Chapter 23

ESTATES AND TRUSTS

Answers to Questions
1

No, trust accounting is essentially cash basis accounting.

Income is earned on the principal amounts of estate and trust assets.

Estates frequently realize income from various investments between the
time that the property inventory is filed by the executor and the time
the estate is fully administered. A primary reason for dividing estate
principal and income is that the beneficiaries are likely to be
different. Separation of principal and income is also important for
trusts, because often a trusts principal is to be maintained intact
until the death of the beneficiary.

A devise is a testamentary disposition of real or personal property.

If a decedent had a valid will in force at the time of death, he or she

is said to have died testate. In the absence of a valid will, the
decedent is said to have died intestate.

The Uniform Probate Code entitles the surviving spouse to a homestead

allowance that is exempt from and has priority over all claims against
the estate. The surviving spouse and minor children who were dependent
on the deceased are also entitled to a reasonable family allowance to be
paid out of estate property during the period in which the estate is
being administered. The family allowance is exempt from and has priority
over all claims except the homestead allowance. Allowance amounts vary
across the states.

Yes, the value of the estate is reduced by funeral expenses, settlements

of estate liabilities, bequests to qualified charities, a marital
deduction, state-level taxes, expenses of estate administration, and a
tax exempt amount.

The taxable amount of an estate is based on fair values of all estate

assets at the date of death.

Yes, within certain limitations. Currently any number of annual gifts of

$13,000 each can be made, with a lifetime limit of $1,000,000.

Income for estates and trusts and applicable tax rates are defined in
essentially the same manner as for individuals. Income includes interest
and dividends, rent, etc. Deductions and/or exemptions for estate
administration fees, charitable donations and distributions to
beneficiaries reduce taxable income. The fiduciary of the estate must
provide applicable information to the beneficiary on Schedule K-1.

10

An estate may be subject to taxation (referred to as estate or

inheritance taxes) at both the state and federal levels. Accountants and
attorneys play a vital role in estate planning to minimize these tax
burdens for their clients and heirs. Even if the federal tax is
permanently repealed, estate planning services will remain critical for
larger estates subject to state level taxation.

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23-1

Field Code Changed

Estates and Trusts

23-2

Federal taxation of estates is currently in a period of flux. The

Economic Growth and Tax Relief Reconciliation Act of 2001 proposed
reduction of the tax, and a total repeal in 2010. This law was
subsequently amended by the Tax Relief, Unemployment Insurance

Reauthorization, and Job Creation Act that was signed into law on
December 17, 2010 which provided the federal estate tax exemption
and rate for 2010-2012. This rate is only good until December
31, 2012, at which time the exemption and rate will revert to
2002 levels unless Congress acts.
11

A valid will ensures the disposition of estate assets in accordance with

the wishes of the deceased. If a valid will is not in place, assets will
be distributed in accordance with state probate laws. Preparation of a
will is also an important part of overall estate planning and can be
useful in reducing estate and inheritance taxes.

12

In addition to federal and state estate and inheritance taxes, estates

are also subject to federal (and possibly state) income taxes. An estate
is a taxable entity and is subject to tax on income earned from the date
of death until final settlement of the estate. The tax may be paid by
the estate or by the beneficiary if estate property has already been
distributed to the beneficiary.

SOLUTIONS TO EXERCISES
Solution E23-1
a

Cash (+A)

9,000

Interest receivable - bonds (-A)

4,400

Estate income (R,+SE)

4,600

Devise - Atlanta Animal Shelter (E,-SE)

100,000

Cash (-A)
c

Funeral expenses (E,-SE)

100,000
16,400

Cash (-A)
d

Cash (+A)
Interest receivable (+A)

16,400
50,000
1,200

Assets subsequently discovered (-A)

Cash (+A)

51,200
3,000

Interest receivable (-A)

1,200

Estate income (R,+SE)

1,800

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Chapter 23

23-3

Solution E23-2
a

Cash (+A)

15,000

Interest receivable - bonds (-A)

11,600

Estate income (R,+SE)

b

Devise - symphony orchestra (E,-SE)

3,400
150,000

Cash (-A)
c

Probate expenses (E,-SE)

150,000
2,800

Cash (-A)
d

Funeral expenses (E,-SE)

2,800
12,800

Cash (-A)
e

Estate principal (-SE)

12,800
44,000

Accounts payable (+L)

44,000

Solution E23-3
a

Dividend receivable (+A)

300,000

No entry on this date, since no distribution has yet been made.

Probate court expenses (E,-SE)

Estate income (R,+SE)

300,000

3,800

Cash (-A)
d

Funeral expenses (E,-SE)

3,800
11,600

Cash (-A)
e

Hospital fees and expenses (E,-SE)

11,600
37,000

Cash (-A)
f

Cash (+A)

37,000
300,000

Dividends receivable (-A)

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300,000

Estates and Trusts

23-4

Solution E 23-4
Melanie Triciao, Testator
Inventory of Estate Assets
As of the date of Death on August 15, 2011
Description of Property

Fair Value

Cash

118,225

Savings accounts

250,000

ViaReggio common stock

225,000

City of Roma municipal bonds

412,000

Mercedes sports car

Condominium on Italian Riviera

41,000
1,265,500

Atlanta personal residence

430,000

Collection of rare hand puppets

85,000

Fully restored Model T Ford

125,000
$2,951,725

Submitted by K. T. Tim, executor

Solution E23-5
1. Estate Inventory
Jeff Carpenter, Testator
Inventory of Estate Assets
As of the date of death on August 25, 2011
Description of Property

Fair Value

Cash in Oxford National Bank

$15,000

Certificates of deposit, includes $7,000 accrued

interest

807,000

Personal effects*

$822,000

*The probate court permitted exclusion of Jeffs

personal effects from the estate inventory. Prepared by
Ms. Colleen Ryan, Executrix, Oxford National Bank

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Chapter 23

23-5

Solution E23-5 (continued)

2.
a
Cash (+A)

11,500

Interest receivable - bonds (-A)

7,000

Estate income (R,+SE)

4,500

Cash (+A)

800,000

Devise- Sooner XXV trust account (E,-SE)

Certificates of deposit (-A)

800,000
100,000

Cash (-A)
d

100,000

Funeral expenses (E,-SE)

7,200

Cash (-A)

7,200

Executrix expenses (E,-SE)

Devise - J.J. Kara (E,-SE)

2,500

Cash (-A)

2,500
716,800

Cash (-A)
3.

716,800

Closing Entries
Estate principal (-SE)

822,000

Estate income (-R,-SE)

4,500

Funeral expenses (-E,+SE)

7,200

Executrix expenses (-E,+SE)

2,500

Devise - Sooner XXV trust (-E,+SE)

100,000

Devise - J.J. Kara

716,800

(-E,+SE)

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Estates and Trusts

23-6

Solution E23-5 (continued)

4. Charge-Discharge Statement
Estate of Jeff Carpenter
Charge-Discharge Statement
For the period of estate administration,
August 25 to September 28, 2011
Estate principal
I charge myself for:
Assets included in estate inventory - total estate
principal charge

$822,000

I credit myself for:

Funeral expenses paid
Executrix expenses paid
Devise paid in cash to Sooner XXV trust account
Devise paid in cash to J.J. Kara
Total estate principal discharge

7,200
2,500
100,000
712,300
$822,000

Estate income
I charge myself for:
Estate income received during estate administration

$4,500

I credit myself for:

Payment of estate income to J.J. Kara

$4,500

Respectfully submitted, Colleen Ryan, Estate Executrix, September

28, 2011.

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Chapter 23

23-7

Solution E23-6
9/15

Cash (+A)

100,000

Trust fund principal (+SE)

9/16

Money market investment (+A)

100,000
100,000

Cash (-A)
10/16

Cash (+A)

100,000
417

Trust fund income (R,+SE)

10/19

Trust fund expenses (E,-SE)

417
300

Cash (-A)
10/27

Trust fund expenses (E,-SE)

300
22

Cash (-A)
11/16

Cash (+A)

22
417

Trust fund income (R,+SE)

11/22

Trust fund expenses (E,-SE)

417
300

Cash (-A)
12/16

Cash (+A)

300
417

Trust fund income (R,+SE)

12/28

Trust fund expenses (E,-SE)

12/31

Trust fund expenses (E,-SE)

417
700

Cash (-A)

700
100

Cash (-A)
12/31

Interest receivable (+A)

100
208

Trust fund income (R,+SE)

- Accrued interest for last month.
12/31

208

Trust fund principal (-SE)

100,000

Trust fund income (-R,-SE)

1,459

Trust fund expenses (-E,+SE)

Interest receivable (-A)
Money market investment (-A)
Cash (-A)

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1,422
208
100,000
37

Estates and Trusts

23-8

Solution E23-7
Sooner XXV Trust
Charge-Discharge Statement
For the period of trust administration,
September 15 to December 31, 2011
Trust principal
I charge myself for:
Assets included in trust - total estate principal
charge

$100,000

I credit myself for:

Transfer of money market investment to J.J. Kara

$100,000

Trust income
I charge myself for:
Trust income received during trust administration

$1,459

I credit myself for:

Funeral expenses paid

700

Trust administration fee paid

100

Payments to Puppy Paradise

622

Total trust income discharge

$1,422

Payment of remaining trust income to J.J. Kara

$ 37

Respectfully submitted, Colleen Ryan, Trust Officer, December 31,

2011.
Solution E23-8
6/1

Cash (+A)

6/2

Investment in certificate of deposit (+A)

1,000,000

Trust fund principal (+SE)

1,000,000
500,000

Cash (-A)
6/2

Investment in stock mutual fund (+A)

500,000
500,000
500,000

Cash (-A)
7/2

Cash (+A)

2,500

Trust fund income (R,+SE)

($500,000 x 6% x 1/12 year)
7/3

Trust fund expenses (E,-SE)

2,500
41

Cash (-A)

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Chapter 23

23-9

Solution E 23-9
Cash (+A)

218,220

Savings accounts (+A)

300,000

Microsystems common stock (+A)

400,000

Big Casino common stock (+A)

120,000

Vintage sports car (+A)

31,000

Mountain cottage (+A)

114,500

Personal residence (+A)

457,500

Trust fund principal (+SE)

1,641,220

- To record receipt of property transferred from executor.

Solution E 23-10
a.
Fair value of gross estate
2009 Tax Exempt Estate
Taxable estate
45% Estate Tax Due
Balance inherited by Emily
b.

$5,300,000
(3,500,000)
$1,800,000
$810,000
$4,490,000

There were many estate planning options for Mr. Dogbert. For example, he
could have given assets to Emily during his lifetime or bequeathed funds
to his church or some favorite charities, excluding those amounts from
his estate. If the reduced estate value would fall below the federal tax
threshold, it would have left a zero inheritance tax. However, all of
these options expired with Dogberts demise.

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Estates and Trusts

23-10

Solution E 23-11
Fair value of gross estate

$3,600,000

2009 Tax Exempt Estate

(3,500,000)

Taxable estate

$100,000

45% Estate Tax Due

Balance inherited by Emily, Laura and Tom

$45,000
$3,555,000

Solution E 23-12
Fair value of gross estate

$23,400,000

2009 Tax Exempt Estate

(3,500,000)

Taxable estate

$19,900,000

45% Estate Tax Due

Balance inherited by Maggie

$8,955,000
$14,445,000

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Chapter 23

23-11

Solution P 23-1
Part 1
June 22

Cash (+A)

15,000

Interest receivable (-A)

5,000

Estate income (R,+SE)

June 24

Cash (+A)

10,000
12,000

Dividends receivable (-A)

June 30

Estate expense (E,-SE)

12,000
250

Cash (-A)
July 4

250

Estate expense (E,-SE)

4,900

Cash (-A)
July 12

4,900

Cash (+A)

501,300

Certificate of deposit (-A)

500,000

Estate income (R,+SE)

July 15

1,300

Cash (+A)

750,000

Certificate of deposit (+A)

500,000

Interest receivable (+A)

Common stocks (+A)

5,000
460,000

Dividend receivable (+A)

12,000

Lake Michigan cottage (+A)

40,000

2005 Corvette (+A)

35,000

Estate principal (+SE)

July 20

1,802,000

Devise - 2005 Corvette - Clark Olson (E,SE)

35,000

Devise- Lake cottage - Kent Olson (E,-SE)

40,000

Devise - stocks -

Clark Olson (E,-SE)

Devise - stocks - Kent Olson (E,-SE)

230,000
230,000

Lake Michigan cottage (-A)

40,000

2005 Corvette (-A)

35,000

Common stocks (-A)

460,000

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Estates and Trusts

23-12

Solution P 22-1 (continued)

July 21

Devise - cash fees - Clark Olson (E,-SE)

Devise - Lana Lang (E,-SE)

5,000
200,000

Devise - Jimmys church (E,-SE)

50,000

Devise - Metropolis Symphony (E,-SE)

50,000

Cash (-A)
Part 2

Closing Entries

July 22

Estate income (-R,-SE)

305,000

11,300

Estate expenses (-E,+SE)

5,150

Cash (-A)
- Close estate income and expenses and
distribute estate net income to Lois
Estate principal (-SE)

6,150

840,000

Devise- 2005 Corvette - Clark Olson

(-E,+SE)

35,000

Devise - Lake cottage - Kent Olson (E,+SE)

40,000

Devise - stocks E,+SE)

Clark Olson (-

230,000

Devise - stocks - Kent Olson (E,+SE)

230,000

Devise - cash fees - Clark Olson (E,+SE)

5,000

Devise - Lana Lang (-E,+SE)

200,000

Devise - Jimmys church (-E,+SE)

50,000

Devise - Metropolis Symphony (E,-SE)

50,000

- Close devise distributions

Estate principal (-SE)
Cash (-A)
- Close estate and transfer remaining
cash balance to Trust

962,000
962,000

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Chapter 23

23-13

Solution P 23-1 (continued)

Part 3
Estate of Jimmy Olson
Charge-Discharge Statement
For the Period of Estate Administration
June 15 to July 22, 2011
Estate Principal
I charge myself for:
Assets included in estate inventory

$1,802,000

I credit myself for:

Devises paid in cash to:
Clark Olson
Lana Lang

5,000
200,000

Jimmys church

50,000

Metropolis Symphony Orchestra

50,000

305,000

Devises distributed in kind to:

Clark Olson

265,000

Kent Olson

270,000

535,000

Transferred to Trust account for Lois

Olson:
Cash

962,000

Total estate principal discharge

$1,802,000

Estate Income
I charge myself for:
Estate income received during estate
administration

$11,300

I credit myself for:

Funeral expenses paid
Cottage repairs paid

$4,900
250

Payment of estate net income to Lois

Olson
Total estate income discharge
Respectfully submitted: Clark Olson, Estate Executor, July 22, 2011

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5,150
6,150

$11,300

Estates and Trusts

23-14

Solution P 23-2
Date

Accounts

July 22

Cash (+A)

Debit

Credit

962,000

Trust fund principal (+SE)

July 23

Certificate of deposit (+A)

962,000
300,000

Cash (-A)
July 25

Super Stock Mutual Fund (+A)

July 31

Smallville Municipal Bonds (+A)

300,000
500,000

Cash (-A)

500,000
100,000

Cash (-A)
August 22

Cash (+A)

100,000
1,500

Trust income (R,+SE)

August 23

Cash (+A)

1,500
305

Trust income (R,+SE)

August 31

405

Trust fund expenses (E,-SE)

100

Trust fund expenses (E,-SE)

3,700

Cash (-A)

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3,700

Chapter 23

23-15

Solution P 23-3
Date

Accounts

March 15

Cash (+A)
Dividends receivable (+A)
Interest receivable (+A)

Debit
66,500
400
2,400

Life insurance receivable (+A)

500,000

Personal residence (+A)

325,000

Household furnishings and personal

effects (+A)

Credit

76,000

Automobile (+A)

21,000

Investments in stocks (+A)

25,000

Investments in bonds (+A)

200,000

Estate principal (+SE)

1,216,300

- Record estate inventory at fair

values.
March 25

Funeral expenses (E,-SE)

March 30

Cash (+A)

2,800

Cash (-A)

2,800
500,000

Life insurance receivable (-A)

April 9

Land (+A)

500,000
10,000

Assets subsequently discovered (-A)

10,000

- Record lakefront property at cost, awaiting an

appraisal.
April 15

Cash (+A)

3,000

Interest receivable (-A)

2,400

Estate income (R,+SE)

April 19

Land (+A)

600
18,000

Assets subsequently discovered (-A)

18,000

- Adjust lakefront property to appraisal.

April 28

Debts of decedent paid (E,-SE)

13,250

Cash (-A)

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13,250

Estates and Trusts

23-16

Solution P 23-3 (continued)

April 29

April 30

Cash (+A)

500

Dividends receivable (-A)

400

Estate income (R,+SE)

100

Devise - Helen Wilson (Home, furnishings

and personal effects) (E,-SE)
Devise - Helen (cash) (E,-SE)

401,000
66,500

Personal residence (-A)

325,000

Household furnishings and personal

effects (-A)

76,000

Cash (-A)

66,500

- Transfer cash and property to Helen

Devise (stocks)- Denise (E,-SE)

25,000

Devise (automobile) - Dennis (E,-SE)

21,000

Devise (cash) - Denise (E,-SE)

700

Automobile (-A)

21,000

Investments in stocks (-A)

25,000
700

Cash (-A) (Estate Income)

- Transfer property to Denise & Dennis
April 30

Assets subsequently discovered (+A)

Estate principal (-SE)

28,000
501,550

Devise - Helen Wilson (-E,+SE)

467,500

Devise - Denise (-E,+SE)

25,700

Devise - Dennis (-E,+SE)

21,000

Debts of decedent paid (-E,+SE)

13,250

Funeral expenses (-E,+SE)

Estate income (-R,-SE)

2,800
700

- Closing entries
April 30

Estate principal (-SE)

714,750

Cash (-A)

486,750

Investment in bonds (-A)

200,000

Land (-A)
- Transfer estate property to Wilson Family Trust.

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28,000

Chapter 23

23-17

Solution P 23-4
Estate of George Wilson
Charge-Discharge Statement
For the period of estate administration,
March 1 to April 30, 2011
Estate principal
I charge myself for:
Assets included in estate inventory

$1,216,300

Assets subsequently discovered

28,000
Assets included in estate inventory - total estate
principal charge

$1,244,300

I credit myself for:

Funeral expenses paid
Estate debts paid
Devise - transfer cash, residence & furnishings to
Helen

2,800
13,250
467,500

Devise - Transferred automobile to Dennis

21,000

Devise - Transferred stocks to Denise

25,000

Transferred bond investments to Wilson Family Trust

Transferred Land to Wilson Family Trust
Transferred cash to Wilson Family Trust
Total estate principal discharge

200,000
28,000
486,750
$1,244,300

Estate income
I charge myself for:
Estate income received during estate administration

$700

I credit myself for:

Payment of estate income to Denise Wilson

$700

Respectfully submitted, Estate Executrix, April 30, 2011.

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Estates and Trusts

23-18

Solution P 23-5
Date

Accounts

April 30

Cash (+A)

486,750

Land (+A)

28,000

Investment in Bonds (+A)

Debit

Credit

200,000

Trust fund principal (+SE)

May 3

Certificate of deposit (+A)

May 25

Cash (+A)

714,750
450,000

Cash (-A)

450,000
31,300

Land (-A)

28,000

Trust income (R,+SE)

May 31

Trust fund expenses(E,-SE)

June 3

Cash (+A)

3,300
165

Cash (-A)

165
2,250

Trust income (R,+SE)

June 15

Trust fund expenses (E,-SE)

2,250
8,700

Cash (-A)
June 30

Trust fund expenses (E,-SE)

8,700
165

Cash (-A)

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165

Chapter 23

23-19

Solution P 23-6
Date

Accounts

May 31

Dividends receivable (+A)

1,200

Interest receivable (+A)

6,750

Life insurance receivable (+A)

Automobile (+A)

Debit

Credit

750,000
2,600

Investments in stocks (+A)

52,000

Investments in bonds (+A)

400,000

Estate principal (+SE)

1,212,550

- Record estate inventory at fair

values.
June 5

Government bonds (+A)

Life insurance receivable (+A)

200,000
50,000

Assets subsequently discovered (-A)

June 15

Cash (+A)

250,000
750,000

Life insurance receivable (-A)

June 16

Cash (+A)

750,000
8,000

Interest receivable (-A)

6,750

Estate income (R,+SE)

1,250

June 18

Funeral expenses (E,-SE)

June 22

Interest receivable (+A)

4,300

Cash (-A)

4,300
15,000

Assets subsequently discovered (-A)

Cash (+A)

15,000
215,000

Government bonds (-A)

200,000

Interest receivable (-A)

June 23

Cash (+A)

15,000
50,000

Life insurance receivable (-A)

June 24

Debts of decedent paid (E,-SE)

50,000
18,250

Cash (-A)

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18,250

Estates and Trusts

23-20

Solution P 23-6 (continued)

June 28

Cash (+A)

1,600

Dividends receivable (-A)

1,200

Estate income (R,+SE)

June 30

Devise (stocks) - Sue (E,-SE)

Devise (automobile) - Pat (E,-SE)

400
52,000
2,600

Executrix fees (E,-SE)

2,500

Devise - Humane society (E,-SE)

1,650

Automobile (-A)

2,600

Investments in stocks (-A)

52,000

Cash (-A)
June 30

Assets subsequently discovered (+A)

4,150
265,000

Estate principal (+SE)

185,350

Devise - Sue (-E,+SE)

52,000

Devise - Pat (-E,+SE)

2,600

Devise - Humane society (-E,+SE)

1,650

Debts of decedent paid (-E,+SE)

18,250

Executrix fees (-E,+SE)

2,500

Funeral expenses (-E,+SE)

4,300

Estate income (-R,-SE)

1,650

- Closing entries
June 30

Estate principal (-SE)

1,397,900

Cash (-A)

997,900

Investment in bonds (-A)

400,000

- Transfer estate property to Josephson Family Trust.

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Chapter 23

23-21

Solution P 23-7
Estate of Tom Josephson
Charge-Discharge Statement
For the period of estate administration,
May 16 to June 30, 2011
Estate principal
I charge myself for:
Assets included in estate inventory

$1,212,550

Assets subsequently discovered

265,000
Assets included in estate inventory - total estate
principal charge

$1,477,550

I credit myself for:

Funeral expenses paid
Estate debts paid

4,300
18,250

Executrix fees paid

2,500

Devise - Transferred automobile to Pat

2,600

Devise - Transferred stocks to Sue

Transferred bond investments to Josephson Family
Trust
Transferred cash to Josephson Family Trust
Total estate principal discharge

52,000
400,000
997,900
$1,477,550

Estate income
I charge myself for:
Estate income received during estate administration

$1,650

I credit myself for:

Payment of estate income to Humane Society

$1,650

Respectfully submitted, Estate Executrix, June 30, 2011.

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Estates and Trusts

23-22

Solution P 23-8
Date

Accounts

June 30

Cash (+A)

Debit
997,900

Credit

Investment in Bonds (+A)

400,000

Trust fund principal (+SE)

July 5

Certificate of deposit (+A)

1,397,900
750,000

Cash (-A)
July 31

Trust fund expenses (E,-SE)

750,000
275

Cash (-A)
August 5

Cash (+A)

275
3,750

Trust income (R,+SE)

August 19

Trust fund expenses (E,-SE)

3,750
15,000

Cash (-A)

2011 Pearson Education, Inc. publishing as Prentice Hall

15,000