3. Henry O’Donnell created an inter vivos trust fund. He owns a large department

Question

3. Henry O’Donnell created an inter vivos trust fund. He owns a large department store in Higgins, Utah. He also owns a tract of land adjacent to the store used as an extra parking lot when the store is having a sale and during the Christmas season. O’Donnell expects the land to appreciate in value and eventually be sold for an office complex or additional stores.

O’Donnell places this land into a charitable lead trust, which will hold the land for 10 years until O’Donnell's son is 21. At that time, title will transfer 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 is currently valued at $470,000.

During the first year of this arrangement, the trustee records the following cash transactions:

Cash inflows:

Rental income

$

75,000

Cash outflows:

Insurance

$

5,500

Property taxes

7,500

Paving (considered an extraordinary repair)

5,500

Maintenance

9,500

Distribution to income beneficiary

45,000

Prepare journal entries for this trust fund including the entry to create the trust. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Record transfer of land to charitable trust

No 1

Transaction 1

General Journal

Debit

Credit

Land

?

Trust-principal

?

Record distribution of income to beneficiary

No 8

Transaction 2

General Journal

Debit

Credit

Equity in income: beneficiary

45,000

Cash-income

?

Cash inflows:

Rental income

$

75,000

Cash outflows:

Insurance

$

5,500

Property taxes

7,500

Paving (considered an extraordinary repair)

5,500

Maintenance

9,500

Distribution to income beneficiary

45,000

Explanation / Answer

Dear ,

Since Henry has created a trust the following entry shall be passed in the books of trust to book the transactions

1. Receiving Land

Land A/c Dr $ 470000, To Contribution from Trustees Cr $ 470000 (Being the contribution received from Trustees)

2. On distribution of profits. The actual cash earnings to the trust is $ 47000. But if the trust intends to distriute only $ 45000 the following entry will be passed

Equity Income Dr $ 45000, To Cash A/c Cr $ 45000.

I hope this will help you.

Thanks!!

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