 Hello and welcome to the session in which we would look at CPA exam questions. I would look over several questions just to show you how to answer CPA questions on the exam day. It's very important to understand that you should be able to at least eliminate two choices on the CPA exam by just looking at the information. If you really understand the topic, two answers should be out, you're down to 50, 50. And this is what I'll try to show you in this session how to eliminate those choices. But before I start, if you are an accounting student and especially if you are a CPA candidate, I strongly suggest you check out my website, farhatlectures.com. I don't replace your CPA prep course. Whatever CPA prep course you are taking, you can keep. What I can do is I can be a useful addition. You can add me to your CPA course. Think of Farhat Lectures as vitamins, as a supplement to your CPA course. Now, how can I help? How can I add those 10 to 15 points that you need to basically get over 75 and move on with your life? I explain the material a little bit more in depth. I explain the material slower. I assume nothing. I don't assume you know anything. Versus the CPA prep courses, they assume you know the material. If you know the material and you're already, that's fine, you don't need me. But if something you forgot in college, you did not learn properly or you need to relearn, I will be the person that's gonna help you. And here's my offer to you. If not for anything, you're risking $29. That's what you are risking to try my website for a month. If it doesn't work, cancel and move on. But are you willing to risk $29 to find out if you can pass the CPA exam? So your risk is limited, $29. The profit is unlimited, the CPA exam. Are you willing to take that trade, okay? Just from a trade perspective. Also check out my website. If you want to know how well or not well, your university is doing on the CPA exam. I have average score by section as well, overall score. If you are taking any accounting, finance, tax courses, check out my website for additional resources. Connect with me on LinkedIn, if you haven't done so. On LinkedIn, I have many students that write me recommendations that use my system and succeed on the exam. Please like this recording on YouTube, share it. And connect with me on Instagram and Facebook. So let's take a look at the first question, okay? And the first question reads, always read the question first. What amount of the year one receipts should be allocated to the trust principle? Well, so what does that mean? It means I have, you know, I see some numbers. What amount is allocated to the trust and what amount is allocated to income? So basically, immediately in your mind, you'll be like, okay, I have certain things that goes under income, certain things that goes under the trust principle. Sometime they call it on the exam, the corpus, what stays with the trust. So you're asking, what amount is here? Okay, that's it. Immediately in your mind, you should have that picture. Justin transferred asset into a trust under which Maggie is entitled to receive income for life. Okay, think of this as husband and wife. Justin is husband and wife and Justin transferred the asset. After Maggie's death, the remaining asset can be given to Adam. Think of Adam as their son. In year one, the trust received rent of 1,000, stock dividend of 6,000 and interest on the certificate of deposit of 3,000, municipal bond interest of 4,000 and proceeds of 7,000 from the sale of a bond. Okay, so immediately, here's what you should be thinking. As you are reading this, any current income, any current income, any current income means any income that's coming from this trust goes into the income section. Rent, that's current income, it goes here. So rent is out. Stock dividend will come back to that. Interest on the certificate of deposit interest goes right here. Municipal interest goes here. It's not taxable, but it goes here. Now let's go back and talk about stock dividend. They received stock dividend of 6,000. Well, this sounds like dividend, right? Well, dividend is current income, but no, stock dividend is considered what? Think of the stock dividend as part of the principle. Because why? Dividend goes here. Dividend, if you receive any dividend income, dividend income goes here. But what they're giving you is not dividend income. They're not giving you revenue, they're not giving you cash. You cannot really use it. They're giving you stock dividend. Therefore, we assume the stock dividend, we assume the stock dividend is part of the corpus, part of the principle. What's happening is this. They did not give you cash, but they added more stocks. So they added more principle to your principle. Therefore, stock dividend, you just need to know, it's part of the corpus. So here we have 6,000 and proceeds of $7,000 from the sale of the bond. Wait a second, we sold some bonds. Is this current income? In a sense, yes, it is. I mean, can we use the 7,000? Yes, but this 7,000 is not coming from income. It's coming from the action of the trustee. They sold anything and put it back into income. Therefore, sale of stocks, if you have any capital gains, any capital losses, sales of bonds, any capital gains, any capital losses is part of the corpus. Otherwise, if you sell the bond and you liquidate, the corpus is gone, the trust is gone. Therefore, you sold the bond, but the fund stays into corpus. Well, six plus seven equal to 13, the answer is 13. The answer is 13. Here you really, I mean, I always say you should be able to eliminate two answer choices. Here you just have to do quick computation. But this is easy. If you understand stock dividend is part of the principle, any capital gains, capital losses part of the principle, the rest is current income. Current income go under income. Current income goes under income. So notice here, they could have asked you, what is the income portion? The income portion is one, three, four and seven. Make sure don't select eight because 8,000 is a correct answer. If they're asking you what amount should be allocated to income rather than trust? So be careful what you are being asked because you could be correct, okay? And the 15 and the seven, it's a combination, wrong combination of a few things could be combination of anything. Then yes, so that's what it is. So make sure you know the difference between the corpus, what goes under the corpus, what goes under income again, forhatlectures.com will take care of that if need be. An income tax return for a trust is filed on which form? Here, this is straightforward in a sense that this should take you and you could be receiving a question like this on the exam, this should take you, this I call a two second question. I mean, you get this question, it should be two seconds move on. What's the answer? Well, let's go through what's not the answer. It cannot be 1040, okay? It just cannot be 1040 period. If you don't know what 1040 is, you should not be sitting for the exam. Also, you should not know it's 990. 990 is for tax exam organization or not for profit organization. You should know this, you should know this by heart. Well, I understand if you are stuck between 1041 and 706. I understand if you are stuck here. Now you have to know. Here's how I want you to remember this. Here's how I want you to remember this. So you're saying is it 706 or is it 1041? Because they both have the word estate in them, right? They both have the word estate. Look, this is an income tax return, an income tax return. When you think of income tax return, you think of 1040, right? Because it's a return. And what do you do with the return? You basically prepare the return every year. So it's a tax return, okay? Tax return. Therefore, if I have to guess between C and D, I'm gonna guess C because it's an income tax return, but it's for a trust. The 1040, it's an income tax return for, I don't think they'll ask you this question on the exam. What's the 1040? It's for individual. Therefore, if you have to guess, you would guess 1041 because it's an income tax return. Now what is the 706? 706 is estate taxes. When you die and you do this only one time. So notice, you do this only one time. Nine months after you die, you have to figure out what are your estate tax, how much assets do you have, minus liabilities, pay off eligible expenses. Then what's left is your estate and you'll pay taxes on your estate. And this is form 706. It's filed once. It looks like a balance sheet. Okay, you need to be familiar with this, but I covered this in a separate session, estate taxes. So remember, income tax return, think of 41. Not for individual, for trust. It actually, it looks very much like a 1040. Okay, I should have showed you a form, but I do have it in the lecture if you want to see a form with detailed explanation. Let's take a look at this question. The party who creates the trust and funds the trust with assets is known as what? So who creates the trust and funds the trust? Well, I'm gonna go back to this triangle here. Here's the trust or the estate of the person if the trust is created after that, but let's assume this is the trust. So the question is who creates this trust and funds the trust? They put in the trust stocks, they put money, they put bonds, they put real estate, they put gold, they can put anything in this trust. Who creates this trust? Well, someone creates this trust that someone is called the grand tour. So this is the answer, the grand tour. The grand tour transfer money, assets, resources, bonds, stocks to the trust from their personal account and they create this legal entity called the trust. Now, why do they do so? Because they want, they do this for a purpose. They want this money to be given to their kids for college use. Therefore what they do, they assign something called a trustee. And this is the trustee. The trustee think of this as your lawyer, okay? Somebody at the bank, somebody working at an insurance company, someone that knows how to manage money and you will assign this person, you'll say, you know what? You're gonna take care of this and you're gonna take care of this for my benefit, for my benefit in a sense on my behalf, to give this money to someone who's gonna be the beneficiary. And let's assume this is my son. This is me, I'm the grand tour. This is my lawyer, the trustee and I want you to manage this trust for the benefit of my son. So my son will get the money. So you wanna make sure you know what a trustee is, what's a Benny? I call them Benny or beneficiary. It could be one or many beneficiaries. It doesn't really matter. So know the structure of a trust. You have three parties, a grand tour, trustee and a Benny. Usually three parties. You could also have one party where the grand tour is also the trustee and the Benny but that's a different story, okay? Make sure you know the difference between those three, the role of those three. Let's take a look at this question. If not expressly granted, which of the following implied power would a trustee have? So remember, who's the trustee? The trustee is the person that's managing the fund on your behalf for the benefit of a third party, okay? What can they do? A or one, power to sell the property, power to borrow from the trust, power to pay the trust expenses. Well, let's logically think about it. Let's logically think about it. First of all, let's look at three because three is the easiest. Power to pay the trust expenses. Do they have, should they have the power to pay the trust expenses? Sure, at least they have to pay their own expenses. If you sign someone to manage your trust, you're gonna have to pay them. That trust is gonna have expenses. They should have the power to pay the expenses. Therefore, anyone with three will stay. So this one, so this one does not have three. B is out, we still have A, C and D. Now, power to sell trust property. Now, power to sell trust property. Can they sell property from the trust? Well, let's go back to this question here. If you can answer this question correctly, then you would know whether they can sell or not. Notice here proceeds of 7,000 from the sale of the bond. So can they sell assets from the trust? Yes, they can. So they can sell asset. The power to sell property, yes, they can. Now, what does that mean? It means they can sell it, but it has to be for everything is for the benefit. You are playing the role of the fiduciary. You wanna make sure you are, all the transaction that you are conducting is in the best interest of the trust, but you can sell property, but you have to take this money, either keep it in corpus or buy another property again. So can they sell property? Yes, they can. And remember, remember we have income and we have corpus. So yes, they can sell it, but they have to keep the money in the corpus. Therefore, they can sell it. So everything with one will stay. So two, C is out because, you know, C is out because it doesn't have one. Now we're left between A and B. All what we have to know now is can they borrow money from the trust? Well, think about it. Do you think they can borrow money from the trust? They can, can they borrow money from the trust? And the answer is just, you need to know this. No, they can't. Well, why not? Because you are compensating them. You are giving them a compensation. You'll assign a compensation for them. You're giving them certain power, but they don't, it's not their property. You can only borrow money from your property. They don't own the property. Like if they go to the bank, let's assume they came to you. You're the lender, you work at the bank and they came to you and said, look, we would like to borrow some money. You say, okay, no problem. I need collateral. And they would say, okay, I have this trust that I manage. But is this really your trust? Are these your assets? Not really. I am managing the trust. Well, sorry, if you are managing the trust, I'm not gonna, you know, I can't give you money against something that you don't really own. Therefore, logically thinking about this two is out. D is out left with one in three. So can they sell property in the trust? Yes, as long as it's in the benefit, it's in the best interest of the trust itself. Obviously they have to pay the trust expenses, including their expenses. So they can be compensated, but they cannot personally profit. Like getting money from the bank and using the trust as a collateral, that's a personal benefit. You cannot in any way, okay, personally benefit from the trust if you're the trustee. You are being entrusted with this. So it's not really your fund. You just have to manage it in the best interest of the person that gave you that power. At the end of this recording, again, I'm gonna invite you. And my challenge is, are you willing to pay $30 to find out if you can pass the exam? How about this offer? I mean, if I was in your shoes and studying for the exam and knowing the risk, the upside, the upside of this offer, I will take this offer. $29, you don't like it. You lose $29, that's fine. If you like it, you're gonna subscribe, but there's a potential of you adding 10 to 15 points on your exam. Once again, I'm not saying I'm gonna replace your CPA prep course. I'm gonna be in addition to your CPA prep course. I'm gonna make your prep course more beneficial to you, more efficient. And you're gonna take, everything will make sense. When these guys lecture, when Roger lecture, when Tim Gerriti lectures, when Peter Olento lectures, when Wiley people lecture, when Glyne people lecture, it's gonna make perfect sense for you. It's gonna make more sense. That's my offer to you. Anyhow, stay safe. Good luck and study hard. The CPA is a 30, the 40 year investment. Don't shortchange yourself. $29 in the grand scheme of things. It's nothing. Just to try it. It's a subscription though. Good luck.