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provisions of the will of the founder of the trust which we are considering. (See § 652.) If at the time of her death this trust fund consists of $110,230 in investments and $186 in cash, it will be necessary for the trustee of the estate of James C. Dawson to deliver to the executor of the estate of Janet Dawson Reeves the amount of cash and other assets comprising this trust fund and to make the following entry (No. 14):

Principal

Cash

$......

$.....

Investments

The will of James C. Dawson provided that upon the death of Mary Allen Dawson the principal of the trust fund bearing her name was to be divided among her children by the donor's brother. When the assets composing this fund are turned over to these children the entry will be, as in the case of the Janet Dawson Reeves trust above:

Principal
Cash
Investments

§ 667. Reversion of Trust Fund to Estate

$......

$.....

It is provided in the will that the Butler University trust at the end of twenty years shall revert to the undivided estate. Suppose that, due to sales and reinvestment, this fund at the end of that time amounts to $47,326. This is an increase of $7,326 over the amount of the original trust. To record the reversion the trustee should make Entries Nos. 15 and 16

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As will be seen from the postings on the trust ledger, the purpose of the first of these entries is to close out the Butler University Trust account and that of the second is to record the securities in the account of the undivided estate.

If any cash is included in the fund the entries will be (compare Entry No. 14)

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§ 668. Reasons for Amortization of Bond Premium and Discount Bonds are seldom bought at their face value. The market value is a fluctuating quantity differing from the face value because of general financial conditions, the popular opinion of the value of the security, the rate of interest provided for, etc. A bond is very likely to be bought for a larger sum than the amount which upon its maturity it will return to the purchaser. If, for example, a $1,000 bond is bought for $1,043.80, the yield to the purchaser will be the interest on $1,000 at the specified rate during the life of the bond and at maturity the $1,000 of principal. The $43.80 is a premium paid for the privilege of receiving this interest during the life of the bond.

If a trustee, desiring to secure investments which would yield a profitable income, were to purchase a large number of bonds at a premium, the interest all being paid to the tenant, and the remainderman not only receiving no income, but also losing the amount of the premium paid on the bonds, the principal of the trust would in time become seriously depleted. Since secure investments yielding a good rate of interest

usually sell at a premium, in order to allow trustees to purchase such bonds with equal justice toward both the tenant and the remainderman, the courts allow the premium paid on bonds to be "amortized” over the life of the bond.

As has been shown, the premium is an amount paid for the privilege of receiving the interest on the principal during the life of the bond. This premium is therefore a just charge against income, but the courts do not allow it to be deducted from the income of the year in which paid, as it would very frequently amount to more than that year's income from the particular bond on account of which it was incurred and would consequently deprive the tenant of all his income for the one year. "Amortization" means the gradual extinguishment of the premium paid by the trustees on bonds bought out of the principal funds, so that during the years preceding the maturity of the bond the income to the life tenant will have been reduced sufficiently to wipe out the premium during the life of the bonds.

§ 669. Law of Amortization

The statutes of the different states vary in regard to the propriety of amortization, and are not always consistent in applying the same principles to bond premium and discount.

In New York the practice of amortization is upheld by the courts as an equitable and proper way of handling trust funds. In the State, however, the principle only holds good with reference to securities purchased by the trustee at a premium and not with reference to securities, owned by the testator which the trustee has taken over, appraised at a premium. In other words the whole interest received from securities turned over from the estate of the testator should be treated as income and the life tenant should not be charged with any part of the premium at which such securities may have been inventoried.

Of course the terms of the will and the surrounding circumstances might show a different intention on the part

of the testator. For uniformity of practice the court has
decided that this intent to have the life tenant receive the
full income from securities purchased at a premium, with-
out reduction by amortization, must be expressed in the very
clearest manner.

§ 670. Methods of Calculating Amortization

There are several methods of handling amortization, of which the two most common are the straight-line method and the annuity method.

By the straight-line method the premium is simply divided by the number of interest payments which will be made on the bond and the income from the bond reduced at the time of each payment by this part of the premium. The following table will show how the premium of $43.80 paid on the purchase of a 6 per cent bond having a face value of $1,000, with 5 years to run, interest payable semiannually, will be amortized by the straight-line method.

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Under the annuity method it is necessary to use a table of bond values. In the case of the bond above referred to, such a table would show that a 6 per cent $1,000 bond, interest payable semiannually, bought for $1,043.80, with 5 years

Baugh and Schmeisser, Theory and Practice of Estate Accounting.

to run, will return to the investor 5 per cent annually on the amount of the investment. Since $1,043.80 is the amount invested, the income at 5 per cent per annum will be $26.08 at the time of the first semiannual interest payment. The amount actually received, however, will be one-half year's interest at 6 per cent on $1,000, or $30. The difference between this amount and the $26.08 of actual earning power of the investment will constitute the amount of this period's amortization to be placed to the credit of the principal of the trust. The book value of the bond will then be reduced by this $3.92 from $1,043.80 to $1,039.88 and the one-half of 5 per cent for the next 6 months calculated on the basis of an investment of $1,039.88.

Thus, the life tenant receives more during the first years,
but less during the later years of the life of any bond, and
at the maturity of the same the amounts amortized should
have been so calculated that the book value of the bond
will be its face, or par value, and the premium will have been
paid by the amortized amounts added to the corpus at the
end of each six months' interest period.*

The following table will show how the premium on this bond is amortized over the life of the bond by the annuity method:

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Baugh and Schmeisser, Theory and Practice of Estate Accounting.

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