UNIT 2 - Solicitors Accounts 2 Flashcards
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.
CORRECT ANSWER D - 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.
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.
CORRECT ANSWER B - 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.
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.
CORRECT ANSWER D - . 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.
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.
CORRECT ANSWER A - 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.
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, completion of 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)
CORRECT ANSWER E - 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.
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.
CORRECT ANSWER B - 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.
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.
CORRECT ANSWER D - 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.)
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.
CORRECT ANSWER A - 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.
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.
CORRECT ANSWER D - 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.
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.
CORRECT ANSWER C - 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.
Which one or more of the following statements is or are correct?
A) A firm of solicitors will normally be registered for VAT.
B) A firm of solicitors registered for VAT will only charge VAT on its supplies of legal services.
C) A firm of solicitors registered for VAT will charge VAT on any supplies of taxable goods or services made in the course or furtherance of the business.
D) A firm of solicitors registered for VAT will charge VAT on the sale of redundant office equipment.
E) Every firm of solicitors must be registered for VAT.
CORRECT ANSWER A, C & D - Registration is only mandatory once the firm’s turnover exceeds the limit for compulsory registration, but a firm can otherwise choose to register voluntarily. A firm will normally choose to register as this means that it can recover input tax charged to it. Once registered a firm must charge VAT on all taxable supplies made in the course or furtherance of its business.
You act for a company which is registered for VAT. You hold £800 on account of costs for the company. You pay an expert’s fee of £500 plus £100 VAT on the company’s behalf. This satisfies the requirements for a disbursement. The invoice is addressed to the company.
Which one of the following statements is correct?
A) You must treat the payment on the agency basis.
B) You must treat the payment on the principal basis.
C) You must issue the company with a VAT invoice for £100 to cover the VAT on the expert’s fee.
D) You must make the payment from the client bank account.
E) You must make the payment from the business bank account.
CORRECT ANSWER A - When an invoice for a disbursement is addressed to the client, you must treat it on the agency basis which means that you pass on the supplier’s invoice to the client. You do not issue an invoice of your own in relation to the disbursement. You can make the payment from either the client bank account (where, as here, you are holding sufficient funds) or the business bank account.
TRUE OR FALSE:
All firms of solicitors are required to obtain an accountants’ report regarding compliance with the SRA Accounts Rules.
FALSE - Under Rule 12.1 only those firms that have, at any time during an accounting period, received client money, or operated a joint account or a client’s own account as signatory are required to obtain an accountants’ report. Whilst Rule 12.1 will apply to most firms, it will not apply to all.
Your firm acts for a client, Hassan. Your firm’s professional charges in acting for Hassan are £200 and your firm has paid court fees of £20 on Hassan’s behalf.
How much output tax you will your firm charge to Hassan?
A) Nil
B) £2
C) £40
D) £44
E) £220
CORRECT ANSWER C - VAT at 20% is charged on the firm’s supply of services. The court fee is a disbursement. It is not part of the firm’s supply of services.
Which one or more of the following statements is/are correct?
A) Clients are always entitled to interest on client money held in the client bank account.
B) A firm can come to an agreement with a client not to pay interest on money held in the client bank account provided that agreement is in writing.
C) A firm must account to the client for a fair sum of interest on money held in the client bank account.
D) A firm is not obliged to open a separate designated deposit bank account for a client.
E) A firm cannot retain interest earned on the client bank account.
CORRECT ANSWER B, C & D - The obligation under Rule 7.1 is to account to the client for a fair sum of interest. If, for example, a firm holds a small sum for a short period it may be ‘fair’ to pay no interest. A firm is not under any obligation to open a separate designated deposit bank account. Interest earned on the client bank account over and above that required to be paid under the Rules may be retained by the firm. Rule 7.2 enables a firm to enter into a written agreement with the client on the payment of interest.
