UNIT 1 - Solicitors Account 1 Flashcards
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.
CORRECT ANSWER A - Staff wages are part of the outgoings or running costs of the business 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.
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.
CORRECT ANSWER A -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.
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.
CORRECT ANSWER C - 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.
A firm of solicitors receives a number of payments from separate clients over the course of a week.
Which of the following is a receipt of pure client money?
A A cheque for £1,200 in payment of the firm’s bill for professional charges.
B A cheque for £50 in reimbursement of an as yet unbilled payment made from the firm’s business bank account.
C A cheque for £200 to cover a disbursement as yet unpaid.
D A cheque for £300,600 comprising £300,000 completion money on the client’s purchase of a flat and £600 in payment of the firm’s bill.
E A cheque for £100 in respect of a disbursement already paid by the firm.
CORRECT ANSWER C - Only the cheque for the unpaid disbursement falls within the definition of client money (in Rule 2.1). Options A, B and E are wrong as they all fall outside the definition and therefore represent a receipt of business money. Option D is a mixed receipt: the completion money is client money and the money in payment of the bill is business money.
A solicitor is instructed by a client in the purchase of a house. The purchase price agreed with the seller is £400,000. Prior to any disbursements being incurred, the client sends the solicitor a cheque for £40,500 comprising £40,000 to use as the deposit for the purchase and £500 generally on account of costs and disbursements.
Which of the following best describes how the solicitor should deal with receipt of the cheque?
A) Split the cheque by paying £500 into the business bank account and £40,000 into the client bank account.
B) Pay the entire sum into the business bank account and then transfer £40,000 into the client bank account.
C) Pay the entire sum into the business bank account.
D) Pay the entire sum into the client bank account.
E) Pay the entire sum into the client bank account and then transfer £500 into the business bank account.
CORRECT ANSWER D - Money for the deposit and money generally on account of costs and disbursements both fall within the definition of client money. The entire receipt is therefore client money. Client money must be paid promptly into the client bank account (Rule 2.3).
A solicitor has acted for a client in respect of commercial property transactions for many years. The solicitor completes the sale of a property on behalf of a client. The proceeds of sale are received into the firm’s client bank account. The solicitor is about to transfer the proceeds of sale to the client when the client instructs the solicitor to pay £10,000 from the proceeds of sale to the school attended by the client’s son in payment of school fees.
Should the solicitor make the payment?
A) Yes, because the solicitor must act in accordance with the client’s instructions.
B) Yes, because there is no risk of money laundering.
C) Yes, because this would comply with the solicitor’s duty to act in the client’s best interests.
D) No, because it is not the purpose for which the money was being held.
E) No, because it would be an improper use of the client account as a banking facility.
CORRECT ANSWER E - Making the payment would be a breach of Rule 3.3. There is no link between the payment and the legal work carried out by the solicitor. The client could receive the proceeds of sale and then simply make the payment direct. The client’s convenience does not justify the improper use of the client account.
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.
CORRECT ANSWER C - 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.
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 account client section. DR cash account client section.
E) CR profit costs account client section. DR client ledger account client section.
CORRECT ANSWER B - 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.
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 briefly for her and to hold £80,000 for her son, who
is buying a house. The firm is acting for the son in his house purchase and completion is imminent.
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.
CORRECT ANSWER E - 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.
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.
CORRECT ANSWER D - 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).
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.
CORRECT ANSWER D - Money received in payment of a bill is not client money and so cannot be paid into the client bank account.
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.
CORRECT ANSWER C - 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.
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.
CORRECT ANSWER A - 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.
A firm issues a bill to a client for its professional charges and VAT.
TRUE OR FALSE:
On issuing the bill the firm will make no entries in the Cash account.
TRUE - On issuing a bill there is no movement of cash and so no entries are made in the Cash account. Entries are required in the Profit Costs account and the HM Revenue & Customs account with corresponding entries on the client ledger account.
TRUE OR FALSE:
All money received from a client is client money.
FALSE - Not all money received from a client will fall within the definition of client money. The definition of client money is in Rule 2.1. For example, money received from a client for a paid disbursement is not client money.
