Question

Cox transferred assets into a trust under which Smart is entitled to receive the income for life. After Smart's death, the remaining assets are to be given to Mix. In Year 1, the trust received rent of $1,000, stock dividends of $6,000, interest on certificates of deposit of $3,000, municipal bond interest of $4,000, and proceeds of $7,000 from the sale of bonds. Both Smart and Mix are still alive. What amount of the year 1 receipts should be allocated to trust principal?

a. $7000
b. $8000
c. $13,000
d. $15,000

Answer 1

Th answer is: C) $13,000

Step-by-step explanation:

The following amounts should be allocated to trust principal:

• $7,000 from the sale of bonds; those bonds were part of the trust principal
• $6,000 of stock dividends; new shares should be added to the trust principal since no cash was received

Earnings from rent ($1,000) and interest ($3,000) should be recorded as gross income.