in original listing of estate assets and is therefore an asset subsequently discovered.)


77. Prepare the journal entry to record the distribution of $4,000 to Anna Lee, an income beneficiary.


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78. Prepare the journal entry to record the collection of the life insurance policy.


79. Prepare the journal entry to record payment of $20,000 in funeral expenses.


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80. Prepare a Charge and Discharge Statement for the estate.

AACSB: AnalyticAICPA BB: LegalAICPA FN: MeasurementBloom's: ApplicationDifficulty: HardLearning Objective: 19-05 Describe the financial statements and journal entries utilized to account for estate and trust transactions.

19-65