Solicitor's Accounts

Question 1

Question 1
A firm of solicitors makes a number of cash payments over the course of a month.
For which of the following cash payments would the corresponding double entry reflect
the fact that the firm has incurred an expense?
A £100,000 for staff wages.
B £15,000 to buy a photocopier.
C £20,000 for new office furniture.
D £50,000 in repayment of a bank loan.
E £3,000 to buy a computer.

Answer 1

Answer
Option A is correct. Staff wages are part of the outgoings or running and it is therefore an
expense of the firm.
The other options are wrong. In options B, C and E the payment of cash results in the firm
acquiring something which is a long- term benefit – the firm has gained an asset. In option D
the firm has reduced a liability.

Question 2

Question 2
A firm of solicitors buys new office premises for £1 million.
Which of the following pair of double entries shows how the transaction should be
recorded?
A CR entry Cash account. DR entry Premises account.
B CR entry Cash account. DR entry Capital account.
C CR entry Premises account. DR entry Cash account.
D CR entry Cash account. DR entry Expense account.
E CR entry Expense account. DR entry Premises account.

Answer 2

Answer
Option A is correct. The two aspects of the transaction are that the firm loses cash and
gains an asset in the form of the office premises. This is recorded by a CR entry on the cash
account and a DR entry on the Premises account.

Question 3

Question 3
A firm of solicitors issues a bill to a client for its professional charges. The firm correctly
records the debt now owed to the firm by making a DR entry in a client account in the
name of the client.
Which of the following best explains how the corresponding double entry should be
recorded?
A A DR entry on the Profit costs account because the firm has earned income.
B A DR entry on the Cash account because the firm has gained cash.
C A CR entry on the Profit costs account because the firm has earned income.
D A CR entry on the Profit costs account because the firm has incurred a liability.
E A CR entry on an Expense account because the firm has incurred an expense.

Answer 3

Answer
Option C is correct. The corresponding entry to a DR must be a CR (with the result that options
A and B must be wrong). The sale of the solicitor’s services is recorded as a CR entry on an
income account, often called ‘Profit costs’, to show that the firm has earned income (options D
and E are wrong in that the sale of the solicitor’s services is neither a liability nor an expense).
The firm will not record any receipt of cash until the bill is paid.

Question 4

Question 1
A solicitor receives £1,000 from a client generally on account of costs. Following the receipt,
the client ledger account shows a CR balance of £1,000 on the client section and a zero
balance on the business section. The solicitor needs to pay a court fee of £300 on the
client’s behalf. The solicitor makes the payment from the firm’s client bank account and
records the payment accordingly in the firm’s accounts. The solicitor has not issued a bill.
Which of the following best describes the effect of the payment?
A The client owes the firm £300.
B There is a DR balance of £300 on the business section of the client ledger account.
C The firm is holding £700 on the client’s behalf.
D There is a CR balance of £300 on the client section of the client ledger account.
E The solicitor is in breach of the SRA Accounts Rules.

Answer 4

Answer
Option C is correct. The firm was holding sufficient money in the client bank account on behalf
of the client to make the payment. Using client money to make the payment was not a breach of the Rules. Once the payment has been made, the CR balance on the client section of the
client ledger account reduces to £700. This shows that the firm is now holding £700 on behalf
of the client.

Question 5

Question 2
A firm sends a bill for professional charges to a client. The firm receives a cheque from the
client in payment of the bill.
Which of the following pair of double entries shows how the receipt of the cheque
should be recorded?
A CR cash account business section.
DR profit costs account business section.
B CR client ledger account business section.
DR cash account business section.
C CR profit costs account business section.
DR client ledger account business section.
D CR client ledger client section.
DR cash account client section.
E CR profit costs account client section.
DR client ledger account client section.

Answer 5

Answer
Option B is correct. Money received in payment of a bill is the firm’s own money and must be
paid into the business bank account. It must therefore be recorded in the business section of
the appropriate accounts (meaning that options D and E are wrong). The firm has received
money. The entries for a receipt are CR on the client ledger account and DR on the cash
account. Options A and C are wrong as no entries are necessary on the profit costs account
when a bill is paid.

Question 6

Question 1
A firm is acting for the executors in the administration of an estate. The firm is holding
£300,000 in the client bank account for the executors and sends the estate accounts to the
residuary beneficiary for approval. The residuary beneficiary approves the estate accounts
and asks the firm to hold £220,000 for her and £80,000 for her son, who is buying a house.
The firm is acting for the son in his house purchase.
Which of the following best describes how the firm should record the residuary
beneficiary’s instructions in the accounts?
A An inter- client transfer of £80,000 from the executors’ ledger account to the son’s ledger
account.
B An inter- client transfer of £300,000 from the executors’ ledger account to a client ledger
in the residuary beneficiary’s name followed by a cash transfer of £80,000.
C An inter- client transfer of £80,000 from the executors’ ledger account to the son’s ledger
account and an inter- client transfer of £220,000 from the executors’ ledger account to a
client ledger in the residuary beneficiary’s name.
D Two cash transfers: one of £80,000 and one of £220,000.
E An inter- client transfer of £300,000 from the executors’ ledger account to a client ledger
in the residuary beneficiary’s name followed by an inter- client transfer of £80,000 from
residuary beneficiary’s ledger account to the son’s ledger account.

Answer 6

Answer
Option E is correct. Although no money will actually move in or out of the client bank account,
ledger entries must accurately reflect for whom money is held in the bank client account. An
inter- client transfer must first of all be made to the beneficiary. On approval of the estate
accounts the money is held for the residuary beneficiary. It is the beneficiary who instructs the
firm to then hold some money on behalf of another person. So, two inter- client transfers must
be made.

Question 7

Question 2
A firm acts for a client in the purchase of a property. The firm sends a bill to the client
made up of:
*
£480 for the firm’s professional charges and VAT
*
£600 for a surveyor’s fee
The client sends the firm a cheque for £101,080, comprised of £1,080 in payment of the bill
and £100,000 as the balance of the purchase price required to complete the purchase.
Which of the following best describes how the firm should deal with receipt of the
cheque?
A The firm should split the cheque by paying £480 to the client bank account and
£100,600 to the business bank account.
B The firm should pay the whole amount into the client bank account and then make a
cash transfer of £600 into the business bank account.
C The firm should pay the whole amount into the business bank account and then make
an inter- client transfer of £100,000.
D The firm should pay the whole amount into the business bank account and then make a
cash transfer of £100,000 into the client bank account.
E The firm should pay the whole amount into the business bank account and then make a
cash transfer of £1,080 into the client bank account.

Answer 7

Answer
Option D is correct. This is a mixed receipt and the funds must be allocated to the correct
account promptly. This can be achieved by splitting the cheque correctly, or by paying the
whole amount into either the client or business bank account and then making a cash transfer
of the correct amount. As a bill has been delivered, the money for professional charges and
the surveyor’s fee (a total of £1,080) is not client money. The £100,000 for the balance of
the purchase price is client money. Therefore, the firm should pay the whole amount into the
business bank account and then make a cash transfer of the £100,000 client money into the
client bank account (as an alternative, the firm could pay the whole amount into the client
bank account and then make a cash transfer of £1,080 into the business bank account).

Question 8

Question 1
During an accounting period, a firm of solicitors bills its clients for total professional charges
of £400,000 plus VAT of £80,000. In the same accounting period, the firm buys a computer
for £10,000 plus VAT of £2,000. The firm is registered for VAT purposes.
How much is the firm required to pay to HMRC in respect of VAT at the end of the
accounting period?
A £80,000.
B £2,000.
C £82,000.
D £78,000.
E Nothing.

Answer 8

Answer
Option D is correct. The firm has been charged £2,000 input tax on the supply of goods for the
purposes of its business. The firm can therefore deduct the £2,000 from the £80,000 output tax
which it accounts for to HMRC.

Question 9

Question 2
A firm of solicitors is registered for VAT purposes. The firm is refurbishing its offices. As
part of that process the firm sells some items of redundant office furniture. The buyer is not
registered for VAT purposes.
Must the firm charge VAT on the sale price?
A Yes, because the sale is made for a cash consideration.
B Yes, because the sale is made in the course of the firm’s business.
C No, because this is an exempt supply.
D No, because this is not a supply of legal services.
E No, because the buyer is not a taxable person.

Answer 9

Answer
Option B is correct. The firm must charge VAT on any supply made in the course of its
business, not just on its supply of legal services; option D therefore is wrong. The sale of
furniture does not fall within the category of exempt supplies (with the result that option C is
wrong). Option A is wrong; the charging of VAT on the supply of goods is not dependent on
the payment of cash consideration. The taxable status of the buyer is only relevant on the
question of reclaiming input tax; option E is therefore wrong.

Question 10

Question 3
A firm of solicitors is acting for a client in a litigation matter. The firm is currently holding
£600 in its client bank account for the client generally on account of costs. The firm receives
an invoice from an enquiry agent for charges of £400 plus VAT in connection with the
client’s matter. The enquiry agent’s invoice is addressed to the firm.
Which of the following best explains which bank account the firm should use to pay the
invoice?
A Client, because the firm is holding sufficient funds on the client’s behalf.
B Client, because the invoice relates to the client’s matter.
C Business, because the firm has not yet delivered its bill.
D Business, because the invoice is addressed to the firm.
E Business, because the client has not given instructions for the payment to be made
from the client bank account.

Answer 10

Answer
Option D is correct. As the enquiry agent’s invoice is addressed to the firm, the principal
method must be used. The firm’s own money must therefore be used to pay the invoice even if
there is money available in the client bank account.

Question 11

Question 1
A solicitor delivers a bill to a client for professional charges of £1,000 plus VAT. The client
complains that the bill is too high. The solicitor agrees to reduce the bill by 10%.
Which of the following best describes how the reduction should be recorded on the
client ledger account?
A CR (Business section) Profit costs – abatement £100.
CR (Business section) VAT – abatement £20.
B CR (Business section) Profit costs – abatement £120.
C CR (Business section) Profit costs – abatement £100.
DR (Business section) VAT – abatement £20.
D CR (Client section) Profit costs – abatement £100.
CR (Client section) VAT – abatement £20.
E DR (Business section) Profit costs – abatement £100.
DR (Business section) VAT – abatement £20

Answer 11

Answer
Option A is correct. In order to record the abatement, the entries made on the business
section of the client ledger account at the time that the bill was issued are reversed to
the extent of the abatement. Two CR entries are needed to show the reductions on profit
costs and VAT. The corresponding DR entries are on the profit costs and HMRC accounts
respectively.

Question 12

Question 2
A solicitor is instructed by a new client in a litigation matter. At the initial interview the
solicitor asks the client to pay £500 generally on account of costs and disbursements. The
client says that they will let the solicitor have a cheque for that sum within the next week. It
is now five days after the initial interview and the client has not yet made any payment to
the solicitor. The solicitor needs to pay a court fee of £100 on the client’s behalf.
Which of the following best explains which bank account the solicitor should use to pay
the £100?
A Client, because disbursements must always be paid from the client bank account.
B Client, because the client’s cheque for £500 will arrive within the next two days.
C Business, because the firm is holding insufficient funds on this client’s behalf.
D Business, because this is a payment of petty cash.
E Business, because disbursements must always be paid from the business bank account.

Answer 12

Answer
Option C is correct. Generally, disbursements can be paid from either the business bank
account or the client bank account, as appropriate; options A and E are accordingly wrong.
Option B is wrong; here the payment cannot be made from the client bank account because
the firm is not holding any money for this client (Rule 5.3). It is not a payment from petty cash
and option D therefore is wrong.

Question 13

Question 3
A solicitor delivers a bill to a client for professional charges of £1,000 and VAT of £200.
The client sends the solicitor a cheque, made payable to the firm, for £1,200 in payment of
the bill, but the accompanying letter instructs the solicitor not to pay in the cheque until the
client confirms that there are sufficient funds in their bank account for the cheque to clear.
Should the solicitor pay the cheque into the firm’s client bank account?
A Yes, because client money cannot be withheld from the client bank account.
B Yes, because the firm is entitled to be paid for the work it has done.
C No, because the cheque may be dishonoured.
D No, because this is not a receipt of client money.
E No, because the client’s instructions have been given in writing.

Answer 13

Answer
Option D is correct. Money received in payment of a bill is not client money and so cannot be
paid into the client bank account.

Question 14

Question 1
A firm of solicitors receives £250,000 on behalf of a client and pays it into the firm’s general
client account. The firm transfers the money to a separate designated deposit bank account
(SDDBA).
Which of the following best explains why the firm made the transfer?
A Because the bank will calculate the interest payable on the SDDBA.
B Because the firm is not required to keep any accounting records for money held in
a SDDBA.
C Because the money will be safer in a SDDBA.
D Because the SRA Solicitors’ Accounts Rules require the money to be held in a SDDBA.
E Because the firm is entitled to keep all the interest earned on a SDDBA.

Answer 14

Answer
Option A is correct. There is no requirement under the Rules to place the money in a SDDBA
(option D is therefore wrong). In these circumstances a firm would usually choose to open a
SDDBA because it is administratively easier as the bank will calculate the real interest earned
on the account. Option B is wrong; the firm is still required to keep accounting records on the
money held in a SDDBA. Option E is wrong; the firm must account to the client for a fair sum
by way of interest (Rule 7.1) and in practice the client would receive all the interest earned on
the SDDBA. Option C is wrong as there is no greater security in money being held in a SDDBA.

Question 15

Question 2
A solicitor is acting for a client in a business transaction. The solicitor receives £100,000
from the client to be used in the transaction. The solicitor pays the money into the firm’s
general client account. Unexpectedly, the transaction is delayed, and the money is held
in the general client account for much longer than anticipated. In view of the delay, the
solicitor decides to allow £50 in interest.
Which of the following pair of double entries shows how the interest owed to the client
should be recorded?
A CR Interest payable ledger account (Business section)
DR Client ledger account (Business section)
B DR Client ledger account (Client section)
CR Cash account (Client section)
C DR Interest payable ledger account (Business section)
CR Client ledger account (Client section)
D DR Client ledger account (Business section)
CR Cash account (Business section)
E DR Interest payable ledger account (Business section)
CR Client ledger account (Business section)

Answer 15

Answer
Option E is correct. When money is held in the general client account the interest payment is
an expense of the business and will be recorded on an interest payable ledger account. The
corresponding CR entry on the business section of the client ledger account shows that the
firm owes £50 to the client.

Question 16

Question 3
A firm received £200,000 on behalf of a client and paid the money into a separate
designated deposit bank account. The bank informs the firm that £100 interest has been
earned on the money.
Which of the following best describes how the firm should deal with the interest?
A Instruct the bank to transfer the interest to the firm’s business bank account.
B Record the interest on the deposit section of the client’s ledger account.
C Instruct the bank to transfer the interest to the client’s ledger account.
D Record the interest on the business section of the client’s ledger account.
E Record the interest on an interest payable ledger account.

Answer 16

Answer
Option B is correct. Interest earned on client money in a separate designated deposit bank
account must be recorded on the client’s ledger account. As it is the client’s money it will be
recorded in the deposit section (and not the business section – option D is wrong). Options
A and C are wrong as the bank has no control over the ledgers maintained by the firm.
Option E is wrong. An interest payable ledger account would be relevant if the firm was
allowing a sum in lieu of interest on money held in the firm’s general client bank account, but
these are not the facts here.

Question 17

Question 1
A solicitor is acting for the seller of a property. The terms of the contract provide for the
buyer to pay a 10% deposit on exchange of contracts to be held by the seller’s solicitor as
stakeholder. On exchange of contracts the solicitor receives the 10% deposit.
Which of the following best describes how the solicitor should deal with the deposit?
A Pay the money into the firm’s client bank account but make no ledger entries to record
the receipt.
B Pay the money into the firm’s business bank account and record the receipt on the
stakeholder ledger account in the joint names of buyer and seller.
C Forward the money to the seller and record the receipt on the stakeholder ledger
account in the joint names of buyer and seller.
D Pay the money into the firm’s client bank account and record the receipt on the
stakeholder ledger account in the joint names of buyer and seller.
E Pay the money into the firm’s business bank account and record the receipt on the
seller’s client ledger account.

Answer 17

Answer
Option D is correct. This is a receipt of client money (Rule 2.1(b)) and so it must be paid
into the firm’s client bank account. A receipt of client money must be recorded (Rule 8.1).
Stakeholder money is held jointly for seller and buyer and therefore the best option is to
record the receipt on a separate stakeholder ledger account in the joint names of buyer and
seller. (It is also permissible to record the entry on the seller’s ledger account, but labelled as
stakeholder money held for both buyer and seller.)

Question 18

Question 2
A firm is acting for a client in the purchase of a property. The client pays the firm £400,000
to use in part payment of the purchase price of £500,000. The client will fund the balance
of the purchase price by borrowing £100,000 from a building society by way of a mortgage.
The firm is also acting for the lender in relation to the mortgage.
Prior to completion of the purchase, the firm receives the mortgage advance and pays the
money into the firm’s client bank account. The firm records the receipt on a client ledger
account in the name of the lender.
Which of the following best describes the accounting records the firm should make on
the borrower’s ledger account on completion?
A An inter- client transfer of £100,000 from the lender’s ledger account followed by a
payment of £500,000 to the seller.
B A payment of £500,000 to the seller.
C A payment of £400,000 to the seller.
D An inter- client transfer of £400,000 to the lender’s ledger account.
E An inter- client transfer of £500,000 from the lender’s ledger account followed by a
payment of £500,000 to the seller.

Answer 18

Answer
Option A is correct. On receipt of the mortgage advance, the mortgage money was held
by the firm on behalf of the lender. On completion the mortgage money is now held for
the borrower and this must be recorded by first making an inter- client transfer. The firm will
then record the payment of the whole purchase price to the seller on the borrower’s ledger
account.

Question 19

A solicitor is a joint executor named in a will. The solicitor is now dealing with the
administration of the estate. To assist with the administration the solicitor opens a bank
account. The solicitor is one signatory on the account. The second signatory is the other
executor named in the will.
Which of the following best explains the solicitor’s obligations with regard to the money
held in the bank account?
A Because the money is not being held in a client account, the solicitor must safeguard
the money, but has no obligations under the SRA Accounts Rules.
B Because this is not client money, the solicitor is not subject to the SRA Accounts Rules.
C Because the money is being held in a joint account, the solicitor’s only obligations are
to obtain bank statements on the account every five weeks and keep a central record
of bills.
D Because the money is not being held in a client account, the solicitor has limited
obligations under the SRA Accounts Rules but must still safeguard the money.
E Because this is client money, the SRA Accounts Rules apply in their entirety.

Answer 19

Answer
Option D is correct. The money is being held in a joint account. This does not fall within the
definition of a client account, but the money is nevertheless client money. As it is not a client
account, only limited elements of the Rules apply. A solicitor entrusted with money is always
under a duty to safeguard that money (SRA Code of Conduct for Solicitors, RELs and RFLs,
para 4.2), so in addition to Rules 8.2 (obtain five- weekly bank statements) and 8.4 (keep a
record of bills) of the SRA Accounts Rules, the solicitor may need to take additional steps to
minimise the risk.

Question 20

A firm of solicitors was set up 14 months ago. During its first accounting year the firm has
generally handled only small amounts of client money, but on three occasions the balance
on the firm’s client bank account has exceeded £1m.
Which of the following best describes the firm’s obligations with regard to obtaining an
accountant’s report?
A The firm is not obliged to obtain an accountant’s report because it only handles small
amounts of client money.
B The firm is not obliged to obtain an accountant’s report because it is only at the end of
its first accounting year.
C The firm must obtain an accountant’s report, but only needs to submit the report to the
SRA if it is qualified.
D The firm must obtain an accountant’s report and must submit the report to the SRA even
if it is not qualified.
E The firm must obtain an accountant’s report and must submit the report to the SRA if it
is not qualified but discloses a breach of the SRA Accounts Rules.

Answer 20

Answer
Option C is correct. Most firms have to obtain an accountant’s report (with the result that
options A and B do not represent the best answer), but only qualified reports (where there
has been a significant breach of the Rules) need to be submitted to the SRA (options D and E
therefore are wrong). Firms handling only small amounts of client money are not required to
obtain a report but having a client bank account balance in excess of £250,000 (Rule 12.2(b)
(ii)) during the accounting year takes the firm outside the exception.

Question 21

A firm of solicitors is acting on behalf of the executors of a will. The administration of the estate will be completed shortly and the executors have asked the firm to pay the legacies due under the will.

As a separate matter the firm also acts for one of the beneficiaries of the will in connection with the beneficiary’s purchase of a property. The beneficiary is entitled to a legacy of £20,000 from the will. The beneficiary gives written instructions to the firm to use this £20,000 legacy to repay the £2,000 the firm has already incurred in surveyor’s fees and searches (for which the firm has billed the beneficiary) and retain the balance of £18,000 and use it as part of the purchase price.

Which of the following statements best explains the action the firm should take?

A. The firm cannot transfer the funds from the executors’ client account ledger to the beneficiary’s client account ledger. The firm should send a cheque to the beneficiary for £20,000.

B. The firm can transfer £2,000 from the executors’ client account ledger to the firm’s business bank account and should then send a cheque for £18,000 to the beneficiary.

C. The firm can transfer £2,000 from the executors’ client account ledger to the firm’s business bank account and should then transfer £18,000 to the beneficiary’s stakeholder account ledger.

D. The firm can transfer £20,000 from the executors’ client account ledger to the beneficiary’s client account ledger and should then transfer £2,000 to the firm’s business bank account.

E. The firm can transfer £20,000 from the executors’ client account ledger to the beneficiary’s client account ledger. The firm should not transfer £2,000 to the firm’s business bank account until the purchase of the property is completed.

Answer 21

D - The firm can transfer £20,000 from the executors’ client account ledger to the beneficiary’s client account ledger and then transfer £2,000 to the firm’s business account.

Question 22

A firm of solicitors is acting for the executors of a deceased man’s estate. It has just obtained the grant of probate. When it applied for the grant of probate, the firm paid the probate application fee of £273 from its business bank account. The firm receives £5,225 from the deceased man’s bank, being the closing balance of the deceased man’s account with the bank, which it pays into its general client bank account.

The firm has received, but not yet paid, an invoice for £100 (no VAT payable) addressed to the firm from a local valuer who provided a probate valuation of the deceased man’s furniture.

The firm submits a bill to the executors as follows:

Professional charges £1,000
VAT £200
Paid disbursement (probate fee) £273
Unpaid disbursement (valuation fee) £100
Total £1,573

What is the maximum amount the firm can transfer to its business bank account?

A. £1,000

B. £1,273

C. £1,200

D. £1,300

E. £1,573

Answer 22

E - £1,573

Question 23

A firm of solicitors is acting on behalf of the executors of a will. The administration of the estate will be completed shortly and the executors have asked the firm to pay the legacies due under the will. As a separate matter the firm also acts for one of the beneficiaries of the will in connection with the beneficiary’s purchase of a property. The beneficiary is entitled to a legacy of £20,000 from the will. The beneficiary intends to use their £20,000 legacy to repay the £2,000 the firm has already incurred in surveyor’s fees and searches (for which the firm has billed the beneficiary) and intends the balance of £18,000 to be retained by the firm as part of the purchase price.

Which one of the following statements best explains the action the firm should take?

The firm can transfer £2,000 from the executors’ client account ledger to the firm’s business account but must send a cheque for £18,000 to the beneficiary.

The firm can transfer £20,000 from the executors’ client account ledger to the beneficiary’s client account ledger and then transfer £2,000 to the firm’s business account.

The firm can transfer £20,000 from the executors’ client account ledger to the beneficiary’s client account ledger but cannot transfer £2,000 to the firm’s business account until the purchase of the property is completed.

The firm can transfer £2,000 from the executors’ client account ledger to the firm’s business account and then transfer £18,000 to the beneficiary’s stakeholder account ledger

The firm cannot transfer the funds from the executors’ client account ledger to the beneficiary’s client account ledger. The firm must send a cheque to the beneficiary for £20,000.

Answer 23

The firm can transfer £20,000 from the executors’ client account ledger to the beneficiary’s client account ledger and then transfer £2,000 to the firm’s business account.

Correct. The legacy of £20,000 is client money. This is a transfer of client money between two clients of the firm (from the executors to the beneficiary). To record the transfer between the two clients only one set of double entries is needed because the money being transferred is already in your firm’s client account (there is no need to take it out of the client account and then pay it back into the client account again). The client ledger (client side as it is client money) of the person transferring the money (the executors) is debited and the client ledger (client side as it is client money) of the person receiving the transfer (the beneficiary) is credited.
NB You will see that, as you know from the adapt elements, terminology for the accounts/ledgers can be different and this question uses client account ledger instead of client ledger client account or client ledger client side.
Once the beneficiary has received the legacy of £20,000, they intend to use £2,000 to pay a disbursement which the firm has incurred and for which they have billed the beneficiary. This amount (£2,000) is therefore non-client money ie money belonging to the authorised body (the firm) under rule 2.1(d). As non-client money, this £2,000 will then be transferred from the firm’s client account to the firm’s business account.

Question 24

You are a trainee solicitor in the Real Estate team of a firm of solicitors. Your firm is acting for a long-standing and highly valued client. This morning the client has had an offer for the purchase of a leisure centre accepted on the basis that unconditional exchange of contracts takes place no later than close of business tomorrow. The client has promised to transfer to your firm the deposit for exchange plus an amount on account of costs, but this will not be received until tomorrow.

Your supervisor has instructed you to arrange the searches in connection with the purchase without delay. The cost of the searches is £680. You check the client’s ledger and there is no money on client account.

Which one of the following best represents the action you should take?

You should wait to pay the search fees until the money is received into client account.

As the client has promised to pay the money on account, you should immediately pay the search fees out of client account.

You should pay the search fees immediately out of the firm’s business account.

You should contact the client and ask for authority to pay the search fees out of the firm’s business account.

You should contact the client and ask for authority to pay the search fees out of client account.

Answer 24

You should pay the search fees immediately out of the firm’s business account.

Correct. The money to pay the search fees cannot be withdrawn from the client account because the client does not have any money in the client account. If you used the client account to pay the search fees, another client’s money would be being used and SRA Accounts Rule 5.3 would be breached. As the searches are time critical in the context of the transaction, they should be undertaken immediately (rather than waiting for the money to arrive from the client) and therefore the firm’s business account must be used to pay for them.

Question 25

Your firm is acting for a client in connection with a litigation matter. Proceedings will be issued next week and court fees of £340 will be due to be paid at the time of issue. No bill has been sent to the client. You have just received a cheque for £340 from the client, made payable to your firm, for the court fees (the ‘money’).

Which one of the following best sets out the position in relation to this money?

As the court fees have not yet been paid, you may not pay the money into the firm’s client account.

As the court fees have not yet been paid and a bill has not been delivered to the client for them, the money is client money.

The cheque must be held on file pending payment of the court fees.

Provided the court fees are paid within 7 days, the money can be paid now into the firm’s business account.

Although the court fees have not yet been paid, as they have been incurred, the money is non-client money.

Answer 25

As the court fees have not yet been paid and a bill has not been delivered to the client for them, the money is client money.

Question 26

You are a solicitor at a firm of solicitors acting for the buyer of a property. The buyer has already sent you the deposit monies prior to exchange. At exchange of contracts, you send the deposit monies to the seller’s solicitor. The contract states that the deposit is to be held as stakeholder.

Which one of the following pairs of double entries shows how the payment of the deposit at exchange should be recorded by you?

Credit client ledger stakeholder
Debit cash sheet client account

Credit cash sheet client account
Debit client ledger client account

Credit cash sheet client account
Debit client ledger stakeholder

Credit client ledger client account
Debit cash sheet client account

Credit client ledger client account
Debit client ledger stakeholder

Answer 26

Credit cash sheet client account
Debit client ledger client account

Correct. Whether the deposit is to be held as stakeholder or agent is only relevant to the seller’s solicitor. As you are the buyer’s solicitor, the accounting entries needed to send the deposit monies to the seller’s solicitor are those recording the payment out of client money from the client account. The buyer has already sent you the money to pay the deposit and it is client money under Rule 2.1(a) and will be in your client account.

Question 27

You are a solicitor at a firm of solicitors and the firm’s bank has notified you that your general/main client account has earned interest. The interest has already been paid into the firm’s business account and the firm decides to pay £120 of it to one of their clients which is a fair sum of interest on the client money held by the firm for the client.

Which one of the following pairs of double entries should be included in the entries that record the payment of the fair sum of interest to the client?

Credit interest receivable ledger
Debit cash sheet client account

Credit cash sheet client account
Debit client ledger client account

Credit cash sheet client account
Debit interest receivable ledger

Credit client ledger client account
Debit cash sheet client account

Credit interest payable ledger
Debit cash sheet client account

Answer 27

Credit client ledger client account
Debit cash sheet client account

Correct. Payment of a sum of interest (earned by the general/main client account) to a client is a two step process once the interest earned (non-client money) has been recorded in the firm’s business account. The first step is to withdraw the interest amount from the firm’s business account and the second is to pay the interest amount into the client account and credit it to the relevant client.
These entries record the second step – the receipt of the fair sum of interest in the client’s client ledger and the client account.

Question 28

A firm of solicitors is acting on behalf of a client who are selling their property and purchasing a new property. A deposit of £14,000 has been received in respect of the sale and is held as agent.

Which one of the following pairs of double entries shows how the receipt of the deposit cheque should be recorded?

Credit cash sheet client account
Debit client ledger client account

Credit stakeholder ledger
Debit cash sheet client account

Credit client ledger client account
Debit cash sheet client account

Credit client ledger client account
Debit stakeholder ledger

Credit cash sheet business account
Debit client ledger client account

Answer 28

Credit client ledger client account
Debit cash sheet client account

Correct. The deposit is being held by the seller’s solicitor as agent. The deposit is client money (Rule 2.1(b)) and will be paid into the seller’s solicitor’s client account and it will be credited to the seller’s client ledger (client side as it is client money). The stakeholder ledger is only used by the seller’s solicitor to record receipt of a deposit when they are holding the deposit as stakeholder (not the case on these facts).

Question 29

A firm of solicitors during its most recent accounting period has held client money. 90% of that client money is from the Legal Aid Agency. During that accounting period the average balance on the firm’s client account has not exceeded £8,000 and the maximum balance was £45,000. The firm is ceasing to operate as an authorised body. They have asked you whether the SRA will require them to obtain an accountant’s report for their most recent accounting period.

Which one of the following is the best advice to your client?

They are required to obtain an accountant’s report within 12 months of the end of the accounting period.

They are required to obtain an accountant’s report within six months of the end of the accounting period.

They are not required to obtain an accountant’s report as an exemption applies because the firm is ceasing to operate as an authorised body.

They are not required to obtain an accountant’s report as an exemption applies because the amounts of client money held in the accounting period do not exceed the limits set out in the SRA Accounts Rules.

They are not required to obtain an accountant’s report as an exemption applies because 90% of the client money is from the Legal Aid Agency.

Answer 29

They are not required to obtain an accountant’s report as an exemption applies because the amounts of client money held in the accounting period do not exceed the limits set out in the SRA Accounts Rule

Correct. Rule 12.2(b) sets out an exemption to the Rule 12.1(a) requirement to obtain an accountant’s report. These facts fall within the 12.2(b) exemption because the client money held during the accounting period does not exceed an average of £10,000 nor does it exceed a maximum of £250,000.

Question 30

You are a solicitor in a form of solicitors who act for Kent limited. Your firm has been holding the proceeds of sale of a property in Nottingham (the ‘Net Proceeds of Sale’) pending the purchase of alternative premises by Kent Limited. Your firm has been holding the Net Proceeds of Sale in the firm’s general client account. In relation to the Net Proceeds of Sale, how should any interest to be paid to the client, Kent Limited, be calculated?

By reference to the most recent interest rate published by the Law Society.

As a fair sum of interest on any client money held on the client’s behalf.

At the Bank of England’s base rate on client money held for every day the money is held.

As a proportion of the total amount of interest paid to your firm by the bank for money held on deposit in the general client account.

At a reasonable rate of interest not exceeding the rate of interest payable on a separate designated client account at the bank where the money is held.

Answer 30

As a fair sum of interest on any client money held on the client’s behalf.