interest

Question 1

true or false - a firm must always pay interest to a client when it holds money on their behalf?

Answer 1

false - exception:
- a firm must provide sufficient information to the client or third party for an informed decision and
- record the different arrangement for interest in a written agreement

Question 2

true or false - the payment of sums in lieu of interest to clients for monies held on their behalf in the general client account is treated as an expense of the firm

Answer 2

true - sums paid to the clients in lieu of interest are treated as buisness expenses

Question 3

what accounting entries are required when a firm pays a sum in lieu of interest to a client for monies held for that client in the general client account

Answer 3

credit client ledger business account
debit interest payable ledger (which only have business columns as is a buisness expense)

Question 4

where a firm operates a designated deposit client account, to hold money on behalf of a specific client how much of the interest arising from this account should be paid to the client

Answer 4

the firm should pay all interest arising from the monies held in a `SDDC account to the client.

Question 5

what accounting enteries are required to record a transfer of money including interest, from a separate designated deposit account?

Answer 5

debit deposit client ledger account and credit deposit cash sheet client account to transfer the money out of the SDDC

• credit client ledger account and debit cash sheet client account to transfer money into the general client account

Question 6

accounting enteries - money held in the general bank account

Answer 6

1) recording interest payable as business money
2) transferring a sum in lieu of interest from the business account to the client account.

Question 7

recording interest as payable as business money

Answer 7

credit the client ledger business account - company owes
debt interest payable expense ledger

(avoid enteries relating to the cash sheet).

Question 8

transferring the sum in lieu of interest from the business to the client account

Answer 8

1) transfer the sum in lieu of interest out of the business account
- dr client ledger business account
cr- cash sheet business account

2) transfer the sum in lieu of interest into the client account
- cr client ledger client account
- dr cash sheet client account

Question 9

money held in a separate designated deposit client account

Answer 9

if a firm holds a large sums of money for a specific client over a long period of time, it may be in the best interests of the client for the money to be trasferred out of the general client account and into an sddca where it can earn higher rates of interest on deposit (should not be used to provide banking services).

should be an instant access deposit account to comply with the requirement that client money should be available on demand. UNLESS the firm has agreed an alternative arrnagement with the client in a wirtten agreement. e.g. a firm may agree with a client to hold their money in a deposit account with a notice period for withdrawals - which could offer higher rates.

when held in this way, all interets arising fromt he account should be paid to the client.

Question 10

transferring money from the sddca to the general client account

Answer 10

1) the client money is transferred from the general client account into an sddca where it can be held on deposit for a specific client.
2) the bank pays interest on the client money held on the deposit
3) the client money, including interest accrued is transferred back into the general client account from the sddca.

Question 11

accounting enteries for money held in sddca’s

Answer 11

there are two methods
1) extra columns on existing ledgers for money on deposit or
- dr client ledger client account
- cr cash sheet client account
- cr client ledger client deposit account
dr cash sheet client deposit account

2) separate ledgers for money on deposit

Question 12

key points

Answer 12

1) the requirement for firms to pay clients a fair sum of interest on client money held on their behalf
2) the exception that alllow firms to agree in writing different interest arrangement with clients after provision of sufficient information
3) firms must not hold moey for clients unless it is necessary for the provision of legal services and may be in breach of they duty to return client money promptly when it is no longer required for the provision of legal services - prohibition on providing banking facilities to clients.
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