Final Revision-Solicitor's Accounts Flashcards
A solicitor makes a payment of £400 to a consulting firm on behalf of a client. The solicitor also does £1,600 of work for the client. The client sends the solicitor a check for £3,000 to pay the bill for these items and tells the solicitor to hold the extra £1,000 for future expenses incurred on behalf of the client.
Which of the following statements is correct with regard to the cheque?
The business money element can be paid into the client account but must be moved into the business account promptly.(C) The entire sum can be paid into the client account, but the business element must be transferred out of the client account promptly. Funds received from mixed payments must be allocated promptly to the correct client account or business account. (A) is incorrect because it does not mention the money must be transferred promptly. (B), (D), and (E) are incorrect because of the word ‘must’. The money can be split, but this is not an absolute obligation and mixed receipts can be placed into either the client or business account first so long as the relevant money is transferred to the other account promptly
A law firm represents a young couple and a bank in the purchase of the couple’s first house. After receiving a clear certificate of title from the firm, the bank releases the mortgage funds by sending the firm a cheque for £250,000.
Which of the following best describes the accounting entries that should be made upon deposit of the cheque?
Credit £250,000 Bank ledger client account
Debit cash sheet £250,000 client accountB) This is a receipt of client money and belongs to the bank until completion, so the money must be paid into the client bank account and recorded as being held for the bank. (A) and (E) are incorrect as the cash sheet must be debited as this is a receipt of money into the client account, not an inter-client transfer. (C) is incorrect as the firm is not debiting the bank’s account; it is crediting it, and (D) is incorrect as the funds are being held for the bank rather than the couple
After having her solicitor on a long-term retainer to help her set up a shoe company, a client now wants to terminate the retainer. The client had initially given the solicitor a cheque of £10,000 to use against costs. Now, all that remains is £156. Therefore, the solicitor writes a cheque in that amount to the client.
Which of the following entries would be the most appropriate to record this payment?
Credit cash sheet client account
Debit client ledger client account(C) The payment should be recorded as a debit in the client ledger in the client account, as the firm would need to debit the client account to send her the money. The corresponding entry would be a credit entry in the cash sheet, as the firm no longer owes this money to the client. (B) is incorrect as both entries must be in the business account or both in the client account. (E) is incorrect because the payment should not be reflected as a credit to the client account. (A) and (D) are incorrect because there must be a corresponding credit to match the debit entry.Q
A client sends a firm £2,000 for costs generally for the firm’s help in the sale of her vintage cars. A solicitor from the firm needs a cheque for £2,000 plus VAT to deliver to valuers who have been involved in the transaction in payment of their bill (already sent to the firm and agreed). The bill was addressed to the client. The solicitor also needs £70 in cash for a hotel room to spend the night in the client’s city in order to complete the necessary transactions.
Which of the following best describes the accounts from which these payments should come?
The hotel room costs should come from the business account and should be recorded in a separate petty cash ledger, and the valuers’ bill should come from the client account, provided there is sufficient money in the client account.(A) The cost of the hotel room is a petty cash item and any such payment on behalf of a client will need to come from the business account even if there is sufficient money in the client account. It also will need to be recorded in the petty cash ledger. The valuers’ bill will come from the client account where the payment on account from the client should have been placed. As (D) states just the opposite, it is incorrect. (B) is incorrect as the valuers’ bill can be paid out of the client account. (C) is incorrect as hotel room costs must be paid from the business account and be recorded in the petty cash ledger. (E) is incorrect as there is no need to delay payment. Petty cash can be used to deal with the hotel room expenses and the valuers can be paid from the client account, as described above.
A law firm’s client is selling their yacht to a buyer in Portsmouth, England. Under the terms of the contract, the buyer is to send a deposit cheque to the firm for the firm to hold as stakeholder. After the buyer inspects and tours the yacht, they send the firm the deposit cheque.
How should the deposit cheque be dealt with by the firm?
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The firm should pay the cheque into a separate stakeholder account promptly.B) The firm should pay the cheque into a separate stakeholder account promptly. The contract provides that the deposit cheque is to be held as stakeholder, so the money should be paid into a separate stakeholder account. (A) and (C) are incorrect as the deposit will not belong to the seller until completion. (D) is incorrect because, while it is correct that client money should be paid into the client account ‘promptly’, the firm would have to show the deposit on a separate stakeholder account, as the money is held for both the client and the buyer. (E) is incorrect because the cheque should be paid into a stakeholder account and not into the business account.
A firm represents a clothing company that prints sports team logos on many of their shirts. The company is registered for VAT.
The firm receives an invoice for accountant’s fees which is addressed to the clothing company. The firm pays the invoice, which totals £5,000 for the accountant’s fees and £1,000 for VAT.
Which of the following statements is correct with respect to these events?
The agency method applies, and the solicitor can use client money to pay the invoice.(B) The agency method must be used here as the invoice is addressed to the client. If there are sufficient funds in the client account, the entire amount should be debited from the client account, without distinguishing between the fee and VAT. (A) is incorrect because the agency method, not the principal method, applies here and will be used. (C) is incorrect. Petty cash would not be used here as this is not an expense of the firm; it is the client’s. Also, typically petty cash is used to deal only with small cash payments, and the payment here is not small (and you would almost certainly not pay £6,000 in actual cash). (D) is incorrect. A firm should issue VAT invoices only in relation to its own professional charges/supply of goods; here, it should simply pass the original invoice, including the VAT element, on to the client. (E) is incorrect as the only entries made on the firm’s VAT ledger relate to the firm’s obligation to account to HMRC for VAT, and here it would be the accountant which would account to HMRC for that VAT.
A firm acted for a company in an intellectual property matter. As a result, the firm held large sums of money for the company at various times. A £1,500 bill remains outstanding from the firm’s representation (£1,000 profit costs plus £200 VAT and disbursements totaling £300). The bank informed the firm upon completion of the firm’s representation of the company that the client’s funds had accrued £100 in interest. At the outset of the instruction, the client agreed in writing that the firm would not have to account to the client for any interest accrued on the client’s money.
Which of the following best states the legal position with respect to the interest?
The solicitor need not account to the client for any of the interest on the client’s funds.(C) The solicitor need not account to the client for any of the interest on the client’s funds. The SRA Accounts Rules provide that a solicitor should account for a fair sum of interest unless the client has agreed an alternative arrangement. Here, the client did agree an alternative arrangement-the client agreed that the firm would not have to account to the client for any interest accrued on the client’s money. Thus, (A) and (B) are incorrect. It should be noted that but for the arrangement, (A) would be the correct choice. (D) and (E) are incorrect because there is no rule limiting how the firm can use the interest.
After a client suffers an injury in a construction accident, a firm is able to recover a large sum of money on behalf of the client. Although the firm issues a bill to the client for £25,000 plus VAT of £5,000, the client gets angry and refuses to pay, saying that this bill is much higher than had been agreed. To avoid a legal dispute, the firm agrees to reduce the bill to £20,000 and a VAT of £4,000.
Which of the following entries would the firm make to record the appropriate abatement of fees?
Debit profit costs and HMRC ledgers
Credit client ledger business account(E) is the only correct combination of entries, all of the others are incorrect. The firm has already delivered its bill. When a firm has agreed to abate of an issued bill, it must reduce the entries on the business account in the profit costs ledger, the HMRC (VAT) ledger, and the client ledger by the amount of the reduction. Here, this would be shown as a credit entry on the client ledger of £5,000 relating to the profit costs and £1,000 for the VAT. In addition to this, the corresponding profit costs and VAT ledgers must also be reduced. This would be shown as a debit entry of £5,000 on the profit costs ledger and £1,000 on the HMRC (VAT) ledgers.
A firm helps a young computer programmer in setting up a video game company. After the company is incorporated, the firm sends the programmer a bill for profit costs of £4,000 and VAT of £800. The programmer sends the firm the £4,800 as payment.
On receipt of the £4,800, what entries should the firm record in their accounts?
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The firm credits £4,800 on the client ledger on the business account and debits the cash sheet on the business account.(E) When a client pays a bill for profit costs, the entire sum is credited to the client ledger on business account (as this is business money) and debited to the cash sheet. (A) and (B) are incorrect because when a client pays an invoice, no entries are made on the HMRC (VAT) ledger. This ledger is simply a record of the sum owed by the solicitor to HMRC. (C) is incorrect because the debit and credit must be both in client account or both in business account (you could pay this into client if you wanted and transfer across, but that would be inefficient). (D) is incorrect because on payment of a bill there is no entry in the profit costs ledger. This is simply a record of all invoices billed by the solicitor.Q
A solicitor represented a client in divorce proceedings. The client received a bill of £1,000 in Profit Costs and £200 VAT from the solicitor. To pay the bill, the client sent the solicitor’s firm a cheque for £1,200, and this payment was reflected in the client ledger in the business account with a credit entry of £1,200.
Which one of the following entries would best describe the corresponding entry the solicitor would make to record the receipt?
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Debit cash sheet business account(B) The solicitor would debit the cash sheet in the business account. The money received is business money and it has been paid into the business account. (A) and (E) are incorrect, as entries are not made on the Profit Costs and HMRC (VAT) ledgers when cash is received in payment of a bill. (C) and (D) are incorrect because they suggest putting the corresponding entry in the client account. (C) is also incorrect because we need a debit to offset the credit entry. Remember every debit must be matched with a credit. A debit in the business account must match a credit in business account, and a debit in the client account must match a credit in the client account. As the question tells you there is a credit on the business account, there must be a corresponding debit on the business account.
A solicitor’s client was about to leave on holiday. The client’s rent payment was due in five days. The client was nervous about sending the payment by post for fear it would not be delivered in time. And the client did not want to deliver the cheque early because he was angry about a dispute he was having with the landlord. Although the landlord was not a client of the solicitor, their office was very close to the solicitor’s office. So, the client gave the solicitor £1,000 in cash (the amount needed to pay the rent) and asked the solicitor to pay the landlord when the rent was due.
How should the solicitor deal with the receipt of £1,000 from its client?
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The solicitor should deposit the money into the client bank account and record the receipt of the money on the client ledger.(B) The solicitor should record the receipt of the money on the client ledger and place the cash in the client bank account. The solicitor must treat the cash as client money because it has received the cash five days before rent is due, and the rules require that client money be paid ‘promptly’ into a client account. (A) is incorrect because the landlord is not a client of the solicitor. (C) and (D) are incorrect because the rent is due in five days and it would be a breach of the SRA Accounts Rules to retain client money in a safe for five days. (E) is incorrect because the cash is client money (that is, money held or received for a client which is not business money) and should be paid into a client account. Q
An electronics company enlists a solicitor’s firm for long-term work on filing for patents for an innovative power supply the company designed sending the solicitor’s firm a cheque for £10,000 for the future costs of this work. The solicitor’s firm asks an accountant what entries they need to make in order to record the receipt of these funds.
Which one of the following entries would be the most appropriate entry to record this receipt?
Debit cash sheet client account
Credit client ledger client account(A) This receipt is client money so it must be shown as a credit entry on the client ledger of the client account record, and the corresponding entry would be a debit on the cash sheet of the client account record, as it is money that the firm now owes to the client. (B) is incorrect because it shows the entries for a payment from the client account, not a receipt. (C) - (E) are incorrect as this is not business money and, therefore, should not be shown on the business account
