Test Bank For Business law Text and Cases Clarkson 12th Edition Chapter 1_52 by QuentinAxel

Chapter 1 Introduction to Law and Legal Reasoning N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

The stability and predictability of the law is essential to business activities. ANSWER: T NAT: AACSB Analytic

A2.

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A breach of a contract is a failure to perform it. ANSWER: T NAT: AACSB Ethics

A4.

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Law is a body of enforceable rules governing relationships among individuals and between individuals and their society. ANSWER: T NAT: AACSB Analytic

A3.

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Constitutional law includes only the U.S. Constitution. 1

TEST BANK A—UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS

ANSWER: F NAT: AACSB Analytic

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CHAPTER 1: INTRODUCTION TO LAW AND LEGAL REASONING

A5.

A state constitution is supreme within the state’s borders. ANSWER: T NAT: AACSB Analytic

A6.

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A state law that conflicts with the U.S. Constitution will be deemed unconstitutional. ANSWER: T NAT: AACSB Analytic

A9.

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Uniform laws apply in all states, including those in which the laws have not been adopted. ANSWER: F NAT: AACSB Analytic

A8.

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Whether a law is constitutional depends on its source. ANSWER: F NAT: AACSB Analytic

A7.

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Statutory law does not include county ordinances. ANSWER: F NAT: AACSB Reflective

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A10. No state has adopted the Uniform Commercial Code in its entirety. ANSWER: F NAT: AACSB Reflective

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A11. Common law is a term for law that is common throughout the world. ANSWER: F NAT: AACSB Analytic

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A12. Damages is a remedy at law.

TEST BANK A—UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS

ANSWER: T NAT: AACSB Analytic

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A13. Remedies in equity include injunctions and decrees of specific performance. ANSWER: T NAT: AACSB Analytic

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A14. In most states, the courts no longer grant “equitable” remedies. ANSWER: F NAT: AACSB Analytic

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A15. A defendant is a person against whom a lawsuit is brought. ANSWER: T NAT: AACSB Analytic

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A16. Courts do not depart from precedents. ANSWER: F NAT: AACSB Reflective

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A17. A judge’s function is to make the law. ANSWER: F NAT: AACSB Analytic

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A18. Criminal law focuses on duties that exist between persons. ANSWER: F NAT: AACSB Analytic

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A19. A reference to “28 U.S.C. Section 1332” means that a statute can be found in section 1332 of title 28 of the United States Code. ANSWER: T NAT: AACSB Analytic

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CHAPTER 1: INTRODUCTION TO LAW AND LEGAL REASONING

A20. Most state trial court decisions are not published. ANSWER: T NAT: AACSB Analytic

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MULTIPLE CHOICE QUESTIONS A1.

The legislature of the state of Mississippi enacts a new statute that sets standards for the liability of businesses selling defective products. This statute applies a. b. c. d.

only in Mississippi. only in Mississippi and its border states. in all states. in all states but only to matters not covered by other states’ laws.

ANSWER: A NAT: AACSB Reflective A2.

4 TYPE: AICPA Critical Thinking

Lewis is a state court judge. Like other judges, Lewis often refers to secondary sources of law for guidance. These sources include a. b. c. d.

official comments to statute. other states’ statutes. state constitutions. the U.S. Constitution.

ANSWER: A NAT: AACSB Reflective A3.

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Hawaii enacts a state law that violates the U.S. Constitution. This law can be enforced by a. b. c. d.

no one. the federal government only. the state of Hawaii only. the United States Supreme Court only.

TEST BANK A—UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS

ANSWER: A NAT: AACSB Reflective

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CHAPTER 1: INTRODUCTION TO LAW AND LEGAL REASONING

A4.

The Federal Trade Commission is a government agency that issues rules, orders, and decisions. The Georgia state legislature enacts statutes. The Jackson County Board and the Peach City Council enacts ordinances. Administrative law includes a. b. c. d.

all law that affects a business’s operation. the rules, orders, and decisions of the Federal Trade Commission. statutes enacted by the Georgia state legislature. ordinances created by the Jackson County Board and the city council of Peach City, Georgia.

ANSWER: B NAT: AACSB Reflective A5.

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act as liaisons between federal and state governments. impose uniform laws on the states. perform specific government functions. standardize laws for the executive and judicial branches.

ANSWER: C NAT: AACSB Reflective

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In a suit against Corbin, Donatella obtains damages. This is a. b. c. d.

an order to do or to refrain from doing a particular act. an order to perform what was promised. a payment of money or property as compensation. the cancellation of a contract.

ANSWER: C NAT: AACSB Reflective A7.

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The Securities Exchange Commission is an administrative agency. The chief purpose of such agencies is to a. b. c. d.

A6.

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In an action against Elin, Frank obtains a remedy. This is a. b. c.

an administrative agency’s enforcement of its rule. a principle of the law derived from earlier court cases. a statute enacted by a state legislature or Congress.

TEST BANK A—UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS

the legal means to recover a right or to redress a wrong.

ANSWER: D NAT: AACSB Reflective

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CHAPTER 1: INTRODUCTION TO LAW AND LEGAL REASONING

A8.

In a suit against Evan, Floyd obtains an injunction. This is a. b. c. d.

an order to do or to refrain from doing a particular act. an order to perform what was promised. a payment of money or property as compensation. the cancellation of a contract.

ANSWER: A NAT: AACSB Reflective A9.

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In a suit against Vladimir over the performance of a contract, Wyler obtains rescission. This is a. b. c. d.

an order to do or to refrain from doing a particular act. an order to perform what was promised. a payment of money or property as compensation. the cancellation of a contract.

ANSWER: D NAT: AACSB Reflective

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A10. In a suit against Sandy, Tippy obtains damages. In the U.S. legal system, this remedy at law is a. b. c. d.

equitable. normal. unlikely. unusual.

ANSWER: B NAT: AACSB Reflective

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A11. Maggie and Nate enter into a contract for the sale of car, but Nate later refuses to deliver the goods. Maggie asks a court to order Nate to perform as promised. Ordering a party to perform what was promised is a. b. c.

an equitable remedy. an unenforceable demand. a remedy at law.

TEST BANK A—UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS

a type of harm.

ANSWER: A NAT: AACSB Reflective

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CHAPTER 1: INTRODUCTION TO LAW AND LEGAL REASONING

A12. As a judge, Diane applies common law rules. These rules develop from a. b. c. d.

decisions of the courts in legal disputes. regulations issued by administrative agencies. statutes enacted by Congress and the state legislatures. uniform laws drafted by legal scholars.

ANSWER: A NAT: AACSB Reflective

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A13. Craig is a state court judge. In his court, as in most state courts, legal and equitable remedies have merged. But it is important to distinguish between equitable and legal remedies a. b. c. d.

because neither type of remedy can be granted today. for no good reason. to negotiate an enforceable business contract. to request a proper remedy.

ANSWER: D NAT: AACSB Reflective

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A14. In Ben v. City Car Dealership, a state supreme court held that a minor could cancel a contract for the sale of a car. Now a trial court in the same state is deciding Daphne v. Even Steven Auto Deals, Inc.,, a case with similar facts. Under the doctrine of stare decisis, the trial court is likely to a. b. c. d.

allow the minor to cancel the contract. disregard the previous case. order the minor to cancel the contract. require the minor to fulfill the contract.

ANSWER: A NAT: AACSB Reflective

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TEST BANK A—UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS

A15. In Export Co. v. Imports, Inc., there is no precedent on which the court can base a decision. The court can consider, among other things, a. b. c. d.

neither public policy nor social values. public policy only. public policy or social values. social values only.

ANSWER: C NAT: AACSB Reflective

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A16. A federal statute regulates an employment practice. To resolve a dispute concerning the practice, Paula, a judge, will most likely apply a. b. c. d.

a common law doctrine that applied before the statute was enacted. a common law doctrine that applies to other, different practices. Paula’s personal philosophy of law. the statute.

ANSWER: D NAT: AACSB Reflective

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Fact Pattern 1-A1 (Questions A17–A19 apply) The Texas Supreme Court decides the case of Livewire Entertainment Co. v. Power Play Corp. Of nine justices, six believe the judgment should be in Livewire’s favor. Justice Bellamy, one of the six, writes a separate opinion. The four justices who believe the judgment should be in Power’s favor join in a third separate opinion. A17. Refer to Fact Pattern 1-A1. These opinions are collected and published in volumes called a. b. c. d.

citations. codes. reporters. reviews.

ANSWER: C NAT: AACSB Reflective

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CHAPTER 1: INTRODUCTION TO LAW AND LEGAL REASONING

A18. Refer to Fact Pattern 1-A1. Bellamy’s opinion is known as a. b. c. d.

a concurring opinion. a dissenting opinion. a majority opinion. a per curiam opinion.

ANSWER: A NAT: AACSB Reflective

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A19. Refer to Fact Pattern 1-A1. The opinion joined by the four justices who favor Power is known as a. b. c. d.

a concurring opinion. a dissenting opinion. a majority opinion. a per curiam opinion.

ANSWER: B NAT: AACSB Reflective

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A20. At a prison in Ohio, inmate Steve recruits other inmates to play Towers & Trolls, a potentially violent, fantasy, role-playing game. Ryan, the prison’s warden, confiscates the game materials and bans its play at the prison. Under the principles discussed in “A Sample Court Case,” Singer v. Raemisch, Ryan most likely acted a. b. c. d.

in violation of Steve’s rights under the First Amendment. reasonably in taking the game materials but not in banning its play. reasonably in banning the game but not in taking the materials. reasonably in the circumstances and under the law.

ANSWER: D NAT: AACSB Reflective

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ESSAY QUESTIONS

14 A1.

TEST BANK A—UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS

Americans with a Better Cause (ABC), a nonprofit organization, files a suit against the U.S. Department of Justice (DOJ), claiming that a certain federal statute the DOJ is empowered to enforce conflicts with the U.S. Constitution and with a state constitution. In each situation, which source of law has priority? ANSWER: The U.S. Constitution is the supreme law of the land. A law in violation of the Constitution, no matter what its source, will be declared unconstitutional and will not be enforced. Thus, the federal statute does not have priority over the Constitution. The federal statute would have priority over the state constitution, however, because under the U.S. Constitution, when there is a conflict between a federal law and a state law, the state law is rendered invalid. PAGE: 4 NAT: AACSB Reflective

A2.

TYPE: = AICPA Decision Modeling

Blizzard Entertainment, Inc., one of the owners of the World of Warcraft (WoW) computer game, is involved in a lawsuit with MDY Industries, LLC, the owner of Glider, a software program that plays WoW for its players while they are away from their keyboards. Blizzard asks the court to direct MDY to stop selling and distributing Glider. The court’s opinion in the case is at MDY Industries, LLC v. Blizzard Entertainment, Inc., 616 F.Supp.2d 958 (D.Ariz. 2010). What is the name for the remedy that Blizzard is seeking? What type of remedy is it? What court decided this case? Specifically where can the court’s opinion be found? ANSWER: The remedy that Blizzard asks the court to provide is an injunction—defined as an order to do or to refrain from doing a particular act. An injunction is an equitable remedy. The U.S. District Court for the District of Arizona decided this case in 2009. The opinion of the court in this case—MDY Industries, LLC v. Blizzard Entertainment, Inc., 616 F.Supp.2d 958 (D.Ariz. 2010)—can be found in its entirety in volume 616 of the Federal Supplement, Second Series, on page 958. The case was decided by the U.S. District Court for the District of Arizona in 2010. PAGES: 16 & 18–19 NAT: AACSB Reflective

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AICPA Research

Chapter 2 Courts and Alternative Dispute Resolution N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

Federal courts are superior to state courts. ANSWER: F NAT: AACSB Analytic

A2.

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The courts can decide whether the other branches of government have acted within the scope of their constitutional authority. ANSWER: T NAT: AACSB Analytic

A3.

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Minimum contacts with a jurisdiction are never enough to support jurisdiction over a nonresident defendant. ANSWER: F NAT: AACSB Analytic

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TEST BANK A—UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS

CHAPTER 2: COURTS AND ALTERNATIVE DISPUTE RESOLUTION

A4.

Diversity of citizenship cases are only those arising between citizens of different states. ANSWER: F NAT: AACSB Analytic

A5.

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A justiciable controversy is a case in which the court’s decision—the “justice” that will be served—will be controversial. ANSWER: F NAT: AACSB Analytic

A9.

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Venue is the term for the subject matter of a case. ANSWER: F NAT: AACSB Analytic

A8.

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A court cannot exercise jurisdiction over an out-of-state defendant who has only done business in the state over the Internet. ANSWER: F NAT: AACSB Analytic

A7.

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Concurrent jurisdiction exists when both federal and state courts have the power to hear a particular case. ANSWER: T NAT: AACSB Analytic

A6.

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In some states, lawyers are not allowed to represent people in small claims courts. ANSWER: T NAT: AACSB Analytic

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A10. The United States Supreme Court has original jurisdiction in rare instances. ANSWER:

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TEST BANK A—UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS

NAT: AACSB Analytic

AICPA Legal

CHAPTER 2: COURTS AND ALTERNATIVE DISPUTE RESOLUTION

A11. A federal case typically originates in a state court. ANSWER: F NAT: AACSB Analytic

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A12. Alternative dispute resolution refers to any method for resolving a dispute outside the court system. ANSWER: T NAT: AACSB Reflective

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A13. Negotiation traditionally involves just the parties to a dispute without their attorneys. ANSWER: F NAT: AACSB Reflective

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A14. Negotiation is the most complex form of alternative dispute resolution. ANSWER: F NAT: AACSB Reflective

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A15. No court offers mediation as an option before a case goes to trial. ANSWER: F NAT: AACSB Reflective

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A16. Arbitration that is mandated by the courts is often binding on the parties. ANSWER: F NAT: AACSB Analytic

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A17. A court will review a contract for validity even if it contains an arbitration clause. ANSWER: F NAT: AACSB Analytic

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TEST BANK A—UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS

A18. Most online dispute resolution services apply general, universal legal principles to resolve disputes. ANSWER: T PAGE: NAT: AACSB Technology

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CHAPTER 2: COURTS AND ALTERNATIVE DISPUTE RESOLUTION

A19. In early neutral case evaluation, a third party’s evaluation of each party’s strengths and weaknesses forms the basis for negotiating a settlement. ANSWER: T NAT: AACSB Reflective

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A20. A choice-of-law clause is a provision in a contract that excuses a party from liability for nonperformance due to “acts of God.” ANSWER: F NAT: AACSB Analytic

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MULTIPLE CHOICE QUESTIONS A1.

The Ohio state legislature passes a law to regulate local delivery services. The final authority regarding the constitutionality of this law is a. b. c. d.

the judicial system. the president of the United States. the governor of Ohio. the U.S. Congress.

ANSWER: A NAT: AACSB Reflective A2.

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Ginger wants to file a suit against Fred. For a court to hear the case a. b. c. d.

Fred must agree. the court must have jurisdiction. the parties must have no minimum contact with each other. the parties must own property.

ANSWER: B NAT: AACSB Reflective

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18 A3.

TEST BANK A—UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS

The case of Max v. National Credit Co. is heard in a trial court. The case of O! Boy! Ice Cream Co. v. Pickled Peppers, Inc., is heard in an appellate court. The difference between a trial and an appellate court is whether a. b. c. d.

a trial is being held. the court is appealing. the parties question how the law applies to their dispute. the subject matter of the case involves complex facts.

ANSWER: A NAT: AACSB Reflective A4.

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Rolf, a citizen of New Mexico, wants to file a suit against Sandy, a citizen of Texas. Their diversity of citizenship may be a basis for a. b. c. d.

no court to exercise jurisdiction. a federal court to exercise original jurisdiction. a state court to exercise appellate jurisdiction. the United States Supreme Court to refuse jurisdiction.

ANSWER: B NAT: AACSB Reflective A5.

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Inferior Company, which is based on South Carolina, makes and sells products that are poorly made. Jack, who is a resident of North Carolina, buys an Inferior product and suffers an injury through its use. The diversity of citizenship between these parties means that a. b. c. d.

federal and state courts have concurrent jurisdiction. federal courts have exclusive jurisdiction. no court has jurisdiction. state courts have exclusive jurisdiction.

ANSWER: A NAT: AACSB Reflective

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CHAPTER 2: COURTS AND ALTERNATIVE DISPUTE RESOLUTION

A6.

3D HD TV Company, a firm in Minnesota, advertises on the Web. A court in North Dakota would be most likely to exercise jurisdiction over 3D HD if the firm a. b. c. d.

conducted substantial business with North Dakota residents through its Web site. interacted with any North Dakota resident through its Web site. only advertised without interactivity at its Web site. suddenly removed its ad from the Internet.

ANSWER: A NAT: AACSB Reflective A7.

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Liu files a suit against Macro Sales, Inc., in a New Jersey state court based on a Web site through which New Jersey residents can do business with Macro. The court will most likely exercise jurisdiction over Macro if the interactivity of the site is seen as a. b. c. d.

a “substantial enough” connection with the state. “downloading” from the state. not connected with the state. “uploading” to the state.

ANSWER: A NAT: AACSB Reflective A8.

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Inferior Company sells products that are poorly made. Jock, who has never bought an Inferior product, files a suit against Inferior, alleging that its products are defective. The firm’s best ground for dismissal of the suit is that Jock does not have a. b. c. d.

certiorari. jurisdiction. standing. sufficient minimum contacts.

ANSWER: C NAT: AACSB Reflective

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TEST BANK A—UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS

Mariah wins her suit against Variety Products Company. Variety’s best ground for appeal is the trial court’s interpretation of a. b. c. d.

the conduct of the witnesses during the trial. the credibility of the evidence that Mariah presented. the dealings between the parties before the suit. the law that applied to the issues in the case.

ANSWER: D NAT: AACSB Reflective

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A10. Drummond wants to make a federal case out of his dispute with Elena. Federal cases originate in a. b. c. d.

federal courts of appeals. federal district courts. state trial courts. the United States Supreme Court.

ANSWER: B NAT: AACSB Reflective

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A11. Boyd files a suit in a federal district court against Cathy. Cathy loses the suit, appeals to the U.S. Court of Appeals for the Second Circuit, and loses again. Cathy asks the United States Supreme Court to hear the case. The Court is a. b. c. d.

not required to hear the case. required to hear the case because Cathy lost in a federal court. required to hear the case because Cathy lost in a lower court. required to hear the case because it is an appeal.

ANSWER: A NAT: AACSB Reflective

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A12. Olivia files a suit against Parker. If this suit is like most cases, it will be a. b. c.

dismissed during a trial. dismissed or settled before a trial. resolved only after a trial.

CHAPTER 2: COURTS AND ALTERNATIVE DISPUTE RESOLUTION

settled at a trial.

ANSWER: B NAT: AACSB Reflective

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TEST BANK A—UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS

A13. Shelly and Tom disagree over the amount of money due under their contract. To avoid involving any third party in a resolution of the dispute, Shelly and Tom might prefer to use the alternative dispute resolution method of a. b. c. d.

arbitration. litigation. mediation. negotiation.

ANSWER: D NAT: AACSB Reflective

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Fact Pattern 2-A1 (Questions A14-A16 apply) Java Cafes, Inc., and Kaffe Import Corporation dispute a term in their contract. A14. Refer to Fact Pattern 2-A1. The least expensive method to resolve the dispute between Java and Kaffe may be a. b. c. d.

arbitration because the case will be heard by a mini-jury. litigation because each party will pay its own legal fees. mediation because the dispute will be resolved by a non-expert. negotiation because no third parties are needed.

ANSWER: D NAT: AACSB Reflective

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A15. Refer to Fact Pattern 2-A1. If Java and Kaffe have a long-standing business relationship that they would like to continue, a preferred method of settling their dispute may be mediation because a. b. c. d.

the case will be heard by a mini-jury. the dispute will eventually go to trial. the process is not adversarial. the resolution of the dispute will be decided an expert.

ANSWER: C NAT: AACSB Reflective

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CHAPTER 2: COURTS AND ALTERNATIVE DISPUTE RESOLUTION

A16. Refer to Fact Pattern 2-A1. Resolving the dispute between Java and Kaffe by having a neutral third party render a binding decision is one of the advantages of a. b. c. d.

arbitration. conciliation. intervention. mediation.

ANSWER: A NAT: AACSB Reflective

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A17. Eden Property Sales Corporation and Dion agree to resolve their dispute in arbitration. The arbitrator’s decision is called a. b. c. d.

a conclusion of law. a finding of fact. an award. a verdict.

ANSWER: C NAT: AACSB Reflective

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A18. Transnational Corporation and UniShip, Inc., agree to a contract that includes an arbitration clause. If a dispute arises, a court having jurisdiction may a. b. c. d.

monitor any arbitration until it concludes. order an arbitrator to rule in a particular way. order a party to bring the dispute to court. order a party to submit to arbitration.

ANSWER: D NAT: AACSB Reflective

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TEST BANK A—UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS

A19. Vince files a suit against Will. Vince and Will meet, and each party’s attorney argues the party’s case before a judge and jury. The jury presents an advisory verdict, after which the judge meets with the parties to encourage them to settle their dispute. This is a. b. c. d.

court-ordered arbitration. early neutral case evaluation. a mini-trial. a summary jury trial.

ANSWER: D NAT: AACSB Reflective

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A20. Kato and Leilani dispute the quality of a collection of sports memorabilia sold over the Internet. They agree to resolve this dispute in 2BRNot2B.com, an online forum. Like most online forums, 2BRNot2B.com applies a. b. c. d.

general, universal legal principles. the provisions of the Federal Arbitration Act. jurisprudence developed by the United Nations. the law of California (or another specific U.S. jurisdiction) .

ANSWER: A NAT: AACSB Reflective

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ESSAY QUESTIONS A1.

Quik Results, Inc., a Maine corporation, makes and sells Power Up!, a weight-gain and muscle-building supplement. Orin, a citizen of New York, sees an ad for Power Up! in WorkOut magazine and buys it in New York City at a local health club. Within ten days of beginning to use Power Up!, Orin suffers internal injuries. Alleging that the injuries are caused by Power Up!, Orin files a suit against Quik in a New York state court. Quik asks the court to dismiss the suit on the ground that it does not have personal jurisdiction over Quik. What is the court most likely to rule and why? ANSWER: The court will most likely refuse to dismiss the suit and allow the action to proceed, because Quik (the defendant) advertised and sold its

CHAPTER 2: COURTS AND ALTERNATIVE DISPUTE RESOLUTION

product Power Up! in New York to New York residents and thus subjected itself to being sued in New York. In other words, because Quik purposefully availed itself of the privilege of conducting business in New York, it had sufficient minimum contacts with the state for a New York state court to exercise jurisdiction over Quik. PAGE: 30–32 NAT: AACSB Reflective A2.

TYPE: = AICPA Decision Modeling

Elle is walking to work along a sidewalk next to a road. A truck owned by Fast Distribution Company (FDC) strikes and injures Elle, causing her injuries that result in more than $250,000 in medical expenses. Elle is a resident of Georgia, where the accident occurred. FDC has its principal place of business, and is incorporated, in Delaware. In what court may Elle sue FDC? ANSWER: Elle may sue FDC in Delaware, because FDC has its principal place of business, and is incorporated, in that state. FDC may be sued in Georgia, because that is where Elle’s injury occurred. FDC may be subject to Elle’s suit in a federal court, because the parties have diversity of citizenship (Elle is a resident of Georgia and FDC has its principal place of business, and is incorporated, in Delaware) and the amount in controversy is more than $75,000 (the cost of Elle’s injuries is more than $250,000). PAGE: 32–33 NAT: AACSB Reflective

TYPE: = AICPA Decision Modeling

Chapter 3 Court Procedures N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

There is one set of procedural rules for federal courts and various sets for state courts. ANSWER: T NAT: AACSB Analytic

A2.

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TYPE:

A default judgment is entered against a party who fails to respond to the allegations in a complaint. ANSWER: T NAT: AACSB Analytic

A3.

PAGE:

52 AICPA Legal

TYPE:

Service of process is the process of obtaining information from an opposing party before trial. ANSWER: F NAT: AACSB Reflective

PAGE:

52 TYPE: AICPA Critical Thinking

24 A4.

TEST BANK A—UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS

An answer can admit to the allegations made in a complaint. ANSWER: T NAT: AACSB Analytic

PAGE:

56 AICPA Legal

TYPE:

CHAPTER 3: COURT PROCEDURES

A5.

At every stage of a trial, either party can file a motion to dismiss the case. ANSWER: T NAT: AACSB Analytic

A6.

TYPE:

PAGE:

57 AICPA Legal

TYPE:

PAGE:

57 AICPA Legal

TYPE:

Only a defendant may file a motion for summary judgment. ANSWER: F NAT: AACSB Analytic

A9.

56 AICPA Legal

A motion for summary judgment may be made before, during, or after a trial. ANSWER: F NAT: AACSB Analytic

A8.

PAGE:

A summary judgment is granted only if there is no genuine question of law. ANSWER: F NAT: AACSB Analytic

A7.

PAGE:

57 TYPE: AICPA Critical Thinking

If a discovery request involves confidential business information, the scope of the request can be limited. ANSWER: T NAT: AACSB Analytic

PAGE:

60 AICPA Legal

TYPE:

A10. Voir dire is a process for presenting evidence in a case. ANSWER: F NAT: AACSB Analytic

PAGE:

61 AICPA Legal

A11. Hearsay evidence is a statement made by someone who was not under oath at the time. ANSWER: T NAT: AACSB Analytic

PAGE:

63 AICPA Legal

TYPE:

A12. A trial commences with the plaintiff’s attorney’s direct examination of the first witness. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

TEST BANK A—UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS

ANSWER: F NAT: AACSB Analytic

PAGE:

65 AICPA Legal

TYPE:

CHAPTER 3: COURT PROCEDURES

A13. After a defendant finishes introducing his or her evidence, the plaintiff can present a rebuttal. ANSWER: T NAT: AACSB Analytic

PAGE:

66 AICPA Legal

TYPE:

A14. A motion for a directed verdict is also known as a motion for judgment as a matter of law. ANSWER: T NAT: AACSB Analytic

PAGE:

66 AICPA Legal

TYPE:

A15. A motion for a new trial will be granted only if the trial judge feels that it is appropriate to grant a judgment for the other side. ANSWER: F NAT: AACSB Analytic

PAGE:

66 AICPA Legal

TYPE:

A16. Either party can appeal a judge’s ruling on any pretrial motion. ANSWER: T NAT: AACSB Analytic

PAGE:

67 AICPA Legal

TYPE:

A17. In most appealed cases, a trial court’s decision is affirmed. ANSWER: T NAT: AACSB Reflective

PAGE:

68 AICPA Legal

A18. An appellate court can reverse the decision of a trial court that erred. ANSWER: T NAT: AACSB Reflective

PAGE:

68 TYPE: AICPA Critical Thinking

A19. A case is remanded when it is sent back for further proceedings to the court that originally heard the case. ANSWER: T NAT: AACSB Analytic

PAGE:

68 AICPA Legal

TYPE:

TEST BANK A—UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS

A20. Every judgment is enforceable. ANSWER: F NAT: AACSB Reflective

PAGE:

71 TYPE: AICPA Critical Thinking

CHAPTER 3: COURT PROCEDURES

MULTIPLE CHOICE QUESTIONS A1.

Glen retains Holly, an attorney, on a contingent-fee basis to seek $100,000 in damages in a personal-injury suit against Interstate Shipping Corporation. Glen wins. He must pay a. b. c. d.

court fees and other expenses, but not Holly’s fee. Holly’s fee, court fees, and other expenses. Holly’s fee only. neither Holly’s fee nor court fees and other expenses.

ANSWER: B NAT: AACSB Reflective A2.

PAGE:

52 TYPE: AICPA Risk Analysis

Ridgeline Trucking wants to initiate a suit against Valley Farms by filing a complaint. The complaint should include a. b. c. d.

an explanation to refute any defense the defendant might assert. a motion for summary judgment. a motion to dismiss. a statement alleging the facts establishing Ridgeline’s basis for relief.

ANSWER: D NAT: AACSB Reflective

PAGE:

52 AICPA Legal

TYPE:

Fact Pattern 3-A1 (Questions A3–A4 apply) Mac and Nan engage in a business transaction from which a dispute arises. Mac initiates a lawsuit against Nan by filing a complaint. A3.

Refer to Fact Pattern 3-A1. The sheriff serves Nan with a summons. If Nan chooses to ignore it a. b. c. d.

Mac must file an amended complaint. Mac will have a judgment entered in his favor. Nan must be served with a second summons. Nan will have a judgment entered in her favor.

ANSWER: B NAT: AACSB Reflective

PAGE:

52 TYPE: AICPA Critical Thinking

TEST BANK A—UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS

CHAPTER 3: COURT PROCEDURES

A4.

Refer to Fact Pattern 3-A1. If Nan responds to Mac’s complaint by filing a counterclaim, then a. b. c. d.

Mac will also have to file a response. Mac will have a judgment entered in his favor. Nan will also have to file an amended answer. Nan will have a judgment entered in her favor.

ANSWER: A NAT: AACSB Reflective A5.

PAGE:

52 AICPA Legal

TYPE:

All-USA Imports, Inc., disputes the use of “all-usa.com” as a domain name by All-USA Overseas Exports, Ltd., and files a suit to resolve the dispute. Service of process must be by a. b. c. d.

e-mail. personal delivery. regular mail. whatever means is reasonably calculated to do the job.

ANSWER: D PAGE: NAT: AACSB Communication A6.

53 TYPE: = AICPA Leveraging Technology

Indelible Fabrics, Inc. (IFI), makes “Jean’s Denim,” a famous brand of clothing. Without IFI’s consent, Kopy Company (KC) begins to use “jeansdenim” as part of a domain name. IFI files a suit against KC and engages in service of process. Service of process must provide a. b. c. d.

equality and fairness in adjudication. notice and an opportunity to respond. space to fill in important information and time in which to do it. privacy between the litigants and publicity in the judgment.

ANSWER: B PAGE: NAT: AACSB Communication

53 TYPE: AICPA Critical Thinking

32 A7.

TEST BANK A—UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS

Loren files a suit against Mabel, alleging a failure to pay for the harvest of Mabel’s orchards. Mabel denies Loren’s charge and claims that Loren breached their contract to harvest a certain number of acres and owes Mabel money for the breach. Mabel’s claim is a. b. c. d.

a contrary charge. a counterclaim. a counterpoint. a cross complaint.

ANSWER: B NAT: AACSB Reflective A8.

56 AICPA Legal

TYPE:

Opal files a complaint in a suit against Phil, and he files an answer. The case may now be a. b. c. d.

dismissed only after a trial begins. dismissed or settled at this point. resolved only after a trial ends. settled only during a trial.

ANSWER: B NAT: AACSB Reflective A9.

PAGE:

56 AICPA Legal

TYPE:

Quin files a suit against Regal Products, Inc. Regal responds that even if Quin’s statement of the facts is true, according to the law Regal is not liable. This is a. b. c. d.

a counterclaim. a motion for judgment on the pleadings. a motion for summary judgment. a motion to dismiss.

ANSWER: D NAT: AACSB Reflective

PAGE:

56 AICPA Legal

TYPE:

CHAPTER 3: COURT PROCEDURES

A10. Cody files a suit against Delta Corporation. Delta responds that it appears from the pleadings the parties do not dispute the facts and the only question is how the law applies to those facts. Delta supports this response with witnesses’ sworn statements. This is a. b. c. d.

a counterclaim. a motion for judgment on the pleadings. a motion for summary judgment. a motion to dismiss.

ANSWER: C NAT: AACSB Reflective

PAGE:

57 AICPA Legal

TYPE:

A11. In Restful Motel’s suit against Sleepy Hotels, Inc., Restful serves a written request for Sleepy to admit the truth of matters relating to the trial. Sleepy’s admission in response is the equivalent of a. b. c. d.

an admission in court. a statement to the media. information to which Sleepy has a right of privacy. irrelevant evidence.

ANSWER: A NAT: AACSB Reflective

PAGE:

60 AICPA Legal

TYPE:

A12. Excel Products Company files a suit against Flying Distribution, Inc., over a contract. Before the trial, Excel can obtain from Flying a. b. c. d.

all documents in Flying’s possession relating to the contract. any documents in Flying’s possession. no documents in Flying’s possession. only those documents that Flying agrees to release.

ANSWER: A NAT: AACSB Reflective

PAGE:

60 AICPA Legal

TYPE:

TEST BANK A—UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS

A13.

During a trial in Gene’s suit against Homer over the use of Gene’s lakeside cabin, Gene’s attorney asks questions of the plaintiff’s witness Illya. This is a. b. c. d.

a cross-examination. a deposition. a direct examination. an interrogatory.

ANSWER: C NAT: AACSB Reflective

PAGE:

65 AICPA Legal

TYPE:

Fact Pattern 3-A2 (Questions A14–A16 apply) Fine Dining Corporation files a suit against Eat-at-Joe’s, Inc. A14. Refer to Fact Pattern 3-A2. During the trial, Fine Dining’s attorney questions the plaintiff’s witness Floyd. Floyd, who is not an expert in the matter about which he is being asked, can a. b. c. d.

testify about any of the facts in the case. testify about only what he personally observed. offer his opinion about any of the evidence. offer his conclusion with regard to the case.

ANSWER: B NAT: AACSB Reflective

PAGE:

65 AICPA Legal

TYPE:

A15. Refer to Fact Pattern 3-A2. The attorney for Eat-at-Joe’s also questions Floyd. This is a. b. c. d.

a cross-examination. a direct examination. an interrogatory. a request for admissions.

ANSWER: A NAT: AACSB Reflective

PAGE:

65 AICPA Legal

TYPE:

CHAPTER 3: COURT PROCEDURES

A16. In Rendezvous Cafe’s suit against Sanitary Waste Services, Inc., the court issues a judgment in Rendezvous’s favor. The judgment can be appealed to an appropriate court of appeals by a. b. c. d.

neither party. Rendezvous only. Rendezvous or Sanitary. Sanitary only.

ANSWER: C NAT: AACSB Reflective

PAGE:

67 AICPA Legal

TYPE:

Fact Pattern 3-A3 (Questions A17–A20 apply) Liz files a suit against Moe in a state court. The case proceeds to trial, after which the court renders a verdict. A17. Refer to Fact Pattern 3-A3. If Moe decides to appeal to a state appellate court, Moe’s attorney must file, with the clerk of the trial court within a prescribed period of time a. b. c. d.

a formal refusal to abide by the verdict. a notice of appeal. a transcript of the trial and copies of the exhibits. the judgment order from which the appeal is taken.

ANSWER: B NAT: AACSB Reflective

PAGE:

67 AICPA Legal

TYPE:

A18. Refer to Fact Pattern 3-A3. If either party appeals, the clerk of the trial court will send to the clerk of the appellate court within a prescribed period of time a. b. c. d.

a brief including the arguments of both parties. a copy of the record on appeal. an explanation for the verdict. a statement of the grounds for reversal.

ANSWER: B NAT: AACSB Reflective

PAGE:

67 AICPA Legal

TYPE:

TEST BANK A—UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS

CHAPTER 3: COURT PROCEDURES

A19. Refer to Fact Pattern 3-A3. If Liz decides to appeal to a state appellate court, Liz’s attorney must file, with the clerk of the appellate court within a prescribed period of time a. b. c. d.

a demand to be heard. a motion for a judgment n.o.v. a notice of appeal. a request for affirmance, remand, or reversal.

ANSWER: C NAT: AACSB Reflective

PAGE:

67 AICPA Legal

TYPE:

A20. Refer to Fact Pattern 3-A3. If Moe appeals to, and files a brief with, a state appellate court, Liz’s attorney may file within a prescribed period of time a. b. c. d.

an advisory interrogatory. an answering brief. a request for a deposition. a responding motion for judgment on the brief.

ANSWER: B NAT: AACSB Reflective

PAGE:

67 AICPA Legal

TYPE:

ESSAY QUESTIONS A1.

Delta Stores, Inc., files a suit in a state court against Eagle Computer Corporation, alleging that Eagle breached a contract to sell 500 notebook computers to Delta. During the course of the suit, Delta files a motion for judgment on the pleadings, Eagle files a motion for a directed verdict, and both parties file motions for summary judgment. When and for what purpose are each of these motions made? ANSWER: After the pleadings have been filed, either party can file a motion for judgment on the pleadings. This motion may be used when no facts are disputed and, thus, only questions of law are at issue. The difference between this motion and a motion for summary judgment is that the party requesting the motion may support a motion for summary judgment with sworn statements and other materials; on a motion for a

TEST BANK A—UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS

judgment on the pleadings, a court may consider only those facts pleaded. At the conclusion of the plaintiff’s case, the defendant can file a motion for a directed verdict (federal courts use the term motion for a judgment as a matter of law), asking the court to direct a verdict for the defendant on the ground that the plaintiff has presented no evidence to justify the granting of the plaintiff’s remedy. In considering the motion, the judge looks at the evidence in the light most favorable to the plaintiff and grants the motion only if there is insufficient evidence to raise an issue of fact. At the end of the defendant’s case, either party can move for a directed verdict. If the only question is which laws apply to the facts in a case, either party can move for summary judgment before or during a trial. When a court considers a motion for summary judgment, it can take into account evidence outside the pleadings. The evidence may consist of sworn statements by parties or witnesses, as well as documents. A motion for summary judgment will be granted only when there are no genuine questions of fact, and the only question is a question of law. PAGES: 56–58 & 66 NAT: AACSB Reflective A2.

TYPE: = AICPA Decision Modeling

National Trucking Corporation files a suit in a state court against Odell’s Service Company (OSC), and wins. OSC appeals the court’s decision, asserting that the evidence presented at trial to support National’s claim was so scanty that no reasonable jury could have found for the plaintiff. Therefore, argues OSC, the appellate court should reverse the trial court’s decision. Is the appellate court likely to reverse the trial court’s findings with respect to the facts? If not, why not? What are an appellate court’s options after reviewing a case? ANSWER: An appellate court will reverse a lower court’s decision on the basis of the facts if the evidence does not support the findings or if it contradicts them. Appellate courts normally defer to a judge’s decision with regard to the facts of a case, however, for a number of reasons. First, trial judges routinely sit as fact finders. As a result, they develop a particular expertise in determining what kind of evidence and testimony is reliable and what kind is not. Second, trial judges and juries have the opportunity to observe witnesses and tangible evidence first hand. The appellate court sees only a cold record of the trial court proceedings and therefore cannot make the kind of judgments about the credibility of witnesses and the per-

CHAPTER 3: COURT PROCEDURES

suasiveness of evidence that can be gleaned only from first-hand experience. (There are also constitutional reasons for an appellate court to defer to a jury verdict. If, based on the evidence presented to a jury, a reasonable person could have come to the same decision that the jury came to, an appellate court cannot reverse the jury’s decision with regard to the facts because this would, in essence, take away a person’s right to a jury trial.) An appellate court’s options after reviewing a case are to affirm the trial court’s judgment, to reverse it in whole, to reverse it in part, to modify the decision, or to remand the case for further proceedings. PAGES: 68–69 NAT: AACSB Reflective

TYPE: = AICPA Decision Modeling

Chapter 4 Constitutional Authority to Regulate Business N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

The state governments retain all powers not specifically delegated to the federal government. ANSWER: T NAT: AACSB Analytic

A2.

74 AICPA Legal

TYPE:

Under their police powers, states can regulate only public activities, such as political demonstrations. ANSWER: F NAT: AACSB Analytic

A3.

PAGE:

74 TYPE: AICPA Critical Thinking

National legislation governs nearly every major business activity, including conduct that has nothing to do with commerce. ANSWER:

PAGE: 35

TYPE:

TEST BANK A—UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS

NAT: AACSB Analytic

AICPA Critical Thinking

CHAPTER 4: CONSTITUTIONAL AUTHORITY TO REGULATE BUSINESS

A4.

The checks and balances in the U.S. Constitution prevent any one branch of government from exercising too much power. ANSWER: T NAT: AACSB Reflective

A5.

PAGE:

76 TYPE: AICPA Critical Thinking

PAGE:

76 AICPA Legal

TYPE:

PAGE:

78 AICPA Legal

TYPE:

Whether the federal government has preempted a certain area is always clear. ANSWER: F NAT: AACSB Analytic

A9.

When there is a direct conflict between a federal and a state law, the state law is rendered invalid. ANSWER: T NAT: AACSB Analytic

A8.

75 TYPE: AICPA Critical Thinking

The Constitution expressly excludes state regulation of commerce. ANSWER: F NAT: AACSB Analytic

A7.

PAGE:

Congress can regulate all commerce in the United States. ANSWER: T NAT: AACSB Analytic

A6.

PAGE:

78 TYPE: AICPA Critical Thinking

The taxing and spending clause of the U.S. Constitution has had a greater impact on business than any other clause in the Constitution. ANSWER: F NAT: AACSB Analytic

PAGE:

79 AICPA Legal

TYPE:

79 TYPE: AICPA Critical Thinking

A10. Some constitutional protections apply to business entities. ANSWER: T NAT: AACSB Reflective

PAGE:

TEST BANK A—UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS

A11. The First Amendment does not protect corporate political speech. ANSWER: F NAT: AACSB Reflective

PAGE:

80 TYPE: AICPA Critical Thinking

CHAPTER 4: CONSTITUTIONAL AUTHORITY TO REGULATE BUSINESS

A12. The First Amendment does not protect commercial speech as extensively as noncommercial speech. ANSWER: T NAT: AACSB Reflective

PAGE:

81 TYPE: AICPA Critical Thinking

A13. The establishment clause of the U.S. Constitution prohibits the federal government from promoting a religion. ANSWER: T NAT: AACSB Analytic

PAGE:

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TYPE:

84 TYPE: AICPA Critical Thinking

A14. A law that has any impact on religion is unconstitutional. ANSWER: F NAT: AACSB Reflective

PAGE:

A15. The right to due process of law applies to corporations. ANSWER: T NAT: AACSB Analytic

PAGE:

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TYPE:

A16. A law that regulates economic matters violates the equal protection clause. ANSWER: F NAT: AACSB Analytic

PAGE:

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A17. Procedural due process requires that any government decision to take a person’s property must be made fairly. ANSWER: T NAT: AACSB Analytic

PAGE:

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TYPE:

A18. A law that discriminates based on gender must substantially relate to an important government objective to be valid. ANSWER: T NAT: AACSB Analytic

PAGE:

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TYPE:

TEST BANK A—UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS

A19. There is a specific guarantee of a right to privacy in the Constitution. ANSWER: F NAT: AACSB Reflective

PAGE:

88 TYPE: AICPA Critical Thinking

CHAPTER 4: CONSTITUTIONAL AUTHORITY TO REGULATE BUSINESS

A20. Law enforcement officials can track the e-mail communications of one party to find out the identities of other parties. ANSWER: T NAT: AACSB Reflective

PAGE:

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TYPE:

MULTIPLE CHOICE QUESTIONS A1.

Enterprising Markets Coalition (EMC), a political lobbying group, wants a certain policy enacted into law. If EMC’s policy conflicts with the U.S. Constitution, a law embodying it can be imposed by a. b. c. d.

Congress. a federal court. a state legislature. none of the choices.

ANSWER: D NAT: AACSB Reflective A2.

74 AICPA Legal

TYPE:

The state of New York regulates private activities to protect or promote the public order, health, safety, and general welfare under its a. b. c. d.

police powers. taxing powers. spending powers. supremacy powers.

ANSWER: A NAT: AACSB Reflective A3.

PAGE:

74 AICPA Legal

TYPE:

The Financial Institutions Association would like a certain law enacted, administered, interpreted, and enforced in the best interest of its members, which include banks. Under the Constitution, Congress a. b. c.

administers the laws. enforces the laws. interprets the laws.

TEST BANK A—UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS

makes the laws.

ANSWER: D NAT: AACSB Analytic

PAGE:

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TYPE:

CHAPTER 4: CONSTITUTIONAL AUTHORITY TO REGULATE BUSINESS

A4.

Ulrich, a citizen of Virginia, wants to enforce in the state of Washington certain rights that he has under a contract with Xtreme SnoBoards Inc. A Washington state court is most likely to enforce such rights under a. b. c. d.

no provision in the U.S. Constitution. the commerce clause. the full faith and credit clause. the privileges and immunities clause.

ANSWER: C NAT: AACSB Reflective A5.

PAGE:

75 AICPA Legal

TYPE:

The Constitution sets out the authority and the limits of the branches of the government. The term checks and balances means that a. b. c. d.

Congress writes checks and the other branches balance the budget. each branch has some power to limit the actions of the others. the courts balance their authority to the other branches’ checklists. the president “checks” the courts, which “balance” the laws.

ANSWER: B NAT: AACSB Analytic A6.

PAGE:

75 AICPA Legal

TYPE:

Tami’s Tasty Tacos, a mobile vendor, files a suit against the state of Utah, claiming that a Utah state law violates the commerce clause. The court will agree if the statute imposes a substantial burden on a. b. c. d.

a local government. interstate commerce. noneconomic activity. the state.

ANSWER: B NAT: AACSB Reflective

PAGE:

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TYPE:

44 A7.

TEST BANK A—UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS

Len, a citizen of Maryland, obtains a federal license to operate a commercial fishing boat in Chesapeake Bay. The Maryland state legislature enacts a law that bans all commercial fishing in the bay. The state law most likely violates a. b. c. d.

no provision in the U.S. Constitution. the commerce clause. the due process clause. the supremacy clause.

ANSWER: D NAT: AACSB Reflective A8.

78 TYPE: AICPA Critical Thinking

Congress enacts a law that sets out a medical-device approval process for the Food and Drug Administration to follow. The law includes a preemption provision. A device that goes through the process injures Joe, who files a claim under state law to recover. The court will most likely rule that a. b. c. d.

Joe’s state law claim preempts the federal law. the federal law and state law claim are concurrent. the federal and state law claim cancel each other out. the federal law preempts Joe’s state law claim.

ANSWER: D NAT: AACSB Reflective A9.

PAGE:

78 AICPA Legal

TYPE:

Mike, an advocate of a certain religion, publishes an article in New Times magazine insisting that Congress base all federal law on his religion’s principles. The First Amendment guarantees Mike’s freedom of a. b. c. d.

religion only. speech only. the press only. the press, speech, and religion.

ANSWER: D NAT: AACSB Reflective

PAGE:

79 AICPA Legal

TYPE:

CHAPTER 4: CONSTITUTIONAL AUTHORITY TO REGULATE BUSINESS

A10. The Motor Vehicle Insurance Association wants the federal government to spend money to build a new highway. Congress can spend revenues a. b. c. d.

only to carry out Congress’s enumerated powers. to promote any objective that Congress deems worthwhile. without regard to whether the expense violates the Bill of Rights. without regard to whether the expense violates the Constitution.

ANSWER: B NAT: AACSB Analytic

PAGE:

79 AICPA Legal

TYPE:

A11. Beachside City enacts an ordinance that bans the distribution of all printed materials on city streets. Carl opposes the city’s latest “revenue-enhancing” measure and wants to protest by distributing handbills. In his suit against the city, a court would likely hold the printed-materials ban to be a. b. c. d.

constitutional under the First Amendment. not subject to the U.S. Constitution. unconstitutional under the commerce clause. unconstitutional under the First Amendment.

ANSWER: D NAT: AACSB Reflective

PAGE:

80 TYPE: AICPA Critical Thinking

A12. Reusable Energy Corporation regularly expresses opinions on political issues. Under the First Amendment, corporate political speech is a. b. c. d.

discouraged. forbidden. protected. required.

ANSWER: C NAT: AACSB Reflective

PAGE:

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TYPE:

TEST BANK A—UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS

A13. Minnesota enacts a statute to ban advertising in “bad taste.” This statute would likely be held by a court to be a. b. c. d.

an unconstitutional restriction of speech. constitutional under the First Amendment. justified by the need to protect individual rights. necessary to protect state interests.

ANSWER: A NAT: AACSB Reflective

PAGE:

81 TYPE: = AICPA Decision Modeling

A14. Xtreme Publications, Inc., disseminates obscene materials. This is a. b. c d.

a crime under numerous state and federal statutes. a privilege under Article IV, Section 2. a right under the commerce clause. a right under the First Amendment.

ANSWER: A NAT: AACSB Analytic

PAGE:

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TYPE:

A15. The police obtain a search warrant and search Errol’s apartment. After yelling obscenities at the officers, Errol confesses to a crime and implicates his friends. The Constitution protects against a. b. c. d.

obscene speech. implication of others. unreasonable searches. none of the choices.

ANSWER: C NAT: AACSB Reflective

PAGE:

85 AICPA Legal

TYPE:

A16. Wyoming enacts a statute that limits the liberty of all persons, including corporations, to broadcast “annoying” radio commercials. This may violate a. b. c.

equal protection. procedural due process. substantive due process.

CHAPTER 4: CONSTITUTIONAL AUTHORITY TO REGULATE BUSINESS

the right to privacy.

ANSWER: C NAT: AACSB Reflective

PAGE:

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TYPE:

TEST BANK A—UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS

A17. Parker owns and operates Rancho Mirage Corporation, a destination resort in Arizona that features horseback riding and bunkhouse accommodations. The Constitution provides that no person shall be deprived of “life, liberty, or property without due process of law.” Included as “legal persons” under this clause are a. b. c. d.

the bunkhouses and other “manmade creations.” the corporation and Parker. horses and other “beings in nature.” none of the choices.

ANSWER: B NAT: AACSB Reflective

PAGE:

87 AICPA Legal

TYPE:

A18. Myra claims that a Nebraska state statute infringes on her “procedural due process” rights. This claim focuses on a. b. c. d.

procedures used in making decisions to take life, liberty, or property. the content of the statute. the similarity of the treatment of similarly situated individuals. the steps to be taken to protect Mary’s privacy.

ANSWER: A NAT: AACSB Reflective

PAGE:

87 AICPA Legal

TYPE:

A19. A Massachusetts state statute imposes a prison term, without a trial, on all street entertainers who operate in certain areas. A court would likely review this statute under the principles of a. b. c. d.

equal protection. free exercise. procedural due process. substantive due process.

ANSWER: C NAT: AACSB Reflective

PAGE:

87 AICPA Legal

TYPE:

CHAPTER 4: CONSTITUTIONAL AUTHORITY TO REGULATE BUSINESS

A20. Jon, a law enforcement official, monitors Kelsey’s Internet activities—email and Web site visits—to gain access to her personal financial data and student information. This may violate Kelsey’s right to a. b. c. d.

equal protection of the law. privacy. procedural due process. substantive due process.

ANSWER: B NAT: AACSB Reflective

PAGE:

89 TYPE: AICPA Risk Analysis

ESSAY QUESTIONS A1.

Jen operates Jen’s Fruits & Vegetables, a small market stocked entirely with produce grown on her adjacent farm. Under what clause of the Constitution can the federal government regulate Jen’s activities? What is Jen’s best argument against federal regulation of her farm and business? ANSWER: Under the commerce clause, according to earlier decisions by the United States Supreme Court, Congress has the power to regulate any activity—interstate or intrastate—that affects interstate commerce. Thus, under that clause, it could be argued that a farmer’s growing and selling of produce is subject to federal regulation because these activities affect interstate commerce. The farmer-vendor’s best argument against federal regulation of her farm and business is that in her case, these activities and their effects are purely local. Because of the economic character of these activities, and hence an effect on interstate commerce, despite their local character, it is unlikely that a court would accept this argument, however. PAGES: 75–78 NAT: AACSB Reflective

A2.

TYPE: = AICPA Decision Modeling

Old Oak Brewery, Inc., makes and sells alcoholic beverages with labels that display a drawing of a squirrel making the gesture generally known as “giving the finger.” Old Oak applies to the Ohio State Liquor Authority (OSLA) for brand-label approval to sell the beer in Ohio. Without considering alternatives, OSLA denies approval because “the label could appear in

TEST BANK A—UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS

grocery stores, with obvious exposure on the shelf to children of tender age.” Why would a court hold that the denial of Old Oak’s application violates the First Amendment? ANSWER: A court would most likely reason that OSLA’s ban on the use of the labels lacks a “reasonable fit” with the state’s interest in shielding minors from vulgarity, and OSLA did not adequately consider alternatives to the ban. The interest of OSLA, as a state agency, in protecting children from vulgar advertising is “substantial.” The question is whether banning Old Oak’s labels “directly advances” that interest. A court might reason that barring the label at issue in this problem cannot realistically be expected to reduce children’s exposure to such displays to any significant degree, considering such displays’ wide currency in society. Also, as to whether the ban on the labels is more extensive than necessary to serve such an interest, a court would likely point out that there may be many, less intrusive alternatives. For example, OSLA might restrict the locations where Old Oak’s products may be displayed in stores. PAGES: 81–82 NAT: AACSB Reflective

TYPE: = AICPA Decision Modeling

Chapter 5 Ethics and Business Decision Making N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

Ethics is the branch of philosophy that focuses on what constitutes right and wrong behavior. ANSWER: T NAT: AACSB Ethics

A2.

93 TYPE: AICPA Critical Thinking

Business ethics focuses on ethical behavior in the business world. ANSWER: T NAT: AACSB Ethics

A3.

PAGE:

93 TYPE: AICPA Risk Analysis

94 TYPE: AICPA Critical Thinking

An action may be legal and ethical. ANSWER: T NAT: AACSB Analytic

PAGE:

TEST BANK A—UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS

A4.

The legality of an action is always clear. ANSWER: F NAT: AACSB Analytic

PAGE:

94 AICPA Legal

TYPE:

CHAPTER 5: ETHICS AND BUSINESS DECISION MAKING

A5.

Corporations can be perceived as owing ethical duties to groups other than their shareholders. ANSWER: T NAT: AACSB Ethics

A6.

PAGE:

94 TYPE: AICPA Critical Thinking

PAGE:

94 TYPE: AICPA Critical Thinking

Focusing on a firm's short-term profits without considering the company’s long-term needs may be acting unethically. ANSWER: T NAT: AACSB Ethics

A9.

94 TYPE: AICPA Critical Thinking

Business ethics is consistent only with short-run profit maximization. ANSWER: F NAT: AACSB Ethics

A8.

PAGE:

The minimal acceptable standard for ethical behavior is compliance with the law. ANSWER: T NAT: AACSB Analytic

A7.

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94 TYPE: AICPA Critical Thinking

Ethical codes of conduct can set the ethical tone of a firm. ANSWER: T NAT: AACSB Ethics

PAGE:

96 TYPE: AICPA Risk Analysis

A10. Setting realistic workplace goals can reduce the probability that employees will act unethically. ANSWER: T NAT: AACSB Ethics

PAGE:

96 TYPE: AICPA Risk Analysis

A11. Some companies have set up confidential systems for employees to “raise red flags” about suspected unethical practices. ANSWER: T NAT: AACSB Ethics

PAGE:

98 TYPE: AICPA Risk Analysis

TEST BANK A—UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS

A12. Restricting the bonuses that are paid to executives is unethical. ANSWER: F NAT: AACSB Ethics

PAGE:

99 TYPE: AICPA Critical Thinking

CHAPTER 5: ETHICS AND BUSINESS DECISION MAKING

A13. Ethical reasoning is the process through which an individual rationalizes whatever action he or she chooses to take. ANSWER: F NAT: AACSB Ethics

PAGE:

100 TYPE: AICPA Critical Thinking

A14. In ethical terms, a cost-benefit analysis is an assessment of the negative and positive effects of alternative actions on individuals. ANSWER: T NAT: AACSB Analytic

PAGE:

101 TYPE: AICPA Risk Analysis

A15. According to utilitarianism, an action that affects the majority adversely is morally wrong. ANSWER: T NAT: AACSB Ethics

PAGE:

101 TYPE: AICPA Critical Thinking

A16. It may be unethical for a company with a product that is outlawed in one country to look elsewhere for a market. ANSWER: T NAT: AACSB Ethics

PAGE:

101 TYPE: AICPA Critical Thinking

A17. A business firm's profits may suffer if the firm is not a “good corporate citizen.” ANSWER: T NAT: AACSB Ethics

PAGE:

103 TYPE: AICPA Critical Thinking

A18. Businesspersons who would choose to act unethically may be deterred from doing so because of public opinion. ANSWER: T NAT: AACSB Ethics

PAGE:

104 TYPE: AICPA Critical Thinking

A19. One guideline to evaluating the ethics of a particular action is to “let your conscience be your guide.”

TEST BANK A—UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS

ANSWER: T NAT: AACSB Analytic

PAGE:

104 TYPE: AICPA Risk Analysis

CHAPTER 5: ETHICS AND BUSINESS DECISION MAKING

A20. Bribery of foreign government officials is both an ethical and a legal issue. ANSWER: T NAT: AACSB Analytic

PAGE:

106 TYPE: AICPA Critical Thinking

MULTIPLE-CHOICE QUESTIONS A1.

John is sales manager for Kleen ‘N Brite Products, Inc. Compared to John’s personal activities, his business activities most likely involve a. b. c. d.

more complex ethical issues. no ethical issues. simpler ethical issues. the same ethical issues.

ANSWER: A NAT: AACSB Reflective A2.

93 TYPE: AICPA Critical Thinking

Mariah works in the public relations department of New Trends Sales Company. Her job includes portraying New Trends’s activities in their best light. In this context, ethics consist of a. b. c. d.

a different set of principles from those that apply to other activities. the same moral principles that apply to non-business activities. those principles that produce the most favorable financial outcome. whatever saves New Trends’s “face.”

ANSWER: B NAT: AACSB Reflective A3.

PAGE:

93 TYPE: AICPA Critical Thinking

Any decision by the management of Fast-Food Franchise Corporation may significantly affect its a. b. c. d.

operators only. operators, owners, suppliers, the community, or society as a whole. owners only. suppliers, the community, or society as a whole only.

TEST BANK A—UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS

ANSWER: B NAT: AACSB Reflective A4.

a legal duty beyond those duties mandated by ethics. an ethical duty beyond those duties mandated by law. any duty beyond those mandated by both ethics and the law. any duty when it is uncertain whether a legal duty exists.

ANSWER: B NAT: AACSB Reflective

PAGE:

94 TYPE: AICPA Critical Thinking

Housemate, Inc., makes and sells a variety of household products. With a fair amount of certainty, Housemate’s decision makers can predict whether a given business action would be legal in a. b. c. d.

all situations. many situations. no situations. practically no situations.

ANSWER: B NAT: AACSB Reflective A6.

93 TYPE: AICPA Risk Analysis

Peak & Vale Accountants provides other firms with accounting services. Questions of what is ethical involve the extent to which Peak & Vale has a. b. c. d.

A5.

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94 AICPA Legal

TYPE:

Kennedy Capital Corporation provides other firms with funds to expand operations. If Kenney strictly complies with existing laws, the firm will a. b. c. d.

fulfill all business ethics obligations. fulfill no business ethics obligations. fulfill some business ethics obligations. not need to fulfill any business ethics obligations.

ANSWER: C NAT: AACSB Reflective

PAGE:

94 TYPE: AICPA Critical Thinking

CHAPTER 5: ETHICS AND BUSINESS DECISION MAKING

A7.

Flexo Trucking Company transports hazardous waste. Garn is a Flexo driver, whom the company knows drives longer hours than federal regulations permit. One night, Garn exceeds the limit and has an accident. Spilled chemicals contaminate Hill City’s water source, forcing the residents to move away. Flexo acted unethically because a. b. c. d.

Flexo showed reckless disregard for Hill City’s residents and others. Garn exceeded the federal time limit. harm was caused by an unfortunate accident. Hill City should have better protected its water source.

ANSWER: A NAT: AACSB Reflective A8.

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96 TYPE: AICPA Critical Thinking

Ergonomic Corporation convenes its employees for its managers to announce (1) a new company-wide ethical code of conduct, (2) an ad campaign to publicize the new code, and (3) the discharge of employees who do not adhere to the code. One of the most effective ways to set a tone of ethical behavior within a business organization is a. b. c. d.

to create an ethical code of conduct. to discharge employees who do not create the appearance of impropriety. to post a marketing campaign online touting the firm’s ethical tone. for management to direct employees to “do as we say, not as we do.”

ANSWER: A NAT: AACSB Reflective A9.

PAGE:

98 TYPE: AICPA Critical Thinking

Lyle, vice-president of sales for Mi-T Electric, Inc., adheres to JudeoChristian religious ethical standards. With respect to their application, these standards are a. b. c. d.

absolute. analytical. discretionary. utilitarian.

ANSWER:

PAGE:

100

TYPE:

TEST BANK A—UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS

NAT: AACSB Reflective

AICPA Critical Thinking

CHAPTER 5: ETHICS AND BUSINESS DECISION MAKING

A10. In making business decisions, Glenda, personnel manager for HVAC Maintenance, Inc., applies his belief that all persons have fundamental rights. This is a. b. c. d.

a religious rule. the categorical imperative. the principle of rights. utilitarianism.

ANSWER: C NAT: AACSB Reflective

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A11. Made4U Goods, Inc., asks its employees, many of whom are members of the National Machinists Union, to apply the utilitarian theory of ethics. This theory does not require a. b. c. d.

a choice among alternatives to produce the maximum societal utility. a determination of whom an action will affect. an assessment of the effects of alternatives on those affected. the acquiring of the means of production by workers.

ANSWER: D NAT: AACSB Reflective

PAGE:

101 TYPE: AICPA Critical Thinking

A12. Halley, a lawyer on the staff of International Group, applies the utilitarian theory of ethics in business contexts. Utilitarianism focuses on a. b. c. d.

moral values. religious beliefs. the consequences of an action. the nature of an action.

ANSWER: C NAT: AACSB Ethics

PAGE:

101 TYPE: AICPA Critical Thinking

A13. In making decisions for United Merchandising Company, Vance uses a costbenefit analysis. This is part of a. b.

duty-based ethics. Kantian ethics.

TEST BANK A—UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS

c. d.

the principle of rights. utilitarianism.

ANSWER: D NAT: AACSB Ethics

PAGE:

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CHAPTER 5: ETHICS AND BUSINESS DECISION MAKING

A14. Chuckie, president of DrinkUp Fresh Beverages, Inc., does not apply utilitarianism to business ethical issues. One problem with utilitarianism is that it a. b. c. d.

gives business profits priority over production costs. ignores the practical costs of a given set of circumstances. requires complex cost-benefit analyses of simple situations. tends to justify human costs that many find unacceptable.

ANSWER: D NAT: AACSB Reflective

PAGE:

101 TYPE: AICPA Critical Thinking

A15. A common ethical dilemma faced by the management of General Holdings Corporation involves the effect that its decision will have on a. b. c. d.

one group as opposed to another. the firm's competitors. the government. the U.S. Chamber of Commerce.

ANSWER: A NAT: AACSB Reflective

PAGE:

101 TYPE: AICPA Critical Thinking

A16. Fealty Credit Corporation asks its employees to evaluate their actions and get on the ethical business decision-making “bandwagon.” Guidelines for judging individual actions include all of the following except a. b. c. d.

an individual’s conscience. business rules and procedures. loopholes in the law or company policies. promises to others.

ANSWER: C NAT: AACSB Reflective

PAGE:

104 TYPE: AICPA Critical Thinking

TEST BANK A—UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS

A17. Spencer Hydraulics Corporation’s ethics committee is asked a business ethics question—should the firm bid low to obtain a contract that it knows it can fulfill only at a higher price? A practical method to investigate and solve this question involves all of the following steps except a. b. c. d.

absolution. decision. inquiry. justification.

ANSWER: A NAT: AACSB Reflective

PAGE:

105 TYPE: AICPA Critical Thinking

A18. Ethical standards would most likely be considered violated if Retail Mart Corporation deals with a company in a developing nation that a. b. c. d.

agrees to produce goods at Retail Mart’s desired price. goes unnoticed by “corporate watch” groups. exploits its workers. pays its workers less than the U.S. minimum wage.

ANSWER: C NAT: AACSB Reflective

PAGE:

106 TYPE: AICPA Critical Thinking

A19. Bilt-Well Construction Corporation makes a side payment to a government official in Nigeria to obtain a contract. In the United States, this is a. b. c. d.

illegal and unethical. illegal but not unethical. unethical but not illegal. legal and ethical.

ANSWER: A NAT: AACSB Reflective

PAGE:

107 TYPE: AICPA Critical Thinking

A20. To assist in detecting illegal bribes, Cut Rite Contractors, Inc., and all U.S. companies, must a. b.

conceal financial records that reveal past bribes. keep records that “accurately and fairly” reflect financial activities.

CHAPTER 5: ETHICS AND BUSINESS DECISION MAKING

c. d.

make bribes through third parties rather than directly to officials. permit payments to foreign officials that are unlawful in that country.

ANSWER: B NAT: AACSB Analytic

PAGE:

107 AICPA Legal

TYPE:

TEST BANK A—UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS

ESSAY QUESTIONS A1.

Ophelia, an executive with Pharma Drug Distribution, Inc., has to decide whether to market a product that might have undesirable side effects for a small percentage of users. How should Ophelia decide whether to sell the product? How does the standard of ethics that is applied affect this answer? ANSWER: When a corporate executive has to decide whether to market a product that might have undesirable side effects for a small percentage of users but that would be beneficial for most users, the decision turns on the benefit to the many versus the harm to the few. Of course, all possible precautions should be taken to protect the few. A more specific answer depends on which system of ethics is applied. From a religious duty-based perspective, the answer might be absolute: do not sell the product because some would be harmed, sell the product only to those who would not be harmed, or sell the product with clear warnings of the possible harm. Similar conclusions might be reached through a philosophical, “categorical imperative,” duty-based approach, which would consider the result if every corporation chose to sell the product. A principleof-rights duty-based approach might likewise come to the same conclusions, reasoning that all persons have a right to life, for example, and that the corporation has an ethical duty to respect that right and act accordingly. From a utilitarian perspective, under a cost-benefit analysis, if the product were sold, it could benefit the greatest number of persons—future and current employees, as well as shareholders, and most consumers. If there was “bad” publicity, and it was adverse enough to reduce sales, however, more persons could benefit from the decision not to market the product. Under any of the different corporate social responsibility theories, the decision whether to market the product would acknowledge the firm’s duty to act ethically and be accountable to society. There might be a balancing of the interests of competing stakeholder groups or a shouldering of the responsibility to behave in a socially beneficial way as a good corporate citizen. Of course, the firm would likely have to accept any legal liability that would arise from its sale of the product. To apply any of these approaches, the executive might evaluate the situation according to the six guidelines for making ethical business decision. Is the action legal? Is it in line with the company’s rules? If so, is it in accord with the “spirit” of the law, those policies, and one’s conscience? Could it withstand the glare of publicity and satisfy promises made to others? It

CHAPTER 5: ETHICS AND BUSINESS DECISION MAKING

seems probable that sales of the product would violate the company’s rules— at the least because in the long run the sales could negatively impact corporate profits when some are harmed by the product’s use—and that, thus, the sales could not withstand publicity, promises to others, or any individual’s conscience. Under the five-step procedure to review the ethical conflicts, the first step is to specify the facts, the problem, and the ethical principles at issue. The second step is to discuss potential actions and their effects. The third step is to come to a consensus as to what to do. This consensus should withstand moral scrutiny (the fourth step) and fulfill corporate, community, and individual values (the fifth step). It seems unlikely that a proposed sale of the product would survive the fourth step, under either a duty-based or an outcome-based ethical standard. PAGES: 94–96 & 100–106 NAT: AACSB Reflective A2.

TYPE: N AICPA Decision Modeling

Matchless Clothing Company buys clothing assembled by Nantra, Ltd., a foreign firm that employs young children for long hours and low pay. Nantra’s nation does not enforce its child labor laws. Human International Politics (HIP), a political activist organization, discovers Matchless’s connection to Nantra and plans to reveal this information. Before HIP does so, however, Matchless publicly releases the information itself and announces that it is severing its relationship with Nantra. Matchless publicizes its action in its advertising, and the company’s sales and profits increase, apparently as a direct result. Has Matchless acted unethically in any way? From an ethical perspective, is Matchless’s conduct in this situation more important than whatever its motive might be? ANSWER: Matchless has not acted unethically in publicly releasing the information itself or in severing its relationship with Nantra. Ethical behavior can sometimes generate sufficient good will to warrant practicing it out of a desire for increased profits. By the same token, unethical behavior can sometimes generate enough bad publicity to warrant avoiding it out of the same desire. A business firm’s activities that are perceived as ethical and receive wide publicity can benefit the firm’s owners in the short run-and even in the long run if the firm’s enhanced public image continues to attract more consumers to its products. There is nothing unethical about making a profit. It is the behavior that generates the profit that can be questionable. Business ethics thus has a practical element. A business firm should act in its best

TEST BANK A—UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS

interest. A firm interested in profits should also be interested in the public’s opinion. As for a motive beyond the incentive to make money, it can be difficult to determine, especially in the complicated world of business ethics. Thus, conduct is probably the more effective measure of ethical behavior, and consequently more important than motive. PAGES: 101–104 NAT: AACSB Reflective

TYPE: = AICPA Decision Modeling

Chapter 6 Intentional Torts and Privacy N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

Tort is a French word for “court.” ANSWER: F NAT: AACSB Analytic

A2.

TYPE:

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116 AICPA Legal

TYPE:

Tortfeasor is the term for a person who commits a tort. ANSWER: T NAT: AACSB Analytic

A4.

116 AICPA Legal

The purpose of tort law is to provide remedies when legally protected interests have been invaded. ANSWER: T NAT: AACSB Analytic

A3.

PAGE:

116 AICPA Legal

To commit an intentional tort, one person must intend to harm a certain other person. 63

TEST BANK A—UNIT TWO: TORTS AND CRIMES

ANSWER: F NAT: AACSB Analytic A5.

PAGE:

118 AICPA Legal

TYPE:

PAGE:

118 AICPA Legal

TYPE:

PAGE:

118 AICPA Legal

TYPE:

An oral defamatory statement must be communicated to a third party to be actionable. ANSWER: T NAT: AACSB Analytic

A9.

An act that causes indignity is sufficient to recover for the infliction of emotional distress. ANSWER: F NAT: AACSB Analytic

A8.

TYPE:

False imprisonment can be a tort if confinement or restraint is unjustified. ANSWER: T NAT: AACSB Analytic

A7.

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Self-defense is a defense to a charge of assault. ANSWER: T NAT: AACSB Analytic

A6.

PAGE:

120 AICPA Legal

TYPE:

An individual’s right to privacy includes the exclusive use of his or her likeness. ANSWER: T NAT: AACSB Analytic

PAGE:

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TYPE:

A10. An unauthorized scan of a bank account can be an invasion of privacy. ANSWER: T NAT: AACSB Reflective

PAGE:

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TYPE:

A11. An unauthorized search is not an invasion of privacy. ANSWER:

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NAT: AACSB Reflective

AICPA Legal

A12. Normally, fraud occurs only when there is reliance on a statement of truth. ANSWER: F NAT: AACSB Analytic

PAGE:

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TYPE:

TEST BANK A—UNIT TWO: TORTS AND CRIMES

A13. Unintentionally causing a party to break a contract may constitute wrongful interference with a contractual relationship. ANSWER: F NAT: AACSB Reflective

PAGE:

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TYPE:

A14. Bona fide competitive behavior can constitute wrongful interference with a contractual relationship. ANSWER: F NAT: AACSB Analytic

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TYPE:

A15. An artisan’s lien is a defense to a charge of trespass to personal property. ANSWER: T NAT: AACSB Reflective

PAGE:

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TYPE:

A16. Conversion cannot occur when a person mistakenly believes that he or she is entitled to the goods. ANSWER: F NAT: AACSB Reflective

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TYPE:

A17. Disparagement of property is another term for appropriation. ANSWER: F NAT: AACSB Analytic

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TYPE:

A18. An Internet service provider is generally not liable for publishing a defamatory statement that comes from a third party. ANSWER: T NAT: AACSB Reflective

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TYPE:

A19. There are no state statutes regulating the use of spam. ANSWER: F NAT: AACSB Analytic

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CHAPTER 6: INTENTIONAL TORTS AND PRIVACY

A20. Federal law permits the use of unsolicited commercial e-mail but prohibits certain types of spamming activities. ANSWER: T NAT: AACSB Analytic

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TYPE:

TEST BANK A—UNIT TWO: TORTS AND CRIMES

MULTIPLE CHOICE QUESTIONS A1.

Boris pushes Cordelia. She falls and breaks her arm. Boris is liable for the injury a. b. c. d.

if he intended to push Cordelia. only if he did not intend to break Cordelia’s arm. only if he had a bad motive for pushing Cordelia. only if he intended to break Cordelia’s arm.

ANSWER: A NAT: AACSB Reflective A2.

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TYPE:

At Parkside Bistro, Ogden believes that he was overcharged and shoves Nellie, the waiter. Nellie sues Ogden, alleging that the shove was a battery. Ogden is liable a. b. c. d.

if Parkside did not overcharge Ogden. if the shove was offensive. if Ogden acted out of malice. under no circumstances—the shove was not a battery.

ANSWER: B NAT: AACSB Reflective A3.

PAGE:

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TYPE:

Deleon trespasses on Capital Corporation’s property. Through the use of reasonable force, Capital’s security guard Brenda detains Deleon until the police arrive. Capital is most likely liable for a. b. c. d.

abuse of process. false imprisonment. trespass to personal dignity. none of the choices.

ANSWER: D NAT: AACSB Reflective

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TYPE:

CHAPTER 6: INTENTIONAL TORTS AND PRIVACY

A4.

Jaqy distributes a handbill among her neighbors accusing one of them— Ked—of being a convicted sex offender. The statement is defamatory only if a. b. c. d.

a neighbor repeats it. Ked suffers emotional distress. the statement is true. the statement is false.

ANSWER: D NAT: AACSB Reflective A5.

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TYPE:

During a heated legislative debate, Representative Peony makes a statement of fact damaging Senator Rose’s good reputation. Peony knows the statement is not true. In this situation, Peony is most likely a. b. c. d.

liable for defamation. not liable for defamation because only Rose’s reputation was hurt. not liable for defamation because Peony enjoys a privilege. not liable for defamation because nobody listens to such debates.

ANSWER: C NAT: AACSB Reflective A6.

PAGE:

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TYPE:

Great Tans, Inc., uses, in its radio ads, a recording by Holly, who owns the rights, without paying for the use. Over time, the song comes to be associated with Great Tans. In Holly’s suit against Great Tans, the firm is most likely liable for a. b. c. d.

appropriation. conversion. wrongful interference with a customary relationship. none of the choices.

ANSWER: A NAT: AACSB Reflective

PAGE:

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TYPE:

70 A7.

TEST BANK A—UNIT TWO: TORTS AND CRIMES

From a computer in a distant location, Sergio searches Tia’s personal computer without her permission. Sergio is most likely liable for a. b. c. d.

appropriation. conversion. invasion of privacy. no tort.

ANSWER: C NAT: AACSB Reflective A8.

122 AICPA Legal

TYPE:

Jim is an appliance salesperson. To make a sale, he asserts that a certain model of a Kitchen Helper refrigerator is the “best one ever made.” This is a. b. c. d.

fraud if the statement is the truth. fraud if Jim believes that this statement is not true. fraud if Jim is stating his opinion, not the facts. not fraud.

ANSWER: D NAT: AACSB Reflective A9.

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TYPE:

Kai files a suit against Lana based on one of Lana’s statements that Kai alleges is fraudulent. To give rise to fraud, the statement must be one of a. b. c. d.

emotion. fact. illusion. opinion.

ANSWER: B NAT: AACSB Reflective

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TYPE:

CHAPTER 6: INTENTIONAL TORTS AND PRIVACY

A10. Clem, a Delite Dairy salesperson, follows Edna, a salesperson for Festive Foods, a Delite competitor, as Edna visits stores to make sales. Clem solicits each of Edna’s customers. Clem is most likely liable for a. b. c. d.

conversion. trespass to personal property. wrongful interference with a business relationship. trade libel.

ANSWER: C NAT: AACSB Reflective

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TYPE:

A11. OK Dry-Cleaning advertises so effectively that the regular customers of its competitor Purity Cleaners patronize OK instead of Purity. This is a. b. c. d.

appropriation. conversion. wrongful interference with a contractual relationship. none of the choices.

ANSWER: D NAT: AACSB Reflective

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TYPE:

A12. Joy invites Ken into her apartment. Ken commits trespass to land if he a. b. c. d.

enters the apartment with fraudulent intent. harms the apartment in any way. makes disparaging remarks about Joy to others. refuses to leave when Joy asks him to go.

ANSWER: D NAT: AACSB Reflective

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TYPE:

A13. Jane enters onto Sam’s property to help someone in danger. If Sam charges Jane with trespass to land, Jane has a. b. c.

no defense. a possible defense. a partial defense.

TEST BANK A—UNIT TWO: TORTS AND CRIMES

a complete defense.

ANSWER: D NAT: AACSB Reflective

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TYPE:

CHAPTER 6: INTENTIONAL TORTS AND PRIVACY

A14. As a joke, Fran hides Gary’s business law textbook so that he cannot find it during the week before the exam. Fran is liable for a. b. c. d.

appropriation. disparagement of property. trespass to personal property. wrongful interference with a business relationship.

ANSWER: C NAT: AACSB Reflective

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TYPE:

A15. Quin, a clerk at PC Computer Store, takes a computer from the store without PC’s permission. Quin is liable for conversion a. b. c. d.

if he damages the computer. if he does not have a good reason for taking the computer. if he fails to prevent a theft of the computer from his possession. under any circumstances.

ANSWER: D NAT: AACSB Reflective

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TYPE:

A16. Ian steals a business law textbook from Jules. Kris, who does not know that the book is stolen, buys it from Ian. Kris has committed a. b. c. d.

conversion. disparagement of property. no tort. wrongful interference with a business relationship.

ANSWER: A NAT: AACSB Reflective

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TYPE:

A17. In a newspaper ad, Select Used Motors falsely accuses Top Value Vehicles, a competitor, of selling stolen cars. Top Value’s sales decrease. Select has most likely committed a. b.

defamation. no tort.

TEST BANK A—UNIT TWO: TORTS AND CRIMES

c. d.

slander of quality. slander of title.

ANSWER: D NAT: AACSB Reflective

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TYPE:

CHAPTER 6: INTENTIONAL TORTS AND PRIVACY

A18. An anonymous person posts online a defamatory message about Dewitt. Not knowing the poster’s identity, Dewitt files a suit against “John Doe.” Using the authority of the court, Dewitt can obtain from the poster’s Internet service provider a. b. c. d.

an apology. damages. the identity of the poster. none of the choices.

ANSWER: C NAT: AACSB Reflective

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TYPE:

A19. Oakley posts a defamatory remark about Pierre in “Roominate,” an online social network maintained by SocNet, Inc., an Internet service provider. Most likely to be held liable for the remark is a. b. c. d.

Oakley. Pierre. Roominate. SocNet.

ANSWER: A NAT: AACSB Reflective

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A20. From a location in Asia, Basil sends spam to U.S. e-mail addresses touting a variety of deceptive scams in an attempt to dupe unwitting recipients into revealing their bank account and credit card numbers. Under the U.S. Safe Web Act, the Federal Trade Commission can a. b. c. d.

authorize the scamming of citizens in Asia. do nothing. share information with foreign agencies to investigate and prosecute. undertake secret activities to destroy Asian servers.

ANSWER: C NAT: AACSB Reflective

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TYPE:

A1.

TEST BANK A—UNIT TWO: TORTS AND CRIMES

Precise Engineering Corporation has a contract with Quik Mart Stores to provide customized software for Quik’s inventory control system. Retail Outlets, Inc, Quik’s competitor, induces Sam, a Precise subcontractor who is writing code for the Quik software, to delay delivery of the code for one week. As a result, Precise’s delivery of the software is delayed, and Quik sustains $500,000 in lost profits. On what ground could Quik recover damages from Retail Outlets? ANSWER: Quik could file an action against Retail Outlets based on wrongful interference with a contractual relationship. The elements that Quik must prove are (1) a valid, enforceable contract between two parties; (2) the knowledge of a third party that this contract exists; and (3) the third party’s intentionally causing the breach of the contract for the purpose of advancing the interest of the third party. For a successful tort action, there must also be damages caused by the third party’s act. Facts that satisfy all of these elements are set out in the problem. There was a valid, enforceable contract between Precise and Quik. Retail Outlets knew of this contract, Retail Outlets intentionally interfered with this contract, causing its breach, for the purpose of advancing its own interest (undercutting the profit of its competitor). Quik suffered lost profits as a result of Retail Outlets’ act. PAGES: 124–126 NAT: AACSB Reflective

A2.

TYPE: = AICPA Decision Modeling

After two years of research and an investment of a substantial amount of money, Coast-to-Coast Company (CC) develops a new product that it hopes will produce substantial profits. CC learns that a competitor, National Sales, Inc., has made and begun to sell a nearly identical product. CC learns from a reliable source that National paid a CC employee to obtain the plans for CC’s product when it was in development. What legal recourse does CC have against National? ANSWER: In terms of legal recourse against National, CC might base a civil suit on charges of conversion and trespass to personal property. Conversion is any act depriving an owner of personal property without that owner’s permission and without just cause. Conversion is the civil side of crimes related to theft. When conversion occurs, trespass to personal

CHAPTER 6: INTENTIONAL TORTS AND PRIVACY

property usually occurs as well. If the initial taking of the property was unlawful, there is trespass; retention of that property is conversion. CC might have a claim for wrongful interference with a contractual relationship for inducing the CC employee to break his or her employment contract with CC by selling company secrets. PAGES: 127–128 NAT: AACSB Reflective

TYPE: = AICPA Decision Modeling

Chapter 7 Negligence and Strict Liability N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

Under the theory of negligence, the duty of care requires an intentional act. ANSWER: F NAT: AACSB Analytic

A2.

TYPE:

PAGE:

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TYPE:

An ordinary person standard determines whether allegedly negligent conduct resulted in a breach of a duty of care. ANSWER: F NAT: AACSB Analytic

A4.

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To determine whether a duty of care has been breached, a judge asks how he or she would have acted in the same circumstances. ANSWER: F NAT: AACSB Analytic

A3.

PAGE:

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TYPE:

A business owner has a duty to use reasonable care to protect its customers against foreseeable risks about which the owner should have known. 73

TEST BANK A—UNIT TWO: TORTS AND CRIMES

ANSWER: T NAT: AACSB Reflective

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TYPE:

CHAPTER 7: NEGLIGENCE AND STRICT LIABILITY

A5.

The degree of care to be exercised in a situation can vary with a person’s profession or occupation. ANSWER: T NAT: AACSB Analytic

A6.

PAGE:

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TYPE:

PAGE:

139 TYPE: AICPA Critical Thinking

Proximate cause exists when injuries sustained were too remotely connected to an incident to trigger liability. ANSWER: F NAT: AACSB Analytic

A9.

139 TYPE: AICPA Critical Thinking

Causation in fact can be determined by use of the but for test. ANSWER: T NAT: AACSB Analytic

A8.

PAGE:

Under the theory of negligence, the duty of care requires one person to come to the aid of another in “peril.” ANSWER: F NAT: AACSB Analytic

A7.

PAGE:

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TYPE:

If no harm results from an allegedly negligent act, there is no liability. ANSWER: T NAT: AACSB Analytic

PAGE:

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TYPE:

A10. A defense available in an action based on a negligence theory is that the plaintiff failed to prove one or more of the required elements. ANSWER: T NAT: AACSB Analytic

PAGE:

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TYPE:

A11. A person assumes all risks associated with any activity in which he or she participates. ANSWER: F NAT: AACSB Analytic

PAGE:

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TYPE:

TEST BANK A—UNIT TWO: TORTS AND CRIMES

CHAPTER 7: NEGLIGENCE AND STRICT LIABILITY

A12. A superseding cause is an intervening event that imposes liability on a defendant for injuries caused by the intervening event. ANSWER: F NAT: AACSB Analytic

PAGE:

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TYPE:

A13. Under the doctrine of comparative negligence, both the plaintiff’s and the defendant’s negligence are taken into consideration. ANSWER: T NAT: AACSB Analytic

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TYPE:

A14. The doctrine of res ipsa loquitur applies if an event causing harm does not normally occur in the absence of negligence. ANSWER: T NAT: AACSB Analytic

PAGE:

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TYPE:

A15. Under the “danger invites rescue” doctrine, a person who tries to rescue another individual from harm is liable for any injuries to the individual. ANSWER: F NAT: AACSB Analytic

PAGE:

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TYPE:

A16. The extreme risk of an activity is a primary basis for imposing strict liability. ANSWER: T NAT: AACSB Analytic

PAGE:

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A17. Under the doctrine of strict liability, liability is imposed strictly according to fault. ANSWER: F NAT: AACSB Analytic

PAGE:

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TYPE:

A18. One of the requirements for a suit based on strict liability is a failure to exercise due care.

TEST BANK A—UNIT TWO: TORTS AND CRIMES

ANSWER: F NAT: AACSB Analytic

PAGE:

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TYPE:

A19. One characteristic of an abnormally dangerous activity is that it involves a low degree of risk. ANSWER: F NAT: AACSB Analytic

PAGE:

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TYPE:

A20. A person who keeps a wild animal is always strictly liable for any harm that the animal inflicts. ANSWER: T NAT: AACSB Reflective

PAGE:

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TYPE:

MULTIPLE CHOICE QUESTIONS A1.

Bette backs out of City Parking Garage, colliding with Dill’s car. Dill may recover $7,500 to cover the cost of the repairs if Bette failed to act as a. b c. d.

a blameless person. a faultless person. a reliable person. a reasonable person.

ANSWER: D NAT: AACSB Reflective

PAGE:

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TYPE:

Fact Pattern 7-A1 (Questions A2–A3 apply) Roy owns an apartment building that contains units of different sizes. The sidewalks around the building are in poor repair. Many sections have buckled from the growth of tree roots over the years. A2.

Refer to Fact Pattern 7–A1. As the owner of the building, Roy has a duty to a. b. c.

arrange to escort anyone who walks onto the property. do nothing. repair the sidewalks.

CHAPTER 7: NEGLIGENCE AND STRICT LIABILITY

repair the sidewalks only if he is notified that it is a problem.

ANSWER: C NAT: AACSB Reflective A3.

PAGE:

TYPE:

arrange to correct the rent to match the tenant’s ability to pay. do nothing. supply correct information. tell tenants what they want to hear even if it is not correct.

ANSWER: C NAT: AACSB Reflective

PAGE:

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TYPE:

Amber shops in a Breezy Bargains store, whose employee Connor recently mopped the floor. Amber slips, falls, and suffers an injury. Breezy is liable to Amber on a negligence theory if there was a “Wet Floor” warning sign and a. b. c. d.

Amber cannot read it. Amber was distracted by other patrons. Amber was enticed by a nearby display. Connor did not place the sign near the wet floor.

ANSWER: D PAGE: NAT: AACSB Reflective A5.

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Refer to Fact Pattern 7–A1. As the landlord of the building, when a prospective tenant asks about the size of an apartment, Ray has a duty to a. b. c. d.

A4.

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Sam, an engineer, supervises the construction of a new bridge. When the bridge collapses due to faulty construction, Sam is sued by those injured in the collapse. As a professional, Sam is held to the same standard of care as a. b. c. d.

ordinary persons. other engineers. other professionals, including doctors, dentists, and lawyers. those injured in the collapse of the bridge.

ANSWER: B NAT: AACSB Reflective

PAGE:

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TYPE:

TEST BANK A—UNIT TWO: TORTS AND CRIMES

CHAPTER 7: NEGLIGENCE AND STRICT LIABILITY

A6.

Leon files a suit against Moira, a medical doctor, alleging negligence. As a physician, Moira is held to the standard of a. b c. d.

a blameless individual. a faultless ordinary person. a reliable professional. a reasonable physician.

ANSWER: D NAT: AACSB Reflective A7.

PAGE:

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TYPE:

Nick sees Opal, a stranger, in peril, but does not attempt to rescue her. Opal could successfully sue Nick for a. b c. d.

negligence per se. nothing. a violation of the “danger invites” rescue doctrine. a violation of a Good Samaritan statute.

ANSWER: B NAT: AACSB Reflective A8.

PAGE:

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TYPE:

Driving his sport utility vehicle negligently, Bart crashes into a streetlight. The streetlight falls, smashing through the roof of a house, killing Chris. But for Bart’s negligence, Chris would not have died. Regarding the death, the crash is the a. b c. d.

cause in fact. intervening cause. proximate cause. superseding cause.

ANSWER: A NAT: AACSB Reflective

PAGE:

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TYPE:

82 A9.

TEST BANK A—UNIT TWO: TORTS AND CRIMES

John sees that Kris is about to step into the path of an oncoming bus. If John does not warn Kris of the danger, John is liable a. b. c. d.

only if Kris is injured. only if Kris is not injured. regardless of the consequences to Kris. under no circumstances.

ANSWER: D NAT: AACSB Reflective

PAGE:

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TYPE:

A10. Ralph, a van driver for Standard Delivery Company, causes a multi-vehicle accident on a city street. Ralph and Standard are liable to a. b. c. d.

all those who were injured. only those who were uninsured. only those whose injuries could have been reasonably foreseen. only those whose vehicles were closest to Rod’s van.

ANSWER: C NAT: AACSB Reflective

PAGE:

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TYPE:

A11. Edie is injured when she is struck by debris from an explosion at Finest Fireworks Factory. The rule that harm must be foreseeable to constitute the proximate cause of an injury under a negligence theory was established in a. b. c. d.

Edie v. Finest Fireworks Factory. Palsgraf v. Long Island Railroad Co. Rylands v. Fletcher. Congress.

ANSWER: B NAT: AACSB Reflective

PAGE:

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CHAPTER 7: NEGLIGENCE AND STRICT LIABILITY

A12. Caleb is driving a car in which Dona is a passenger when an accident occurs. Caleb and Dona are emotionally rattled, but neither is physically hurt. Caleb is not liable to Dona on a negligence theory because a. b. c. d.

both parties were emotionally rattled. Caleb did not apparently intend to cause an accident. Dona must have been comparatively negligent. Dona was not injured.

ANSWER: D NAT: AACSB Reflective

PAGE:

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TYPE:

A13. Kay carelessly bumps into Lyle, knocking him to the ground. Kay has committed the tort of negligence a. b. c. d.

only if Lyle is injured. only if Lyle is not injured. under any circumstances. under no circumstances.

ANSWER: A NAT: AACSB Reflective

PAGE:

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TYPE:

A14. Clyde enters Desert Decathlon, an athletic competition in which Clyde has often competed. Regarding the risk of injury, Clyde assumes the risks a. b. c. d.

attributable to the Decathlon in any way. different from the risks normally associated with the Decathlon. greater than the risks normally associated with the Decathlon. normally associated with the Decathlon.

ANSWER: D NAT: AACSB Reflective

PAGE:

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TYPE:

TEST BANK A—UNIT TWO: TORTS AND CRIMES

A15. Nadine is a spectator at the Metro City Softball Tournament, an athletic competition. Regarding the risk of injury, Nadine assumes the risks a. b. c. d.

attributable to the tournament in any way. different from the risks normally associated with the tournament. greater than the risks normally associated with the tournament. normally associated with the tournament.

ANSWER: D NAT: AACSB Reflective

PAGE:

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TYPE:

A16. Beth is injured in a car accident and sues Cash, alleging negligence. Cash claims that Beth was driving more carelessly than he was. Comparative negligence may reduce Beth’s recovery a. b. c. d.

even if Beth was only slightly at fault. only if Beth was as equally at fault as Cash. only if Beth was less at fault than Cash. only if Beth was more at fault than Cash.

ANSWER: A NAT: AACSB Reflective

PAGE:

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A17. An Illinois state statute requires commercial vehicle drivers to “fully attend to the operation of the vehicle.” Jerry, a driver for Crosstown Taxi Company, is driving and talking on his cell phone when his cab collides with Kayla’s car, injuring her. Kayla’s best theory for recovery against Jerry and Crosstown is a. b. c. d.

a Good Samaritan statutes. negligence per se. res ipsa loquitur. the “danger invites rescue” doctrine.

ANSWER: B NAT: AACSB Reflective

PAGE:

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TYPE:

CHAPTER 7: NEGLIGENCE AND STRICT LIABILITY

A18. In an emergency situation, Milena, an emergency medical technician, renders aid to Lothar, who needs help. Lothar would most likely be prohibited from suing Milena for negligence under a. b. c. d.

any circumstances. a Good Samaritan statute. a social host statute. no circumstances.

ANSWER: B NAT: AACSB Reflective

PAGE:

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TYPE:

A19. Earth Movers, Inc., uses dynamite to prepare land for highway projects. Strict liability is imposed on this activity because a. b. c. d.

Earth Movers is a corporation. the activity is inherently negligent. the activity is of a dangerous nature. the government pays for highway construction.

ANSWER: C NAT: AACSB Reflective

PAGE:

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A20. Eva owns Fast-Rate Salvage, a demolition company. A demolition by a Fast-Rate crew injures Glen, a passerby. Under the theory of strict liability, Eva must pay for Glen’s injury a. b c. d.

only if Glen’s injury was not reasonably foreseeable. only if Glen’s injury was reasonably foreseeable. only if the Fast-Rate crew was at fault. whether or not the Fast-Rate crew was at fault.

ANSWER: D NAT: AACSB Reflective

PAGE:

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TYPE:

ESSAY QUESTIONS

86 A1.

TEST BANK A—UNIT TWO: TORTS AND CRIMES

Biff went to Carraba’s Market to pick up a few items for dinner. It was a rainy, windy day, and the wind had blown water through the entrance to Carraba’s each time the door opened. As Biff entered, he slipped and fell in the rainwater that had accumulated on the floor. Dorothea, the manager, knew of the weather conditions but had not posted any sign to warn customers of the water hazard. Biff injured his back as a result of the fall and sued Carraba’s for damages, alleging negligence. Is Carraba’s liable? Why or why not? ANSWER: An occupier of the premises has a duty to use ordinary care to keep its premises in a reasonably safe condition and to warn customers of any foreseeable hazards. What constitutes a foreseeable hazard depends on whether a reasonably prudent person would conclude that harm could likely result from the conditions. Here, the manager knew of the storm conditions, knew that water accumulated rapidly on the floor, and knew or should have known that the water created a hazard. A court could find that the manager’s failure to remove the water constituted negligence, and the manager could be held liable for the customer’s injuries. PAGES: 137–141 NAT: AACSB Reflective

A2.

TYPE: N AICPA Decision Modeling

Neal, a twelve-year-old, buys a pair of skis from Outdoor Outfitters (OO), telling the salesperson that he has never been skiing but “really wants to do it.” The salesperson urges Neal to take a lesson in the sport before attempting a run, but Neal ignores the advice. On the first run, Neal loses control, hits a tree, and is injured. Neal files a suit against OO, alleging that it was negligent to have sold the skis to him, when he was clearly too young and inexperienced. How might OO defend itself? ANSWER: Neal’s injuries might have been foreseeable, but OO could defend against his claim by asserting the defense of assumption of risk. OO could argue that it had no duty to warn Neal of a dangerous risk (skiing near trees) of which he should have been aware. OO might also argue that even if it had a duty, it fulfilled it by cautioning Neal to take a lesson before his first run. OO might then assert that Neal voluntarily entered the risky situation, knowing the risk involved. OO might also raise comparative negligence as a defense. All individuals are expected to exercise a reasonable degree of care in looking out for themselves. Both

CHAPTER 7: NEGLIGENCE AND STRICT LIABILITY

parties’ negligence—if, indeed, OO was negligent at all—can be computed and the liability distributed accordingly. PAGES: 142–144 NAT: AACSB Reflective

TYPE: = AICPA Decision Modeling

Chapter 8 Intellectual Property and Internet Law N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

A beverage company that competes with Coca-Cola Company cannot call its products “Koke.” ANSWER: T NAT: AACSB Reflective

A2.

152 AICPA Legal

TYPE:

State and federal governments provide for the registration of trademarks. ANSWER: T NAT: AACSB Reflective

A3.

PAGE:

153 AICPA Legal

TYPE:

Trademark dilution requires proof that consumers are likely to be confused by the unauthorized use of a mark. ANSWER: F NAT: AACSB Analytic

PAGE:

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TYPE:

A4.

TEST BANK A—UNIT TWO: TORTS AND CRIMES

An applicant cannot register a trademark on the basis of an intention to use the mark in commerce. ANSWER: F PAGE: NAT: AACSB Analytic

A5.

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TYPE:

PAGE:

154 AICPA Legal

TYPE:

PAGE:

155 AICPA Legal

TYPE:

Trade dress has the same legal protection as trademarks. ANSWER: T NAT: AACSB Reflective

A9.

PAGE:

A generic term is not protected under trademark law unless it acquires a secondary meaning. ANSWER: F NAT: AACSB Reflective

A8.

A personal name is protected under trademark law if it acquires a secondary meaning. ANSWER: T NAT: AACSB Reflective

A7.

TYPE:

An arbitrary use of ordinary words may not be trademarked. ANSWER: F NAT: AACSB Reflective

A6.

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PAGE:

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A certification mark distinguishes products approved, or “certified,” by the government. ANSWER: F NAT: AACSB Reflective

PAGE:

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TYPE:

A10. A trade name cannot be registered with the federal government unless it is also a trademark or a service mark. ANSWER:

PAGE:

156

TYPE:

CHAPTER 8: INTELLECTUAL PROPERTY AND INTERNET LAW

NAT: AACSB Reflective

AICPA Legal

A11. Patent protection begins on the date that a patent is issued. ANSWER: F NAT: AACSB Reflective

PAGE:

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TYPE:

TEST BANK A—UNIT TWO: TORTS AND CRIMES

A12. Patent infringement occurs only if an invention is copied in its entirety. ANSWER: F NAT: AACSB Reflective

PAGE:

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TYPE:

A13. Copyright protection is automatic—registration is not required. ANSWER: T NAT: AACSB Analytic

PAGE:

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A14. It is possible to copyright an idea. ANSWER: F NAT: AACSB Reflective

PAGE:

A15. A person can reproduce copyrighted material for purposes such as teaching, including multiple copies for classroom use, without paying royalties. ANSWER: T NAT: AACSB Reflective

PAGE:

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TYPE:

A16. Exchanging pirated, copyrighted works with others is not infringement unless money is involved. ANSWER: F NAT: AACSB Analytic

PAGE:

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TYPE:

A17. A marketing technique can be a trade secret. ANSWER: T NAT: AACSB Reflective

PAGE:

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A18. International copyright protection is automatic—even in nations that have not signed international agreements relating to intellectual property rights. ANSWER: F NAT: AACSB Analytic

PAGE:

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TYPE:

CHAPTER 8: INTELLECTUAL PROPERTY AND INTERNET LAW

A19. Theft of confidential data by industrial espionage is a theft of trade secrets. ANSWER: T NAT: AACSB Reflective

PAGE:

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TYPE:

A20. International copyright protection exists for computer programs as “intellectual creations.” ANSWER: T NAT: AACSB Reflective

PAGE:

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TYPE:

MULTIPLE CHOICE QUESTIONS A1.

Pola develops a new espresso machine, which she names “Sure Shot.” She also writes the operating manual. Pola can obtain trademark protection for a. b. c. d.

the espresso machine. the “newness” of the espresso machine. the name. the operating manual.

ANSWER: C NAT: AACSB Reflective A2.

PAGE:

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TYPE:

Sincere Forms, Inc., uses, in its ads, a trademark that is similar, but not identical, to the famous, registered mark of Desired Objects, Inc. Sincere’s unauthorized use of the mark constitutes trademark dilution provided a. b. c. d.

consumers are confused. Sincere and Desired are competitors. Sincere’s use is intentional. Sincere’s use lessens the value of Desired’s mark.

ANSWER: D NAT: AACSB Reflective

PAGE:

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TYPE:

90 A3.

TEST BANK A—UNIT TWO: TORTS AND CRIMES

Standard Corporation can not claim a trademark in the phrase “Quality Is Standard” if the phrase a. b. c. d.

has a secondary meaning. is descriptive. is generic. is memorable.

ANSWER: C NAT: AACSB Reflective A4.

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TYPE:

Excel Goods, Inc., and Finest Products Corporation use the mark “Good Housekeeping Seal of Approval” to certify the quality of their products. Excel and Finest are not in business together and do not own this mark. The mark is a. b. c. d.

a certification mark. a collective mark. a service mark. trade dress.

ANSWER: A NAT: AACSB Reflective A5.

PAGE:

155 AICPA Legal

TYPE:

USA Transport Company uses a mark associated with its name to distinguish its services from those of other transport firms. The mark is a. b. c. d.

a certification mark. a collective mark. a service mark. trade dress.

ANSWER: C NAT: AACSB Reflective

PAGE:

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TYPE:

CHAPTER 8: INTELLECTUAL PROPERTY AND INTERNET LAW

A6.

Trevor’s business is The Spicy Chocolatier Café chain. “The Spicy Chocolatier Café” is a. b. c. d.

a certification mark. a collective mark. a service mark. a trade name.

ANSWER: D NAT: AACSB Reflective A7.

PAGE:

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TYPE:

E-Shopping Corporation inserts Fiesta Mall, Inc.’s trademark as a meta tag in E-Shopping’s Web site’s key-words field without Fiesta’s permission in a manner that suggests Fiesta authorized the use. This is a. b. c. d.

ANSWER: C NAT: AACSB Reflective A8.

PAGE:

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TYPE:

Ric designs a new computer hard drive, which he names “Sci Phi.” He also writes the operating manual to be included with each final product. Ric could obtain patent protection for a. b. c. d.

the hard drive only. the name only. the operating manual only. the hard drive, the name, and the operating manual.

ANSWER: A NAT: AACSB Reflective

PAGE:

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TYPE:

92 A9.

TEST BANK A—UNIT TWO: TORTS AND CRIMES

Sights Unseen, Inc., (SUI) sells scopes with distinctively designed and made lenses and mirrors to scientists. Telescopes, Etc. Corporation later begins to sell scopes with identical set-ups of lenses and mirrors, without SUI’s permission, to consumers. This is most likely a. b. c. d.

ANSWER: B NAT: AACSB Reflective

PAGE:

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TYPE:

A10. RiteMade Machinery, Inc., designs, makes, and sells a drill press. Steel Equipment Company copies the design without RiteMade’s permission. Steel’s conduct is actionable provided a. b. c. d.

consumers are confused. Steel’s conduct is intentional. Steel’s conduct reduces the value of RiteMade’s design. RiteMade’s design is patented.

ANSWER: D NAT: AACSB Reflective

PAGE:

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TYPE:

A11. Felicia invents a new valve to cap undersea oil spills, which she names “Great Catch.” She also writes the installation manual to be included with each valve. Felicia could obtain copyright protection for a. b. c. d.

the valve. the “newness” of the valve. the name. the installation manual.

ANSWER: D NAT: AACSB Reflective

PAGE:

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TYPE:

CHAPTER 8: INTELLECTUAL PROPERTY AND INTERNET LAW

A12. Cathy uses, on her new recording Drive By, the melody of a song written by Ed, without Ed’s permission. This is a. b. c. d.

ANSWER: A NAT: AACSB Reflective

PAGE:

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TYPE:

A13. Donna makes and distributes copies of Every Good Boy Does Fine, a movie copyrighted by Great Films Corporation, without Great Films’ permission. Donna may be liable for a. b. c. d.

damages, fines, or imprisonment. damages only. fines or imprisonment only. nothing.

ANSWER: A NAT: AACSB Reflective

PAGE:

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TYPE:

A14. Ellen publishes a book titled First Place, which includes a chapter from Frank’s copyrighted book Great NASCAR Drivers without his permission. Ellen’s use of the chapter is actionable a. b. c. d.

only if consumers are confused. only if Ellen and Frank are competitors. only if consumers are confused and Ellen and Frank are competitors. regardless of whether consumers are confused or Ellen and Frank are competitors.

ANSWER: D NAT: AACSB Reflective

PAGE:

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TYPE:

TEST BANK A—UNIT TWO: TORTS AND CRIMES

A15. Kim uses, on her new recording Let’s Go, the guitar solo from Malcolm’s digital sound recording without his permission. This is a. b. c. d.

ANSWER: A NAT: AACSB Reflective

PAGE:

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TYPE:

A16. Rockstar Software, Inc., develops a new series of performance-related video games. The games are most likely protected by a. b. c. d.

ANSWER: A NAT: AACSB Reflective

PAGE:

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TYPE:

A17. Diamond Financial Planners employs Elle, Diamond’s most productive performer. Elle, however, dissatisfied with the commission structure, quits to work for Feldstar Investments, Inc. Elle takes her list of Diamond clients to induce them to switch to Feldstar. Laws related to trade secrets cover a. b. c. d.

Diamond’s list of clients. Elle’s performance methods. Feldstar’s commission structure. none of the choices.

ANSWER: A NAT: AACSB Reflective

PAGE:

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TYPE:

CHAPTER 8: INTELLECTUAL PROPERTY AND INTERNET LAW

A18. The process behind the production of “Numb3rs,” a suite of business accounting and inventory software, is protected by a. b. c. d.

ANSWER: D NAT: AACSB Reflective

PAGE:

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TYPE:

A19. Canada and the United States are signatories of the Berne Convention. Doug, a citizen of Canada, publishes a book first in Canada and then in the United States. Doug’s copyright must be recognized by a. b. c. d.

Canada only. Canada and the United States only. all of the signatories of the Berne Convention. none of the choices.

ANSWER: C NAT: AACSB Reflective

PAGE:

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TYPE:

A20. Symphony, Inc., a U.S. jewelry designer and maker, files a suit against Kawa, Ltd., a Japanese jewelry maker, for the infringement of intellectual property rights under Japan’s national laws. Under the TRIPS agreement, Symphony is entitled to receive a. b. c. d.

better treatment than Kawa. the same treatment as Kawa. worse treatment than Kawa. nothing.

ANSWER: B NAT: AACSB Reflective

PAGE:

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TYPE:

ESSAY QUESTIONS

96 A1.

TEST BANK A—UNIT TWO: TORTS AND CRIMES

Max plots a new Batman adventure and carefully and skillfully imitates the art of DC Comics to create an authentic-looking Batman comic. Max is not affiliated with the owners of the copyright to Batman. Can Max publish the comic without infringing on the owners’ copyright?

CHAPTER 8: INTELLECTUAL PROPERTY AND INTERNET LAW

ANSWER: Probably not. The idea of a superhero crimefighter attired in tights and cape is not copyrightable, but the particular way in which an idea is expressed (in this case, in the character of Batman) is copyrightable and may not be freely used by others. When the form or expression of an idea is copied, an infringement of copyright occurs. The reproduction does not have to be exactly the same as the original nor reproduce the original in its entirety to constitute infringement. PAGES: 162–163 NAT: AACSB Reflective A2.

TYPE: = AICPA Decision Modeling

College Copy Shop (CCS) compiles, copies, and sells reading materials to students on the instructions of their professors, who indicate which parts of which publications should be included. These include texts published by Deep Topics, Inc. CCS does not obtain the permission of Deep Topics, or any of the other original publishers of the copied materials, and does not pay royalties on the sales of the compilations. Deep Topics and others file a suit against CCS, alleging infringement of the plaintiffs’ intellectual property rights. Which type of intellectual property is involved in this situation? What is CCS’s likely defense? How is a court most likely to rule? Explain. ANSWER: The intellectual property at issue in this situation is copyright—specifically, of course, the copyrights of the publishers of the materials that CCS copies and sells without permission. CCS is likely to assert the “fair use” doctrine in its defense. This doctrine includes exceptions to the general requirement that an owner’s permission be obtained before copyrighted material can be copied. CCS is probably likely to argue that its compilations are excepted because they are dedicated to “educational” uses. A court is most likely to conclude, however, that the copying and selling of the materials is not a fair use, because CCS profits from their sale, which undercuts the potential market for the copyrighted publications from which the copies are made. In determining fair use, a court considers four factors: the purpose and character of the use, the nature of the copyrighted work, the amount and substantiality of the portion used in relation to the copyrighted work as a whole, and the effect of the use on the potential market for or value of the copyrighted work. In this situation, the fourth factor is most significant and supports the conclusion that CCS’s use of the materials is not a fair use.

TEST BANK A—UNIT TWO: TORTS AND CRIMES

PAGE: 163 NAT: AACSB Reflective

TYPE: = AICPA Decision Modeling

Chapter 9 Criminal Law and Cyber Crime N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

A misdemeanor is a crime punishable only by a fine. ANSWER: F NAT: AACSB Analytic

A2.

TYPE:

PAGE:

176 AICPA Legal

TYPE:

A wrongful mental state is typically required for criminal liability. ANSWER: T NAT: AACSB Analytic

A4.

175 AICPA Legal

Thinking about killing someone constitutes the crime of attempted murder. ANSWER: F NAT: AACSB Reflective

A3.

PAGE:

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TYPE:

PAGE: 97

178

TYPE:

Picking pockets is not robbery. ANSWER:

TEST BANK A—UNIT TWO: TORTS AND CRIMES

NAT: AACSB Reflective

AICPA Legal

CHAPTER 9: CRIMINAL LAW AND CYBER CRIME

A5.

A person who commits larceny can be sued under tort law. ANSWER: T NAT: AACSB Reflective

A6.

TYPE:

PAGE:

179 AICPA Legal

TYPE:

PAGE:

179 AICPA Legal

TYPE:

A person’s intent to return embezzled property is a defense to the crime of embezzlement. ANSWER: F NAT: AACSB Analytic

A9.

178 AICPA Legal

Changing a trademark is forgery. ANSWER: T NAT: AACSB Analytic

A8.

PAGE:

It may be a crime to take another’s property, but it is not a crime to receive stolen goods. ANSWER: F NAT: AACSB Analytic

A7.

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TYPE:

A kickback for a special favor or service is not considered a bribe. ANSWER: F NAT: AACSB Reflective

PAGE:

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TYPE:

A10. A defendant may be relieved of liability by showing that a criminal act was necessary to prevent an even greater harm. ANSWER: T NAT: AACSB Analytic

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TYPE:

A11. Ordinarily, “ignorance of the law is an excuse,” or a valid defense to criminal liability. ANSWER: F NAT: AACSB Analytic

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TYPE:

100

TEST BANK A—UNIT TWO: TORTS AND CRIMES

A12. A suspect cannot be tried twice in the same court for the same crime. ANSWER: T NAT: AACSB Analytic

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TYPE:

101

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A13. The purpose of the exclusionary rule is to encourage criminals to provide exclusive evidence of their crimes. ANSWER: F NAT: AACSB Analytic

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TYPE:

A14. Any crime that requires knowledge of computer technology for its investigation is a computer crime. ANSWER: T NAT: AACSB Analytic

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TYPE:

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A15. Most cyber crimes are “new” crimes. ANSWER: F NAT: AACSB Analytic

PAGE:

A16. It is not identity theft to use a fabricated identity to access financial resources online. ANSWER: F NAT: AACSB Analytic

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TYPE:

A17. Dishing is phishing that involves voice communication. ANSWER: T NAT: AACSB Analytic

PAGE:

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A18. A stolen credit card is more likely to hurt a consumer than a merchant. ANSWER: F NAT: AACSB Reflective

PAGE:

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TYPE:

A19. A hacker is someone who uses one computer to break into another. ANSWER: T NAT: AACSB Analytic

PAGE:

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TYPE:

A20. A cyberterrorist might target a government agency, but not a business. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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ANSWER: F NAT: AACSB Reflective

PAGE:

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103

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MULTIPLE CHOICE QUESTIONS A1.

Gail is a “payday” lender charged with filing false claims in bankruptcy proceedings against her debtors. The standard of proof to find a defendant who has been charged with a crime guilty is a. b. c. d.

a preponderance of the evidence. beyond all doubt. beyond a reasonable doubt. clear and convincing evidence.

ANSWER: C NAT: AACSB Reflective A2.

174 AICPA Legal

TYPE:

Domino causes a disturbance at El Nino Cafe. He is arrested and charged with disorderly conduct, a misdemeanor. A misdemeanor is a crime punishable by a. b. c. d.

a fine only. imprisonment up to one year. imprisonment up to six months. imprisonment up to ten days.

ANSWER: B NAT: AACSB Reflective A3.

PAGE:

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TYPE:

Plato works for Quirky Squirters, Inc. During work hours, Plato “steals” his employer’s computer time to start up his own business, Rowdy Drenchers. This is a. b. c. d.

burglary. robbery. larceny. no crime.

ANSWER: C NAT: AACSB Reflective

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TYPE:

104 A4.

TEST BANK A—UNIT TWO: TORTS AND CRIMES

Rock pushes Sylvia to the ground, grabbing her purse as she falls. The use of force or fear is required for this act to constitute a. b. c. d.

burglary. forgery. larceny. robbery.

ANSWER: D NAT: AACSB Reflective A5.

TYPE:

no crime. forgery. larceny. robbery.

ANSWER: B NAT: AACSB Reflective

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TYPE:

Sven receives an MP3 player stolen from Tomas. To be criminally liable, Sven must know a. b. c. d.

the player is stolen. Tomas is the true owner. how to operate an MP3 player. what an MP3 player is.

ANSWER: A NAT: AACSB Reflective A7.

178 AICPA Legal

Ivan signs Jeb’s name, without his authorization, to the back of a check. This is a. b. c. d.

A6.

PAGE:

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TYPE:

Riley, a Sterling Bank employee, deposits into his account checks that are given to him by bank customers to deposit into their accounts. This is a. b. c.

burglary. embezzlement. larceny.

105

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money laundering.

ANSWER: B NAT: AACSB Reflective

PAGE:

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TYPE:

106 A8.

TEST BANK A—UNIT TWO: TORTS AND CRIMES

Mona offers Ned, a building inspector, money to overlook the violations in her new warehouse. Ned accepts the money and overlooks the violations. Mona is charged with the crime of bribery. The crime occurred when a. b. c. d.

Mona decided to offer the bribe. Mona offered the bribe. Ned accepted the bribe. Ned overlooked the violations.

ANSWER: B NAT: AACSB Reflective A9.

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TYPE:

Cameron manages an illegal gambling operation in his BBQ Bar & Grill. Cameron reports the profits of the gambling operation as income from BBQ’s legitimate activities on its tax returns. This is a. b. c. d.

embezzlement. larceny. money laundering. no crime.

ANSWER: C NAT: AACSB Reflective

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A10. Davis points a gun at Eton, threatening to shoot him if he does not steal from his employer, Freddy’s Convenience Store, and give the stolen funds to Davis. Charged with theft, Eton can successfully claim, as a defense a. b. c. d.

nothing. duress. entrapment. self-defense.

ANSWER: B NAT: AACSB Reflective

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TYPE:

107

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A11. Vance points a gun at Workman, threatening to shoot him. Workman hits Vance, causing his death. Charged with homicide, Workman can successfully claim as a defense a. b. c. d.

nothing. duress. entrapment. self-defense.

ANSWER: D NAT: AACSB Reflective

PAGE:

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TYPE:

A12. Ollie, an employee of Payroll Management Corporation, is arrested at work. A grand jury issues a formal charge against Ollie for larceny. This charge is a. b. c. d.

an arraignment. an indictment. an information. an inquisition.

ANSWER: B NAT: AACSB Reflective

PAGE:

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TYPE:

A13. Jean sends e-mail to Irwin promising a percentage of the amount in an African bank account for assistance in transferring the funds to a U.S. bank account. Irwin forwards his account number, but the funds are never sent. Instead, Jean quickly withdraws the funds in Irwin’s account. This is a. b. c. d.

online greed but not fraud. an online “fool-me-once, shame on you” occurrence but not fraud. online gambling but not fraud. online fraud.

ANSWER: D NAT: AACSB Reflective

PAGE:

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TYPE:

108

TEST BANK A—UNIT TWO: TORTS AND CRIMES

A14. Harvey puts up a guitar for bids on eWay, a Web auction site. Faith makes the highest bid and sends the payment, which Harvey receives, but he does not send the guitar to her. This is online a. b. c. d.

auction fraud. puffery. retail fraud. frustration but not fraud.

ANSWER: A NAT: AACSB Reflective

PAGE:

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TYPE:

A15. Posing as Platinum Bank, Oswald e-mails Nadia, asking her to update her personal banking information through a link in the e-mail. She clicks on the link and types in the data, which Oswald promptly sells to Moe. This is a. b. c. d.

no crime. employment fraud. phishing. vishing.

ANSWER: C NAT: AACSB Reflective

PAGE:

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TYPE:

Fact Pattern 9-1 (Questions A16–A17 apply) Minka uses her computer to secretly install software on hundreds of personal computers without their owners’ knowledge. A16. Refer to Fact Pattern 9-1. Minka’s secretly installed software allows her to forward transmissions from her unauthorized network to even more systems. This network is a. b. c. d.

a hacker. a bot. a botnet. a worm.

ANSWER: C NAT: AACSB Reflective

PAGE:

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TYPE:

CHAPTER 9: CRIMINAL LAW AND CYBER CRIME

109

110

TEST BANK A—UNIT TWO: TORTS AND CRIMES

A17. Refer to Fact Pattern 9-1. Minka’s software is harmful to the computers on which she installed it. This program is a. b. c. d.

malware. badware. harmware. infectware.

ANSWER: A NAT: AACSB Reflective

PAGE:

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TYPE:

A18. Posing as a representative of Global Games Company, Ferris e-mails Evan, a job seeker, asking him to forward personal banking information so that if he is hired, payroll checks can be deposited directly into his account. Evan supplies the data, which Ferris promptly sells to Dixie. This is a. b. c. d.

no crime. employment fraud. phishing. vishing.

ANSWER: B NAT: AACSB Reflective

PAGE:

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TYPE:

A19. Via the Internet, Rocky sabotages the computer system of Quik Chik’n Company, a food manufacturer, with the purpose of altering the levels of ingredients of the company’s products so that consumers of the food become ill. Rocky is a. b. c. d.

a cyberterrorist. a botnet. a virus. a worm.

ANSWER: A NAT: AACSB Reflective

PAGE:

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TYPE:

111

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A20. Rashad accesses Quant Company’s computer system without authority to obtain protected financial data. Under federal law, this is a. b. c. d.

a felony if it is committed for a commercial purpose. a felony if Quant brings a civil suit against Rashad. not a crime. a crime, but not a felony.

ANSWER: A NAT: AACSB Reflective

PAGE:

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ESSAY QUESTIONS A1.

Sophie is the president of Tasty Foods Corporation, a wholesale grocery company. An inspection by Uri, a government agent, uncovers unsanitary conditions caused by Vic, a Tasty Foods employee, in the company’s warehouse. Will, a Tasty Foods vice president, assures Uri that the situation will be corrected, but a later inspection reveals no such corrections. Sophie knows nothing about any of this. Can Tasty Foods be convicted of a crime in these circumstances? Can Sophie be held personally liable? ANSWER: The answer to both questions is yes. A corporation may be held liable for the crime of its employee if (1) the criminal act is within the scope of the employment and the purpose of the statute defining the act as a crime is to impose liability on the corporation, (2) the crime consists of a failure to perform a specific duty imposed on corporations by law, and (3) the crime was authorized by one of the corporation’s “high managerial agents.” Here, all of these elements exist. The unsanitary conditions in the warehouse are within the employee’s scope of employment, the crime consists of a failure to keep the warehouse clean, and the crime was authorized by a company vice president. As for the president’s personal liability, if she has the authority and the responsibility to deal with the situation, she can be held personally liable. A corporate officer must have the authority and the responsibility to deal with the situation. Personally liability is imposed in such circumstances, not because the corporate officer knew about the crime or intended it, but because the officer is in a “responsible relationship” to the corporation and has the power to prevent the crime. Under this “responsible corporate officer” doctrine, a corporate

112

TEST BANK A—UNIT TWO: TORTS AND CRIMES

officer can be held liable for an employee’s violations of the law. This liability may be imposed regardless of whether the officer participated in, directed, or knew about the violation. PAGES: 177–178 NAT: AACSB Reflective A2.

TYPE: = AICPA Decision Modeling

Good Health & Life Insurance Corporation suffers a security breach in its computer network. Before the company discovers the breach, the perpetrator obtains corporate financial records and other confidential data, including marketing plans. Is this a crime? If so, what are its elements? What steps might Good Health & Life take to ensure that going forward only authorized users access the data on its computers? Whose efforts— those of the federal government or Good Health & Life—are most important in securing the company’s computer infrastructure and why? ANSWER: The breach of Good Health & Life’s computers and the subsequent theft of data constitute a crime under the federal Access Device and Computer Fraud and Abuse Act of 1984, or the Computer Fraud and Abuse Act (CFAA). The crime has two elements: (1) accessing the computers without authority and (2) taking the confidential data. Precautions that Good Health & Life might take to safeguard its computer system in the future could start with employing a cyberspace security firm. These experts could help the firm devise an elaborate, ever-changing password system. They could install protective programs, such as firewalls and antivirus software, to limit outside access. They could further assist the firm by constantly updating this technology to thwart the criminal attempts of outsiders who are updating theirs. The most successful protective measure is to encrypt the data. Through encryption, plaintext can be transformed into ciphertext, which cannot be read unless the encryption coded is broken. Of course, an encryption system must be updated as regularly as the systems of those who would break it. The voluntary efforts of Good Health & Life and other private companies are the most important factor in securing those firms’ computer infrastructure. The federal government has little choice but to rely on those efforts because the government has limited regulatory authority over the Internet. PAGE: 196 NAT: AACSB Reflective

TYPE: N AICPA Decision Modeling

Chapter 10 Nature and Terminology N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

Some promises are not legally binding. ANSWER: T NAT: AACSB Analytic

A2.

206 TYPE: AICPA Critical Thinking

Resolving whether a promise should be enforced is a function of contract law. ANSWER: T NAT: AACSB Analytic

A3.

PAGE:

206 AICPA Legal

TYPE:

If a contractual promise is not fulfilled, the person who made it may be required to perform the promised act. ANSWER: T NAT: AACSB Analytic

PAGE:

207 TYPE: AICPA Critical Thinking

114 A4.

TEST BANK A—UNIT THREE: CONTRACTS AND E-CONTRACTS

The intention to enter into a contract is judged by outward, objective facts as interpreted by a reasonable person. ANSWER: T NAT: AACSB Analytic

PAGE:

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TYPE:

115

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A5.

The only requirement of a valid contract is that it be voluntarily entered into. ANSWER: F NAT: AACSB Analytic

A6.

PAGE:

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TYPE:

PAGE:

208 AICPA Legal

TYPE:

A unilateral contract is formed when the one receiving the offer completes the requested act or performance. ANSWER: T NAT: AACSB Analytic

A9.

TYPE:

“Consideration” refers to the voluntary consent of all of the parties to a contract. ANSWER: F NAT: AACSB Analytic

A8.

208 AICPA Legal

Every contract involves at least three parties. ANSWER: F NAT: AACSB Reflective

A7.

PAGE:

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TYPE:

No offer may be revoked before it is accepted. ANSWER: F NAT: AACSB Analytic

PAGE:

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TYPE:

PAGE:

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A10. A check is a formal contract. ANSWER: T NAT: AACSB Analytic

A11. Informal contracts are usually based on their substance rather than their form. ANSWER: T NAT: AACSB Analytic

PAGE:

210 TYPE: AICPA Critical Thinking

116

TEST BANK A—UNIT THREE: CONTRACTS AND E-CONTRACTS

A12. An express contract must be in writing. ANSWER: F NAT: AACSB Analytic

PAGE:

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TYPE:

117

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A13. An implied contract is not an actual contract. ANSWER: F NAT: AACSB Reflective

PAGE:

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TYPE:

A14. If a voidable contract is ratified, the parties must fully perform their respective legal obligations. ANSWER: T NAT: AACSB Analytic

PAGE:

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TYPE:

212 TYPE: AICPA Critical Thinking

A15. An executed contract is one that has been fully performed. ANSWER: T NAT: AACSB Analytic

PAGE:

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A16. A quasi contract is a fictional contract. ANSWER: T NAT: AACSB Analytic

PAGE:

A17. A void contract is enforceable if it is in writing. ANSWER: F NAT: AACSB Reflective

PAGE:

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TYPE:

A18. The doctrine of quasi contract can be used only when there is an actual contract that covers the matter in controversy. ANSWER: F NAT: AACSB Reflective

PAGE:

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TYPE:

A19. Plain language laws regulate some types of contracts to require “legalese.” ANSWER: F NAT: AACSB Analytic

PAGE:

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TYPE:

A20. A reasonable, lawful, and effective meaning will normally be given to all of a contract’s terms. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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TEST BANK A—UNIT THREE: CONTRACTS AND E-CONTRACTS

ANSWER: T NAT: AACSB Reflective

PAGE:

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TYPE:

119

CHAPTER 10: NATURE AND TERMINOLOGY

MULTIPLE CHOICE QUESTIONS A1.

Phil agrees to work for Vacation Resorts, Inc., as a chef. In determining whether a contract has been formed, an element of prime importance is a. b. c. d.

the parties’ intent. Phil’s rate of pay. the duration of the work. Vacation Resorts’s facilities.

ANSWER: A NAT: AACSB Analytic A2.

207 AICPA Legal

TYPE:

Crosby believes that he and Dakota agreed he would act as her personal sports trainer for seven workout sessions. In a later dispute, the existence of any contract can be judged by a. b. c. d.

the parties’ statements at the time of their alleged contract. what the defendant claims was the parties’ intent. what the plaintiff claims was the parties’ intent. what the parties agree they intended.

ANSWER: A NAT: AACSB Reflective A3.

PAGE:

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TYPE:

Expert Pavers, Inc., contracts with Fabricated Building Corporation to repave Fabricated’s parking lot for which Fabricated agrees to pay. The elements of this, and any other, contract include a. b. c. d.

capability. consideration. formation. practicality.

ANSWER: B NAT: AACSB Analytic

PAGE:

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TYPE:

120 A4.

TEST BANK A—UNIT THREE: CONTRACTS AND E-CONTRACTS

Mona asserts that a deal she entered into with Nate is an unenforceable contract. Defenses to the enforcement of a contract include a. b. c. d.

a desire not to perform. adverse economic consequences. results that do not match expectations. the lack of a party’s voluntary consent.

ANSWER: D NAT: AACSB Reflective A5.

208 AICPA Legal

TYPE:

Freida and Gail enter into a bilateral contract, which is created when Freida gives a promise in exchange for Gail’s a. b. c. d.

payment of money only. performance of a particular act only. promise only. prudent awareness only.

ANSWER: C NAT: AACSB Reflective A6.

PAGE:

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TYPE:

Clay offers to pay Dorianne $50 for a golf lesson for Estee. They agree to meet the day after tomorrow to exchange the cash for the lesson. These parties have a. b. c. d.

a bilateral contract. a trilateral contract. a unilateral contract. no contract.

ANSWER: A NAT: AACSB Reflective

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TYPE:

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A7.

Opie offers to sell his guitar to Pinky for $100. Pinky agrees. They complete and sign a printed form, and Pinky gives Opie a check for the price. This check is a. b. c. d.

a formal contract. an informal contract. a simple contract. no contract.

ANSWER: A NAT: AACSB Analytic A8.

210 TYPE: AICPA Critical Thinking

On Monday, Neil tells Outdoor Landscaping, Inc., that he will pay Outdoor $500 if a variety of tasks are completed by Friday. On Wednesday, when Outdoor is more than half done with the work, Neil says that he has changed his mind. Under the present-day view, these parties had a. b. c. d.

an expired contract when Neil said that he had changed his mind. a quasi contract when Neil said that he would pay for certain work. a unilateral contract as soon as Outdoor began to perform. no contract.

ANSWER: C NAT: AACSB Analytic A9.

PAGE:

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TYPE:

On behalf of the jazz group Synco-Passion, their manager Raul agrees to a performance in the Quay Club on May 1. Portia, acting for Quay Club, sends a written copy of the agreement to Raul to be signed. Typically, businesspersons put their contracts in writing to a. b. c. d.

ensure proof of the contracts’ existence. create substance from form. obtain a check or other negotiable instrument. practice their “letters of credit.”

ANSWER: A NAT: AACSB Reflective

PAGE:

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TYPE:

122

TEST BANK A—UNIT THREE: CONTRACTS AND E-CONTRACTS

A10. Flo tells Gregor that she will buy his textbook from last semester for $65. Gregor agrees. Flo and Gregor have a. b. c. d.

an executed contract. an express contract. an implied contract. a quasi contract.

ANSWER: B NAT: AACSB Reflective

PAGE:

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TYPE:

A11. When Jeff’s car breaks down, he asks Kwik Tow, Inc., to tow it from its location to Loyal Repair Shop. There is no discussion of a price, and Jeff and Kwik do not sign any documents. After the tow, Kwik sends Jeff a bill. With respect to Jeff’s obligation to pay the bill, this is a. b. c. d.

an express contract. an implied contract. a quasi contract. no contract.

ANSWER: B NAT: AACSB Reflective

PAGE:

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TYPE:

A12. Following negotiations with Merchants Storage Company, Lonny enters into an informal contract to clean the loading dock. This means that the parties’ contract a. b. c. d.

requires no special form. must be drafted “in form” to be valid. is indefinite and imprecise. does not exist.

ANSWER: A NAT: AACSB Reflective

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TYPE:

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A13. Sam and Tiffany enter into an implied contract. This is a contract in which the parties’ conduct a. b. c. d.

defines the contract’s terms. finds the contract’s facts. terminates any unintended consequences. undercuts any terms based on the facts.

ANSWER: A NAT: AACSB Reflective

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TYPE:

A14. Scot enters into a contract with Tiffany that later proves voidable at Tiffany’s option. If she elects to avoid any duty to perform under the contract a. b. c. d.

both parties are released from it. neither party is released from it. only Scot is released from it. only Tiffany is released from it.

ANSWER: A NAT: AACSB Reflective

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TYPE:

A15. Holiday Sales Company and Global Distributors, Inc., enter into a contract for the delivery of imported specialty goods. Until the goods are delivered and paid for, these parties have a. b. c. d.

an executory contract. no contract. a quasi contract. an informal contract.

ANSWER: A NAT: AACSB Reflective

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TYPE:

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TEST BANK A—UNIT THREE: CONTRACTS AND E-CONTRACTS

A16. Mia, a physician, renders aid to Noel, who is injured and unconscious. Mia can recover the cost of the aid from Noel a. b. c. d.

even if Noel was not aware of the aid. only if Noel recovers because of the aid. only if Noel was aware of the aid. under no circumstances.

ANSWER: A NAT: AACSB Reflective

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TYPE:

A17. Green Grocers, Inc., enters into a contract with Hiway Transport Company for the delivery of a shipment of fresh produce. In a later dispute between these parties over the delivery, the doctrine of quasi contract cannot be used because a. b. c. d.

both of the parties involved are businesses. at least one of the parties had greater bargaining power. the subject of the contract was a service. there is an actual contract covering the subject in dispute.

ANSWER: D NAT: AACSB Reflective

PAGE:

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TYPE:

A18. Phil enters into a contract with Quality Resorts, Inc., to work as a chef. Under the plain meaning rule, the meaning of this contract must be determined by reference to a. b. c. d.

any available evidence. any relevant extrinsic evidence. the face of the instrument. the later testimony of the parties.

ANSWER: C NAT: AACSB Reflective

PAGE:

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TYPE:

125

CHAPTER 10: NATURE AND TERMINOLOGY

A19. Diaz and Cuzco enter an express contract for the construction of a warehouse. Express contract terms are given, in relation to the parties’ course of performance, a. b. c. d.

less priority. the same priority. no priority. more priority.

ANSWER: D NAT: AACSB Reflective

PAGE:

217 AICPA Legal

TYPE:

A20. National Grocers, Inc., enters into a contract with Overland Shipping Company for the delivery of a shipment of fresh produce. If ambiguities appear in the contract, they will be construed against a. b. c. d.

the party who drafted the contract. the party with the greater bargaining power. the promisor. the promisee.

ANSWER: A NAT: AACSB Reflective

PAGE:

217 AICPA Legal

TYPE:

ESSAY QUESTIONS A1.

Ed, a businessperson, is a friend of Fran, the owner of a candy store. Every day, Ed spends five minutes in Fran’s candy store, looking at the candy and usually buying one or two candy bars. One afternoon, Ed goes into the store, looks at the candy, and picks up a $1 candy bar. Ed waves the candy at Fran without saying a word and walks out. Is there a contract? If so, how would it be classified in terms of formation, performance, and enforceability? ANSWER: The facts presented here indicate the presence of all the elements necessary for a valid contract. There are a serious offer and acceptance, consideration is exchanged (a candy bar for $1), both parties have capacity, the selling of the candy is legal, and there is no particular form

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required for this type of contract. Thus, a contract exists and for the reasons given here is classified as valid, enforceable, and informal. In addition, this is a classic case of an implied contract. There is no explicit agreement between the parties. Rather, an agreement is implied by Ed’s action of waving the candy bar and by his past conduct. By his conduct Ed is telling Fran that he will pay for the candy later. The contract is also bilateral (as opposed to unilateral), because Fran impliedly promises to sell the candy to Ed in exchange for Ed’s implied promise to pay. The contract is partially executory, as Ed has engaged to pay for the candy in the future. Because the contract is for a legal purpose, both parties have capacity, and voluntariness of consent is not an issue, the contract is neither voidable nor void. PAGES: 207–208 & 210–212 NAT: AACSB Reflective A2.

TYPE: = AICPA Decision Modeling

On May 1, Local Cartage Company and Modern Computers, Inc., orally agree that Local Cartage will pick up from National Chip Corporation and deliver to Modern Computers’ manufacturing plant a certain number of computer chips on each Monday in May. Under the agreement, Modern Computers will pay for the delivery services on June 1. On May 1, is this contract express, implied in fact, or implied in law? On May 31, after all of the deliveries have been made, is the contract executed or executory? ANSWER: An express contract is one in which the terms are fully expressed, either in writing or orally. The contract between Local Cartage and Modern Computers is an oral contract, in which the terms are fully expressed. That means their contract is an express contract. The contract between Local Cartage and Modern Computers is an executory contract on May 31. An executed contract is a contract that has been fully performed on both sides. An executory contract is a contract that has not been fully performed. If, as in this problem, one party (Local Cartage) has fully performed but the other (Modern Computers) has not, the contract, although it is executed on one side and executory on the other, is still classified as executory. PAGES: 210 & 211 NAT: AACSB Reflective

TYPE: = AICPA Decision Modeling

Chapter 11 Agreement in Traditional and E-Contracts N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

An agreement is evidenced by a single event: an offer. ANSWER: F NAT: AACSB Analytic

A2.

TYPE:

PAGE:

222 AICPA Legal

TYPE:

An invitation to negotiate—“can you afford this?”—is an offer. ANSWER: F NAT: AACSB Analytic

A4.

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An offeror must have a serious intention to become bound by the offer. ANSWER: T NAT: AACSB Analytic

A3.

PAGE:

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TYPE:

An expression of opinion—“your customers will like this”—is an offer. 125

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TEST BANK A—UNIT THREE: CONTRACTS AND E-CONTRACTS

ANSWER: F NAT: AACSB Analytic A5.

PAGE:

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TYPE:

PAGE:

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TYPE:

PAGE:

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TYPE:

An offeree’s power of acceptance is terminated when the offeror dies unless the offer is irrevocable. ANSWER: T NAT: AACSB Analytic

A9.

A counteroffer does not terminate but continues an offer. ANSWER: F NAT: AACSB Analytic

A8.

TYPE:

A statement of future intent—“I plan to sell my 700-pound sow”—is an offer. ANSWER: F NAT: AACSB Reflective

A7.

224 AICPA Legal

An advertisement—“this property for sale”—is an offer. ANSWER: F NAT: AACSB Reflective

A6.

PAGE:

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TYPE:

An acceptance subject to new conditions implicitly rejects the offer. ANSWER: T NAT: AACSB Analytic

PAGE:

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TYPE:

A10. Under the mailbox rule, an acceptance takes effect at the time it is sent. ANSWER: T NAT: AACSB Analytic

PAGE:

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TYPE:

A11. An acceptance sent by means not expressly or impliedly authorized is not effective until it is received. ANSWER:

PAGE:

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TYPE:

127

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NAT: AACSB Analytic

AICPA Legal

A12. If an offeror does not expressly authorize a certain mode of acceptance, then acceptance may be made by any reasonable means. ANSWER: T NAT: AACSB Analytic

PAGE:

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TYPE:

A13. A “sale” of software generally involves only a right to use the software. ANSWER: T NAT: AACSB Analytic

PAGE:

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TYPE:

A14. A forum-selection clause indicates the place for the resolution of a dispute arising under a contract. ANSWER: T NAT: AACSB Reflective

PAGE:

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TYPE:

236 AICPA Legal

TYPE:

A15. State e-signature laws are uniform. ANSWER: F NAT: AACSB Analytic

PAGE:

A16. Under federal law, an electronic signature can be as valid as a signature on paper. ANSWER: T PAGE: NAT: AACSB Technology

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TYPE:

A17. The UETA covers only e-records and e-signatures relating to a transaction. ANSWER: T NAT: AACSB Analytic

PAGE:

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TYPE:

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TYPE:

A18. Parties cannot opt out of the UETA. ANSWER: F NAT: AACSB Analytic

PAGE:

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TEST BANK A—UNIT THREE: CONTRACTS AND E-CONTRACTS

A19. The UETA does not apply to a transaction unless the parties agreed to conduct the transaction electronically. ANSWER: T NAT: AACSB Analytic

PAGE:

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TYPE:

A20. An e-record is considered received under the UETA only if a person is aware of its receipt. ANSWER: F NAT: AACSB Analytic

PAGE:

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TYPE:

129

CHAPTER 11: AGREEMENT IN TRADITIONAL AND E-CONTRACTS

MULTIPLE CHOICE QUESTIONS A1.

Fanny tells Eden that she will sign a lease if it includes a clause permitting Fanny to extend the lease at the same amount of rent. Fanny’s intent to sign the lease is determined by reference to Fanny’s a. b. c. d.

assumptions. beliefs. unspoken opinions. words and action.

ANSWER: D NAT: AACSB Reflective A2.

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TYPE:

Nate tells Opal, “I might sell the skis that I bought last fall since I haven’t used them and the skiing season is almost over.” This is a. b. c. d.

an acceptance of an offer. an invitation to accept an offer. an offer. a statement of future intent.

ANSWER: D NAT: AACSB Reflective A3.

PAGE:

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TYPE:

Royal Properties, Inc., mails a flyer to hundreds of firms, advertising a building for sale. Standard Manufacturing Company responds by saying, “We accept your offer.” Between Royal and Standard, there is a. b. c. d.

a contract for the sale of the building. a contract to consider the offer before any others. a contract to negotiate a sale of the building. no contract.

ANSWER: D NAT: AACSB Reflective

PAGE:

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TYPE:

130 A4.

TEST BANK A—UNIT THREE: CONTRACTS AND E-CONTRACTS

Yvon asks Zack, “Do you want to buy one of my fishing rods?” This is a. b. c. d.

a valid offer. not a valid offer because the terms are not definite. not a valid offer because Yvon did not state an intent. not a valid offer because Zack did not respond.

ANSWER: B NAT: AACSB Reflective A5.

TYPE:

did not confer a benefit on Elmo by returning the dog. did not know of the reward when he found and returned the dog. does not need the money. returned the dog.

ANSWER: B NAT: AACSB Reflective

PAGE:

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TYPE:

Interstate Coffee Brokers, Inc. (ICBI), offers to sell Java Roasters, Inc., fifty bags of coffee beans. Java rejects the offer. The offer is a. b. c. d.

terminated. valid for a reasonable time to give Java a “second chance.” valid for the period of time prescribed by a state statute. valid until ICBI revokes the offer.

ANSWER: A NAT: AACSB Reflective A7.

227 AICPA Legal

Elmo advertises a reward for the return of his lost dog. Floyd, who does not know of the reward, finds and returns the dog. Floyd cannot recover the reward because he a. b. c. d.

A6.

PAGE:

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TYPE:

Bill offers to sell his Consumer Service Center business to Dina for $100,000. Dina replies, “The price is too high. I will buy it for $90,000.” Dina has a. b.

accepted the offer. made a counteroffer without rejecting the offer.

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c. d.

rejected the offer and made a counteroffer. rejected the offer without making a counteroffer.

ANSWER: C NAT: AACSB Reflective

PAGE:

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TYPE:

132 A8.

TEST BANK A—UNIT THREE: CONTRACTS AND E-CONTRACTS

Grant offers to sell his Honda Civic for $10,000 to Ivy. Referring to the prices for similar Hondas, Ivy says, “I’ll pay no more than $5,000.” Grant says, “Forget it.” Grant’s offer was terminated by a. b. c. d.

Grant. Honda. Ivy. no one—Grant’s offer is still open.

ANSWER: C NAT: AACSB Reflective A9.

PAGE:

230 AICPA Legal

TYPE:

Quik Fix-It, Inc., offers Pam a job as a plumber. No time for acceptance is specified in the offer. The offer will terminate a. b. c. d.

after a reasonable period of time. after a typical work week (five business days). after a usual month (thirty calendar days). never.

ANSWER: A NAT: AACSB Reflective

PAGE:

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TYPE:

A10. Alan offers to transfer Beth’s DVDs to digital flash drives for $150 plus the cost of the drives. The mailbox rule will not apply if Beth accepts the offer by a. b. c. d.

e-mail. messenger. regular mail. telegram.

ANSWER: A NAT: AACSB Reflective

PAGE:

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TYPE:

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A11. Tomato Farms (TF) offers to sell Unified Grocers, Inc., a boxcar load of tomatoes. The offer is sent via overnight delivery because an acceptance is required urgently. It would be most reasonable for Unified to accept via a. b. c. d.

a fax, a letter, or a phone call to TF within two weeks. a fax sent to TF as soon as the offer is received. a letter mailed to TF within two days. a phone call to TF within five business days.

ANSWER: B NAT: AACSB Reflective

PAGE:

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TYPE:

A12. Deepwater Mining Corporation offers to sell East China Refining, Inc., a certain quantity of unrefined oil. If East China sends an acceptance via Deepwater’s authorized mode of communication, it will be effective when it is a. b. c. d.

in transit. received. sent. written.

ANSWER: C NAT: AACSB Reflective

PAGE:

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TYPE:

A13. Flem, a user of GameCenter.com’s Web site, can download gaming software for free if he first clicks on “I accept” after viewing certain terms. This is a. b. c. d.

a contract that does not include the terms. a contract that includes the terms. not a contract but the terms are enforceable. unenforceable.

ANSWER: B NAT: AACSB Reflective

PAGE:

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TYPE:

134

TEST BANK A—UNIT THREE: CONTRACTS AND E-CONTRACTS

A14. Deb buys a song through eSongs, an online music vendor. Before completing the purchase and downloading the song, Deb must agree to a provision not to make and sell copies of the song. This provision is a. b. c. d.

a browse-wrap term. a click-on agreement. a shrink-wrap agreement. a choice-of-law clause.

ANSWER: B PAGE: NAT: AACSB Reflective

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TYPE:

A15. Magic Math Corporation makes business accounting software, which is packaged with a shrink-wrap agreement. National Distribution Company distributes the software to retailers, including an Office Stuff store, where Peg buys a package of it. The parties to the shrink-wrap agreement are a. b. c. d.

Magic Math and National Distribution only. Magic Math and Peg only. Magic Math, National Distribution, Office Stuff, and Peg. Office Stuff and Peg only.

ANSWER: B PAGE: NAT: AACSB Reflective

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TYPE:

A16. Lightspeed Corporation makes computers, each of which is packaged with a shrink-wrap agreement. Milo buys a Lightspeed desktop. The terms of the shrink-wrap agreement are most likely enforceable if a. b. c. d.

Milo buys the computer directly from Lightspeed. Milo uses the computer after reading the terms. Milo pays for the computer before reading the terms. the terms concern warranties.

ANSWER: B PAGE: NAT: AACSB Reflective

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TYPE:

135

CHAPTER 11: AGREEMENT IN TRADITIONAL AND E-CONTRACTS

A17. Howie enters into a contract with Ida over the Internet to buy soybeans as a hedge against falling prices in corn. Neither party prints out a hard copy. Under the Electronic Signatures in Global and National Commerce Act (ESIGN Act), this contract can a. b. c. d.

be “denied legal effect” if it falls under the UCC’s Statute of Frauds. be “denied legal effect” unless a hard copy is printed. be “denied legal effect” until it is executed. not be “denied legal effect” because it is only in electronic form.

ANSWER: D PAGE: NAT: AACSB Reflective

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TYPE:

A18. Michelle gives out a business card with an e-mail address on it. According to the comments that accompany the UETA, it may be reasonable to infer that Michelle has consented to a. b. c. d.

transact business electronically. submit to the jurisdiction of any selected forum. accept and respond to any correspondence sent to that address. nothing.

ANSWER: A PAGE: NAT: AACSB Technology

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TYPE:

A19. Somethin’-in-the-Oven Corporation and Cookin’ Good, Inc., transact a deal under the UETA. Other state law applies to a dispute between the parties relating to a. b. c. d.

attributing a party’s e-signature. the formation of the parties’ contract. the sending and receiving of e-records. the legal effect of the parties’ e-signatures and e-records.

ANSWER: B NAT: AACSB Reflective

PAGE:

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TYPE:

136

TEST BANK A—UNIT THREE: CONTRACTS AND E-CONTRACTS

A20. Beyond-the-Sea Corporation and Homeport Company make a deal for Homeport’s products, via e-records. Under the UETA, an e-record is considered sent when it a. b. c. d.

is signed and encrypted, and will be sent without changes. is stored in the sender’s back-up system. is composed on the sender’s computer. leaves the sender’s control.

ANSWER: D PAGE: NAT: AACSB Technology

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TYPE:

ESSAY QUESTIONS A1.

On May 1, Brand Name Industries, Inc. (BNI), sent Carol a letter, via overnight delivery, offering to employ her to audit BNI’s financial statements for the current year for $1,000. In the letter, BNI stated that Carol had ten days to accept. On May 5, Carol sent BNI a fax that stated, “The price for the audit seems too low. Would you consider paying $1,200?” BNI received the fax. The next day, Dan offered to conduct the audit for $800. On learning of Dan’s offer, Carol immediately e-mailed BNI, agreeing to do the work for $1,000. BNI received this e-mail on May 7. Explain why BNI and Carol do, or do not, have a contract. ANSWER: BNI and Carol have a contract. Carol effectively accepted BNI’s offer to perform an audit of BNI’s financial statements. Carol’s fax was merely an inquiry about BNI’s offer. An attempt to change the terms of an offer is a rejection of that offer, terminates it, and makes a counteroffer. Here, however, the fax did not indicate an intent to reject the offer, and a reasonable person in BNI’s position would not conclude that the fax was a rejection. Carol was still considering the offer. Her learning of Dan’s offer did not act as a revocation of BNI’s offer (although the offer would have been revoked if BNI had accepted Dan’s offer, and Carol had learned of this acceptance). Also, in accepting BNI’s offer, Carol used a medium that was reasonable under the circumstances because BNI did not expressly specify any particular method of acceptance. Carol’s acceptance was timely sent and received, and consequently, was effective on dispatch.

CHAPTER 11: AGREEMENT IN TRADITIONAL AND E-CONTRACTS

PAGES: 229–233 NAT: AACSB Reflective A2.

137

TYPE: = AICPA Decision Modeling

Omega, Inc., sells business application software—accounting and bookkeeping programs, blank business forms, inventory control functions, and so on—in different combinations, in different packages, at different prices. Each package includes a shrink-wrap agreement that limits warranties and remedies. Precision Engineering Associates (PEA) buys an Omega package and uses the product. Later, PEA files a suit against Omega, claiming that the software is flawed and that the flaws caused PEA to suffer business losses. PEA asks for relief that exceeds the limits in the shrink-wrap agreement. What are shrink-wrap agreements? Are these agreements always enforced? Under what circumstances is a court likely to enforce this agreement? ANSWER: A shrink-wrap agreement is an agreement whose terms are expressed inside a package that contains computer hardware or software. The terms usually focus on warranties, remedies, or other issues related to the product’s use. Shrink-wrap agreements have not always been enforced. The most important consideration is the time at which the manufacturer communicates the terms to the end-user. A court is likely to enforce such an agreement if a buyer has an opportunity to read the agreement before using the product. These agreements are enforced partly because from a business perspective, it is more practical to enclose the full terms of a sale in a package rather than, for example, to read them over a phone while taking an order for a product. Such an agreement might not be enforced, however, if a court reasons that a buyer learned of the terms after the parties made their contract, and the buyer did not then agree to the terms. On this basis, the terms would be proposals for addition to the contract, which would require the buyer’s express assent. PAGE: 235 NAT: AACSB Technology

TYPE: = AICPA Decision Modeling

Chapter 12 Consideration N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

In contract law, “consideration” refers to the courtesy that one party shows another in negotiating a deal. ANSWER: F NAT: AACSB Analytic

A2.

243 AICPA Legal

TYPE:

For consideration to have “legally sufficient value,” it must consist of goods or money. ANSWER: F NAT: AACSB Analytic

A3.

PAGE:

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TYPE:

A promise by one party to pay another for refraining from an act is enforceable. ANSWER: T NAT: AACSB Reflective

PAGE:

243 AICPA Legal

TYPE:

138 A4.

TEST BANK A—UNIT THREE: CONTRACTS AND E-CONTRACTS

Use of the word consideration in an agreement means that consideration has been given. ANSWER: F NAT: AACSB Reflective

PAGE:

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TYPE:

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A5.

A transaction that lacks a bargained-for exchange lacks an element of consideration. ANSWER: T NAT: AACSB Analytic

A6.

PAGE:

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PAGE:

245 AICPA Legal

TYPE:

Courts typically consider the adequacy of consideration. ANSWER: F NAT: AACSB Analytic

A9.

TYPE:

Inadequate consideration may indicate undue influence. ANSWER: T NAT: AACSB Analytic

A8.

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Parties are not generally free to bargain as they wish. ANSWER: F NAT: AACSB Analytic

A7.

PAGE:

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Risks ordinarily assumed in business do not constitute consideration for the modification of a contract. ANSWER: T NAT: AACSB Analytic

PAGE:

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TYPE:

A10. Rescission is the dissolution of a contract that returns the parties to the positions they held before the contract. ANSWER: T NAT: AACSB Analytic

PAGE:

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TYPE:

A11. Two parties can mutually agree to rescind a contract unless it is executory. ANSWER: F NAT: AACSB Analytic

PAGE:

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TYPE:

140

TEST BANK A—UNIT THREE: CONTRACTS AND E-CONTRACTS

A12. A promise to do what one already has a legal duty to do is legally sufficient consideration. ANSWER: F NAT: AACSB Analytic

PAGE:

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TYPE:

141

CHAPTER 12: CONSIDERATION

A13. A promise to pay for an act that has yet to occur is unenforceable. ANSWER: F NAT: AACSB Analytic

PAGE:

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TYPE:

A14. An illusory promise is a promise that is enforceable without consideration. ANSWER: F NAT: AACSB Analytic

PAGE:

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TYPE:

A15. A contract that one party retains the exclusive right to cancel at any time is unenforceable. ANSWER: T NAT: AACSB Analytic

PAGE:

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TYPE:

A16. If a debt is liquidated, an accord and satisfaction cannot take place. ANSWER: T NAT: AACSB Reflective

PAGE:

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TYPE:

A17. A release does not require consideration to be legally binding. ANSWER: F NAT: AACSB Analytic

PAGE:

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TYPE:

A18. A covenant not to sue is against public policy. ANSWER: F NAT: AACSB Analytic

PAGE:

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A19. The doctrine of promissory estoppel does not apply if there is a clear and definite promise. ANSWER: F NAT: AACSB Analytic

PAGE:

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TYPE:

A20. A promise to pay a debt for which a statute of limitations bars recovery is an enforceable promise. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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ANSWER: T NAT: AACSB Reflective

PAGE:

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TYPE:

143

CHAPTER 12: CONSIDERATION

MULTIPLE CHOICE QUESTIONS A1.

Kelsey promises to pay Jon, her son, $15,000 if he obtains his degree at Ivy University, where he is currently in his second year. Jon graduates. Kelsey is a. b. c. d.

not required to pay, because Jon was already at Ivy. not required to pay, because obtaining a degree benefits Jon. required to pay, because a job can be hard to find after college. required to pay, because Jon obtained a degree at Ivy.

ANSWER: D NAT: AACSB Reflective A2.

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TYPE:

Jen questions whether there is consideration for her contract with Isaac to exchange her catering services for his payment of a certain amount. To constitute consideration, the value of whatever is exchanged must be a. b. c. d.

objectively worthy. grossly inadequate. legally sufficient. practically sound.

ANSWER: C NAT: AACSB Reflective A3.

PAGE:

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TYPE:

Vince offers to buy a book owned by Sun-Hi for twice what Sun-Hi paid for it. She accepts and hands the book to Vince. Sun-Hi’s delivery of the book is a. b. c. d.

not consideration because its transfer is a preexisting duty. not consideration because its exchange is not a bargain. consideration. not consideration because its value is legally insufficient.

ANSWER: C NAT: AACSB Reflective

PAGE:

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TYPE:

144

TEST BANK A—UNIT THREE: CONTRACTS AND E-CONTRACTS

Fact Pattern 12-A1 (Questions A4–A6 apply) Jesse defends against a breach-of-contract suit by College Credit Corporation by claiming that their deal—a student loan accruing interest at a certain rate and payable beginning on a certain date—was unfair because the consideration for their contract was inadequate. A4.

Refer to Fact Pattern 12-A1. A court is most likely to evaluate the adequacy of consideration if a. b. c. d.

a thing exchanged has no intangible value to one of the parties. something exchanged is not of direct economic or financial value. the items exchanged were of unequal value. there is a gross disparity in the value of the consideration exchanged.

ANSWER: D NAT: AACSB Analytic A5.

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TYPE:

Refer to Fact Pattern 12-A1. “Adequacy” of consideration refers to a. b. c. d.

“how much” consideration is given. legally sufficient value in the eyes of the law. the intangible value to a contracting party of a thing exchanged. the substantiality of the consideration exchanged.

ANSWER: A NAT: AACSB Analytic A6.

PAGE:

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TYPE:

Refer to Fact Pattern 12-A1. If, as Jesse claims, the consideration in this problem is inadequate, it may indicate a lack of a. b. c. d.

accord in Jesse’s satisfaction with the value of the deal. bargained-for exchange or mutual assent. flexibility on the part of College Credit to accommodate Jesse’s needs. “heft,” “substance,” or “weight” in the terms of the contract.

ANSWER: B NAT: AACSB Reflective

PAGE:

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TYPE:

CHAPTER 12: CONSIDERATION

145

146 A7.

TEST BANK A—UNIT THREE: CONTRACTS AND E-CONTRACTS

Under a contract with Bucolic Farms, Agro Excavation, Inc., begins digging an agricultural pond. In mid-project, Agro asks for $15,000 over the contract price, claiming an increase in the “cost of doing business.” Bucolic agrees but later refuses to pay. Their agreement is a. b. c. d.

unenforceable because Agro’s performance was a preexisting duty. unenforceable because Bucolic’s promise was illusory. enforceable. unenforceable because its performance is unforeseeably difficult.

ANSWER: A NAT: AACSB Reflective

PAGE:

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TYPE:

Fact Pattern 12-A2 (Questions A8–A10 apply) Cut-Rate Construction Company (CCC) begins building a restaurant for Diners Restaurants, Inc., but after two months demands an extra $100,000. Diners agrees to pay. A8.

Refer to Fact Pattern 12-A2. If CCC offers no reason for the extra $100,000, but says only that it will otherwise stop construction, the agreement is a. b. c. d.

enforceable as an accord and satisfaction. enforceable because of unforeseen difficulties. unenforceable as an illusory promise. unenforceable due to the preexisting duty rule.

ANSWER: D NAT: AACSB Reflective A9.

PAGE:

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TYPE:

Refer to Fact Pattern 12-A2. If CCC offers, as a reason for the extra $100,000, that ordinary business expenses have increased, the agreement is a. b. c. d.

enforceable as an accord and satisfaction. enforceable because of unforeseen difficulties. unenforceable as an illusory promise. unenforceable due to the preexisting duty rule.

ANSWER:

PAGE:

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TYPE:

147

CHAPTER 12: CONSIDERATION

NAT: AACSB Reflective

AICPA Legal

A10. Refer to Fact Pattern 12-A2. If CCC offers, as a reason for the extra $100,000, that extraordinary unforeseen difficulties will add considerable cost to the project, the agreement is a. b. c. d.

enforceable as an accord and satisfaction. enforceable because of unforeseen difficulties. unenforceable as an illusory promise. unenforceable due to the preexisting duty rule.

ANSWER: B NAT: AACSB Reflective

PAGE:

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TYPE:

A11. Panini Vittles, Inc., contracts with Qino to deliver its sandwiches. Later, the parties decide to cancel their contract. They can a. b. c. d.

rescind their entire contract. rescind their contract to the extent that it is executory. rescind their contract if they make a new contract at the same time. not rescind their contract.

ANSWER: B NAT: AACSB Reflective

PAGE:

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TYPE:

A12. Mary promises to pay her assistant Ned $10,000 in consideration of the services he provided over the years. Mary never pays Ned. Mary is a. b. c. d.

liable for payment of the $10,000. liable only if Ned still works for Mary. not liable, because the consideration is in the past. not liable, because the consideration was unintentional.

ANSWER: C NAT: AACSB Reflective

PAGE:

246 AICPA Legal

TYPE:

A13. Homebuyers Mortgage Corporation’s promise to pay its employees a yearend bonus “if it seems like a good idea at the time” is a.

an enforceable contract.

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TEST BANK A—UNIT THREE: CONTRACTS AND E-CONTRACTS

b. c. d.

an illusory promise. an unconscionable proviso. a unilateral pact.

ANSWER: B NAT: AACSB Reflective

PAGE:

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TYPE:

149

CHAPTER 12: CONSIDERATION

A14. Domestic Auto Sales, Inc., promises its salaried employees a bonus at the end of the year if management thinks it is warranted. This promise is a. b. c. d.

enforceable. unenforceable because it is not supported by consideration. unenforceable because the dollar amount is missing. unenforceable because the employees are paid salaries.

ANSWER: B NAT: AACSB Reflective

PAGE:

248 AICPA Legal

TYPE:

A15. Herm promises to pay Nixie to work as an assistant buyer for his Organic Foods stores. Nixie agrees and quits her job with Pic-U Grocery, but Herm does not hire her. Herm is most likely liable to Nixie under a. b. c. d.

the concept of accord and satisfaction. the doctrine of promissory estoppel. the preexisting duty rule. no circumstances.

ANSWER: B NAT: AACSB Reflective

PAGE:

249 AICPA Legal

TYPE:

A16. Cherry is injured in an accident caused by Bronco. Bronco agrees to pay Cherry $2,500 if she agrees to release him from further liability. Cherry agrees. If Cherry’s damages ultimately exceed $2,500, she can a. b. c. d.

collect the balance from Bronco in a breach-of-contract suit. collect the balance from Bronco in a tort suit. collect the balance from Bronco on the ground of unforeseen events. not collect the balance from Bronco.

ANSWER: D NAT: AACSB Reflective

PAGE:

249 AICPA Legal

TYPE:

150

TEST BANK A—UNIT THREE: CONTRACTS AND E-CONTRACTS

A17. Berkie’s bicycle is damaged in an accident caused by Imogene. Berkie agrees not to sue Imogene if she will pay for the damage. If she fails to pay, Berkie can bring an action for breach of contract. This is a. b. c. d.

a covenant not to sue. an accord and satisfaction. an illusory promise. a release.

ANSWER: A NAT: AACSB Reflective

PAGE:

249 AICPA Legal

TYPE:

A18. Auto Body Repair Shop (ABRS) promises to pay Ben $1,000 a week to work for ABRS. Ben accepts and quits his job with Car Care Service. ABRS fails to provide a job for Ben. Ben has a cause of action based on a. b. c. d.

an illusory promise. a release. past consideration. promissory estoppel.

ANSWER: D NAT: AACSB Reflective

PAGE:

250 AICPA Legal

TYPE:

A19. Venture Capital Corporation loans Wally $15,000 to start a new business. Wally does not pay, but Venture fails to sue within the time prescribed by the applicable statute of limitations. Wally’s promise to pay the debt even though recovery is barred a. b. c. d.

needs new consideration. needs no consideration. is unenforceable regardless of any consideration. needs legally sufficient and adequate consideration.

ANSWER: B NAT: AACSB Reflective

PAGE:

252 AICPA Legal

TYPE:

151

CHAPTER 12: CONSIDERATION

A20. Betty pledges to donate $1,000 to the Children’s Hospital. On the basis of the pledge, the hospital orders additional equipment. Betty reneges on the pledge. The hospital sues Betty. If the court enforces the pledge, it will be a. b. c. d.

because Betty’s performance is uncertain. because of the unforeseen difficulties. because the pledge is a gift. under the doctrine of promissory estoppel.

ANSWER: D NAT: AACSB Reflective

PAGE:

252 AICPA Legal

TYPE:

ESSAY QUESTIONS A1.

Flossy promises to pay her cousin Garth, who is dangerously obese, $10,000 if Garth loses 100 pounds within the next two years. Garth agrees, performs his part of the bargain, and asks for the money. Flossy refuses to pay, saying that she forgot about the deal, but that even if she did make such a pledge, there was no valid consideration for it. Garth files a suit against Flossy. In whose favor is the court likely to rule, and why? ANSWER: A court is most likely to rule against Flossy and in favor of Garth. Garth provided legally sufficient consideration by losing 100 pounds in weight over the stipulated two-year period. Generally, a waiver of a legal right—in this case, the right to eat to obesity—at the request of another party is sufficient consideration to support a promise. The promise in this question was the payment of $10,000. It does not matter whether the performance—the loss of weight—also benefited the Garth. PAGES: 243–244 NAT: AACSB Reflective

A2.

TYPE: = AICPA Decision Modeling

Real Estate Investments, Inc., owns and manages an office building. Secure Insurance Company agrees to lease the building for five years. Under the lease, Secure is obligated to pay all of the utility costs. Two years into the term, Secure asks Real Estate to modify the lease to provide that the utility costs be split equally between them. Real Estate agrees, but later decides it

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TEST BANK A—UNIT THREE: CONTRACTS AND E-CONTRACTS

does not want to share the costs and refuses to pay. Is the landlord bound to its agreement to share the utility costs? Why or why not?

CHAPTER 12: CONSIDERATION

153

ANSWER: Real Estate Investments, Inc., the landlord, is not bound to its agreement to share utility costs with Secure Insurance Company, its tenant. The agreement to split the utility costs was a modification of the original terms of the parties’ lease. Under the preexisting duty rule, a modification of a contract requires consideration to be binding. Real Estate is not bound because the landlord did not receive any consideration in exchange for the agreement to split the utility costs. PAGE: 245 NAT: AACSB Reflective

TYPE: = AICPA Decision Modeling

Chapter 13 Capacity and Legality N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

When both parties to a contract are minors, neither of them may disaffirm the contract. ANSWER: F NAT: AACSB Reflective

A2.

256 AICPA Legal

TYPE:

A minor’s right to disaffirm a contract terminates sixty days after the contract’s date. ANSWER: F NAT: AACSB Analytic

A3.

PAGE:

256 AICPA Legal

TYPE:

Contractual capacity includes the financial ability to pay for the benefits of a contract. ANSWER: F NAT: AACSB Analytic

PAGE:

256 AICPA Legal

TYPE:

150 A4.

TEST BANK A—UNIT THREE: CONTRACTS AND E-CONTRACTS

The age of majority in most states is eighteen years. ANSWER: T NAT: AACSB Analytic

PAGE:

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TYPE:

151

CHAPTER 13: CAPACITY AND LEGALITY

A5.

All contracts between adults and minors are void. ANSWER: F NAT: AACSB Analytic

A6.

PAGE:

256 AICPA Legal

TYPE:

PAGE:

257 AICPA Legal

TYPE:

Parents are always liable for the contracts made by their minor children. ANSWER: F NAT: AACSB Analytic

A9.

TYPE:

Parents are required by law to provide necessaries for their minor children. ANSWER: T NAT: AACSB Analytic

A8.

256 AICPA Legal

A minor may disaffirm a contract only if the subject matter is illegal. ANSWER: F NAT: AACSB Reflective

A7.

PAGE:

258 AICPA Legal

TYPE:

A contract is void if one of the parties was intoxicated at the time of its formation. ANSWER: F NAT: AACSB Analytic

PAGE:

258 AICPA Legal

TYPE:

A10. A contract to do something that is prohibited by statutory law is void. ANSWER: T NAT: AACSB Analytic

PAGE:

260 AICPA Legal

TYPE:

A11. A contract to commit a crime is a contract and therefore enforceable. ANSWER: F NAT: AACSB Analytic

PAGE:

260 AICPA Legal

TYPE:

A12. A party who uses the benefits of a contract before paying for them commits usury.

152

TEST BANK A—UNIT THREE: CONTRACTS AND E-CONTRACTS

ANSWER: F NAT: AACSB Reflective

PAGE:

261 AICPA Legal

TYPE:

A13. Federal law bars electronic payments, such as credit-card transactions, at online gambling sites. ANSWER: T NAT: AACSB Reflective

PAGE:

261 AICPA Legal

TYPE:

A14. Whether a contract with an unlicensed professional is enforceable depends on the purpose of the statute that requires the license. ANSWER: T NAT: AACSB Analytic

PAGE:

263 AICPA Legal

TYPE:

A15. In an employment contract, a covenant not to compete can be enforceable. ANSWER: T NAT: AACSB Reflective

PAGE:

263 AICPA Legal

TYPE:

A16. The lack of an opportunity to read a contract may be unconscionable. ANSWER: T NAT: AACSB Reflective

PAGE:

265 AICPA Legal

TYPE:

A17. An exculpatory clause in an employment contract is usually enforceable. ANSWER: F NAT: AACSB Analytic

PAGE:

268 AICPA Legal

TYPE:

A18. If an illegal contract is executory, either party can enforce it. ANSWER: F NAT: AACSB Analytic

PAGE:

269 AICPA Legal

TYPE:

A19. Portions of a divisible contract may be enforced. ANSWER: T NAT: AACSB Reflective

PAGE:

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153

CHAPTER 13: CAPACITY AND LEGALITY

A20. When a statute protects a certain class of people, a member of that class cannot enforce an otherwise illegal contract. ANSWER: F NAT: AACSB Analytic

PAGE:

270 AICPA Legal

TYPE:

154

TEST BANK A—UNIT THREE: CONTRACTS AND E-CONTRACTS

MULTIPLE CHOICE QUESTIONS A1.

Dante enters into a contract with Rosalinda, who does not have contractual capacity. Dante can enforce the contract if Rosalinda a. b. c. d.

does not choose to avoid the contract. is a minor. can obtain the funds to pay for the benefits of the contract. is intoxicated or mentally incompetent.

ANSWER: A NAT: AACSB Reflective A2.

256 AICPA Legal

TYPE:

Yvon and Zach are minors who marry each other. Their minority status may be terminated under the laws of a. b. c. d.

all states. most states. some states. no states.

ANSWER: C NAT: AACSB Reflective A3.

PAGE:

256 AICPA Legal

TYPE:

Orin relinquishes the right to his daughter Neko’s control, care, custody, and earnings. This act is a. b. c. d.

disaffirmance. emancipation. ratification. severability.

ANSWER: B NAT: AACSB Reflective

PAGE:

256 AICPA Legal

TYPE:

155

CHAPTER 13: CAPACITY AND LEGALITY

A4.

Chris, a minor, signs a contract to buy alcoholic beverages for Dine & Drink, his parents’ restaurant. The contract is a. b. c. d.

valid but may be disaffirmed. valid but may not be disaffirmed. void as a matter of law. void unless it is also signed by Ed, the manager of Dine & Drink.

ANSWER: C NAT: AACSB Reflective A5.

256 AICPA Legal

TYPE:

Olga, a minor, signs a contract to buy a computer from Phil, the owner of Quality Computer Store. Olga’s right to disaffirm the contract a. b. c. d.

does not change the fact that Phil is bound by the contract. does not yet exist because Olga is still a minor. gives Phil, an adult, the right to disaffirm the contract. is not valid because a computer is a “necessary.”

ANSWER: A NAT: AACSB Reflective A6.

PAGE:

256 AICPA Legal

TYPE:

Elmo, a minor, misrepresents his age to be twenty-one and contracts to buy a car from Fine New Autos. Ordinarily, Elmo can disaffirm the contract a. b. c. d.

only if he can prove that Fine New Autos did not know his true age. only if he can prove that Fine New Autos knew his true age. under any circumstances. under no circumstances.

ANSWER: C NAT: AACSB Reflective

PAGE:

257 AICPA Legal

TYPE:

156 A7.

TEST BANK A—UNIT THREE: CONTRACTS AND E-CONTRACTS

Jenna, a minor acting on her own, signs a contract to buy a horse and its tack from Field Equine Ranch. Later, after taking possession of the horse and tack, Jenna disaffirms the deal. She a. b. c. d.

can keep the horse and the tack. can keep the horse but not the tack. can keep the tack but not the horse. must return both the horse and the tack.

ANSWER: D NAT: AACSB Reflective A8.

257 AICPA Legal

TYPE:

Ruth, a minor, charges groceries at Sam’s Mini-Mart. Two days later, Ruth disaffirms the purchase. Ruth owes Sam’s a. b. c. d.

the reasonable value of the groceries. the retail value of the groceries. the wholesale value of the groceries. nothing.

ANSWER: A NAT: AACSB Reflective A9.

PAGE:

257 AICPA Legal

TYPE:

Jacquie signs a contract to buy a car just before reaching the age of majority. After reaching the age of majority, Jacquie does not take possession or make payments. Most courts would hold, with respect to the contract, that this is a. b. c. d.

disaffirmance. emancipation. ratification. rescission.

ANSWER: A NAT: AACSB Reflective

PAGE:

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TYPE:

157

CHAPTER 13: CAPACITY AND LEGALITY

A10. Max, a minor subject to his parents’ care and control, signs a contract to rent an apartment from Noel for one year. Before the end of the term, Max moves out. Noel sues for the rent for the rest of the term. Max can a. b. c. d.

avoid liability for the rent but not disaffirm the contract. disaffirm the contract and avoid liability for the rent. disaffirm the contract but not avoid liability for the rent. not disaffirm the contract nor avoid liability for the rent.

ANSWER: B NAT: AACSB Reflective

PAGE:

257 AICPA Legal

TYPE:

A11. Lindsey, an emergency medical technician, is called to an accident scene by Nicole and renders medical care to Marvin, a minor. Lindsey may recover the cost from a. b. c. d.

the state. Marvin. Nicole. no one.

ANSWER: B PAGE: NAT: AACSB Communication

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TYPE:

A12. On Tim’s eighteenth birthday, he decides that he no longer wants to keep a car he bought from Woody’s Autos, Inc., when he was seventeen. His right to disaffirm the deal will depend on a. b. c. d.

the car’s condition when Tim bought it. the car’s current condition. whether Tim acts within a reasonable period of time. whether Woody’s has the right to disaffirm.

ANSWER: C NAT: AACSB Reflective

PAGE:

257 AICPA Legal

TYPE:

158

TEST BANK A—UNIT THREE: CONTRACTS AND E-CONTRACTS

A13. Delia enters into, and fails to disaffirm soon after reaching the age of majority, a contract with Electronics Stores, Inc. (ESI). Later Delia attempts to disaffirm the contract. ESI files a suit against her. The court will most likely consider the contract ratified if it is a. b. c. d.

executed. exculpatory. disaffirmed. rescinded.

ANSWER: A NAT: AACSB Reflective

PAGE:

258 AICPA Legal

TYPE:

A14. Intoxicated but fully aware of the consequences, Uri agrees to a two-year cell-phone service contract with Wander Talk, Inc., at more than the average market price. This contract is a. b. c. d.

enforceable. not enforceable because contracting parties can change their minds. not enforceable because the contract clearly favors Wander Talk. not enforceable because Uri was intoxicated when he agreed to it.

ANSWER: A NAT: AACSB Reflective

PAGE:

258 AICPA Legal

TYPE:

A15. Fay is mentally incompetent but has not been so adjudged by a court. Any contract Fay enters into is a. b. c. d.

voidable if Fay has a lucid interval at the time of contracting. voidable if Fay lacks the capacity to comprehend the consequences. voidable if the other party does not realize that Fay is incompetent. unavoidable.

ANSWER: B NAT: AACSB Reflective

PAGE:

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TYPE:

159

CHAPTER 13: CAPACITY AND LEGALITY

A16. Fernando obtains a consumer loan from Greater Regional Credit Union at an interest rate that exceeds the state’s maximum. Greater Regional has a. b c. d.

created a risk for the purpose of assuming it. engaged in a restraint of trade. violated a licensing statute. committed usury.

ANSWER: D NAT: AACSB Reflective

PAGE:

261 AICPA Legal

TYPE:

A17. Jolie signs a contract with Keaton, an unlicensed physician, to perform plastic surgery—a medical procedure. This contract is enforceable by a. b. c. d.

Jolie. Jolie’s medical insurance company. Keaton. no one.

ANSWER: D NAT: AACSB Reflective

PAGE:

263 AICPA Legal

TYPE:

A18. Brasilia, a real estate broker licensed only in Connecticut, concludes a land sale in Delaware. She can a. b. c. d.

collect the commission if it has not been paid. keep the commission if it has already been paid. foreclose on the property to obtain any unpaid amount. not collect the commission, keep it, or foreclose on the property.

ANSWER: D NAT: AACSB Reflective

PAGE:

263 AICPA Legal

TYPE:

160

TEST BANK A—UNIT THREE: CONTRACTS AND E-CONTRACTS

A19. Cross-Country Trucking Company contracts with Baldwin to transport crated goods to a certain destination for $5,000. Cross-Country delivers the crates, but Baldwin does not pay. Cross-Country learns that the crates contained stolen goods. Cross-Country can a. b. c. d.

do nothing with respect to the contract. recover $5,000 from Baldwin. recover the goods but not the $5,000 from Baldwin. recover the goods or the $5,000 from Baldwin.

ANSWER: B NAT: AACSB Reflective

PAGE:

269 AICPA Legal

TYPE:

A20. Smitty enters into an illegal bargain with Taylor. Smitty can enforce the contract or recover for its value if he has been induced to enter into the bargain as a result of a. b. c. d.

fraud. his desire to obtain the object of the deal. a persuasive “sell” by Taylor. his belief that Taylor would do right by him.

ANSWER: A NAT: AACSB Reflective

PAGE:

270 AICPA Legal

TYPE:

ESSAY QUESTIONS A1.

In State X, persons must be at least eighteen years old before they can purchase alcoholic beverages. The state also has passed a law requiring that persons who prepare and serve liquor in the form of drinks in commercial establishments be licensed. The only requirement for obtaining a yearly license is that the person be at least eighteen years old. Moffitt, aged thirty-five, is hired as a bartender for the Lone Star Restaurant. Bekins, a staunch alumnus of a nearby university, brings twenty of his friends to the restaurant to celebrate a football victory. Bekins has ordered four rounds of drinks, and the bar bill exceeds $200. Bekins learns that Moffitt has failed to renew his bartender’s license, and Bekins refuses to pay, claiming the contract is unenforceable. Is Bekins correct?

CHAPTER 13: CAPACITY AND LEGALITY

161

ANSWER: Contracts made with unlicensed persons may or may not be enforceable. There are basically two types of licensing statutes: those considered regulatory (designed to protect the public welfare from unauthorized and unqualified practitioners) and those whose underlying purpose is to raise revenues or whose control of practice is not tied to specific, required skills. Under the statutes declared regulatory, contracts made with an unlicensed person are illegal and unenforceable. For statutes declared other than regulatory, contracts are enforceable. In some cases, the statute itself expressly bars enforcement of contracts made with an unlicensed person. These statutes are obviously regulatory. For all other statutes, the courts will look to the underlying purpose of the requirement of the license. In this case, it appears that the license requirement is not tied to any skill necessary for the protection of the welfare of society. The only requirement is that the person be age eighteen, but this is also the requirement for any person to be able to purchase liquors dispensed. Therefore, most courts would enforce the contract for the bar bill that Bekins owes but would rule Moffitt guilty of a misdemeanor. PAGE: 263 NAT: AACSB Reflective A2.

TYPE: = AICPA Decision Modeling

Baby Products, Inc., hires Cole to develop and implement an e-commerce strategy for marketing Baby’s products. Cole signs a contract that includes a clause prohibiting him from competing with Baby during and after the employment. Before the strategy is implemented, Cole resigns from Baby’s employ and opens a business to compete with Baby. In Baby’s suit against Cole, to determine whether Cole may compete with Baby, what is the most important factor the court should consider? ANSWER: In determining whether Cole may compete with Baby, the court should consider, most importantly, whether the covenant not to compete is necessary to protect Baby’s legitimate business interests. A covenant not to compete can violate the public policy to promote competition in the economy. If so, it would be an unreasonable restraint of trade. To be enforceable, a covenant not to compete should be ancillary to an otherwise enforceable contract, which, in this question, is the employment contract. A covenant not to compete should contain reasonable restrictions in terms of duration and geographic area. The covenant should not

162

TEST BANK A—UNIT THREE: CONTRACTS AND E-CONTRACTS

unreasonably burden the party who is prohibited from competing. If the restrictions are unreasonable, a court can void the covenant. Whether a party resigns under an employment contract does not affect the enforceability of a covenant not to compete. PAGES: 263–265 NAT: AACSB Reflective

TYPE: = AICPA Decision Modeling

Chapter 14 Mistakes, Fraud, and Voluntary Consent N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

If the parties to a contract attach materially different meanings to a contract term, the contract cannot be rescinded. ANSWER: F NAT: AACSB Reflective

A2.

274 AICPA Legal

TYPE:

A contract is always enforceable even if one party is aware that the other party made a mistake of fact. ANSWER: F NAT: AACSB Analytic

A3.

PAGE:

276 AICPA Legal

TYPE:

If a price quotation contains a mistake in the adding of a number of figures, the contract may not be enforceable. ANSWER: T NAT: AACSB Reflective

PAGE:

276 AICPA Legal

TYPE:

162

TEST BANK A: UNIT THREE: CONTRACTS AND E-CONTRACTS

163

CHAPTER 14: MISTAKES, FRAUD, AND VOLUNTARY CONSENT

A4.

A mistake of fact cannot be unilateral. ANSWER: F NAT: AACSB Reflective

A5.

PAGE:

277 AICPA Legal

TYPE:

PAGE:

277 AICPA Legal

TYPE:

PAGE:

277 AICPA Legal

TYPE:

A statement of opinion is generally subject to a claim of fraud. ANSWER: F NAT: AACSB Analytic

A9.

Misrepresentation of a material fact is an element of fraud. ANSWER: T NAT: AACSB Analytic

A8.

TYPE:

An innocent party can enforce a fraudulent contract. ANSWER: T NAT: AACSB Analytic

A7.

276 AICPA Legal

Overestimating the value of an object is a mistake for which a court will normally provide relief. ANSWER: F NAT: AACSB Reflective

A6.

PAGE:

277 AICPA Legal

TYPE:

Reliance on a non-expert’s statement of opinion will not normally entitle a party to relief. ANSWER: T NAT: AACSB Reflective

PAGE:

277 AICPA Legal

TYPE:

A10. Reformation is a remedy in which the terms of a contract are altered to reflect the true intentions of the parties. ANSWER: T NAT: AACSB Analytic

PAGE:

278 AICPA Legal

TYPE:

164

TEST BANK A: UNIT THREE: CONTRACTS AND E-CONTRACTS

A11. An expert’s false statement to a naive buyer about a technical detail will not usually entitle the buyer to rescind a contract. ANSWER: F NAT: AACSB Reflective

PAGE:

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TYPE:

A12. Misrepresentation of a material fact cannot occur through words alone. ANSWER: F NAT: AACSB Reflective

PAGE:

278 AICPA Legal

TYPE:

A13. Misrepresentation of a material fact cannot occur through conduct alone. ANSWER: F NAT: AACSB Analytic

PAGE:

278 AICPA Legal

TYPE:

280 AICPA Legal

TYPE:

A14. Intent to deceive is an element of fraud. ANSWER: T NAT: AACSB Analytic A15. In effect, negligent misrepresentation.

PAGE:

misrepresentation

ANSWER: T NAT: AACSB Analytic

PAGE:

treated

281 AICPA Legal

as TYPE:

fraudulent N

A16. Reliance on a misrepresentation is justified if the misrepresentation is an obviously extravagant statement. ANSWER: F NAT: AACSB Analytic

PAGE:

281 AICPA Legal

TYPE:

A17. To rescind a contract for fraud, a plaintiff must prove an injury. ANSWER: F NAT: AACSB Analytic

PAGE:

282 AICPA Legal

TYPE:

165

CHAPTER 14: MISTAKES, FRAUD, AND VOLUNTARY CONSENT

A18. Forcing someone to enter into a contract through fear created by threats is duress. ANSWER: T NAT: AACSB Analytic

PAGE:

283 AICPA Legal

TYPE:

A19. Economic need generally is sufficient to constitute duress. ANSWER: F NAT: AACSB Reflective

PAGE:

284 AICPA Legal

A20. A contract written exclusively by one party and presented to the other party on a take-it-or-leave-it basis is an adhesion contract. ANSWER: T NAT: AACSB Analytic

PAGE:

284 AICPA Legal

TYPE:

MULTIPLE CHOICE QUESTIONS A1.

Jill and Karl contract for the sale of Jill’s horse for $1,000. Unknown to either party, the horse has died. Karl is a. b. c. d.

entitled to another horse of equivalent value. not required to pay due to the mutual mistake. not required to pay due to the unilateral mistake. required to pay because she assumed the risk the horse might die.

ANSWER: B NAT: AACSB Reflective

PAGE:

274 AICPA Legal

TYPE:

Fact Pattern 14-A1 (Questions A2-A3 apply) Linea, an employee of Hard Labor Industries (HLI), is injured in a work-related accident. Based on the diagnosis of Newt, a doctor, Linea accepts $50,000 from HLI and waives the right to future claims. Newt’s diagnosis later proves to have been wrong. A2.

Refer to Fact Pattern 14-A1. In terms of the impact on Linea’s agreement with HLI, Newt’s misdiagnosis is

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TEST BANK A: UNIT THREE: CONTRACTS AND E-CONTRACTS

a. b. c. d.

a mistake of fact. an expert’s puffery. innocent misrepresentation. negligent misrepresentation.

ANSWER: A NAT: AACSB Reflective

PAGE:

274 AICPA Legal

TYPE:

167

CHAPTER 14: MISTAKES, FRAUD, AND VOLUNTARY CONSENT

A3.

Refer to Fact Pattern 14-A1. Most likely, Linea may a. b. c. d.

obtain damages from HLI. obtain damages from Newt. recover nothing. set aside the settlement with HLI.

ANSWER: D NAT: AACSB Reflective A4.

PAGE:

274 AICPA Legal

TYPE:

Danton, a popular performer, dies. His spouse Caitlin sells their house to Buck. Unknown to Caitlin or Buck, in one of the closets is the master recording of an unreleased album. With respect to this recording, Buck can a. b. c. d.

keep it because Caitlin should have known about it. keep it because the sale of a house includes everything in it. not keep it because there was no voluntary consent to its sale. not keep it because the sale of a house includes nothing in it.

ANSWER: C NAT: AACSB Reflective

PAGE:

274 AICPA Legal

TYPE:

Fact Pattern 14-A2 (Questions A5–A6 apply) Moore Properties, Inc., offers in writing to sell to New Development Corporation (NDC) a certain half-acre of land for “$112,000.” After New Development signs the offer in acceptance and returns it, Moore discovers that the price should have been stated as “$121,000.” A5.

Refer to Fact Pattern 14-A2. Moore’s misstatement of the price is a. b. c. d.

a bilateral mistake. a fraudulent misrepresentation. a unilateral mistake. unconscionable.

ANSWER: C NAT: AACSB Reflective

PAGE:

276 AICPA Legal

TYPE:

168 A6.

TEST BANK A: UNIT THREE: CONTRACTS AND E-CONTRACTS

Refer to Fact Pattern 14-A2. The effect of Moore’s misstatement of the price will most likely fall on a. b. c. d.

Moore and NDC, who must split the difference. Moore only. NDC only. neither Moore nor NDC.

ANSWER: B NAT: AACSB Reflective A7.

276 AICPA Legal

TYPE:

Crosscreek County and Bridgework Corporation enter into a construction contract that includes mathematical specifications. Later Crosscreek, whose engineer, Damon, compiled the specs, learns that some of the dollar figures are incorrect. Bridgework refuses to agree to changes. A court would most likely a. b. c. d.

award damages to both parties for the mistakes. order Damon to be discharged for fraud. enforce the contract without requiring changes. reform the contract to reflect the figures accurately.

ANSWER: D NAT: AACSB Reflective A8.

PAGE:

276 AICPA Legal

TYPE:

Sylvia creates a profile for Today’s Date, Inc., an online dating service. She exaggerates her appealing features and posts a photo of her friend Uva, whom Sylvia thinks is prettier. Enticed by the profile, Van subscribes to the service so that he can contact Sylvia. Van is most likely a victim of a. b. c. d.

undue influence. fraud. mistake. nothing.

ANSWER: B NAT: AACSB Reflective

PAGE:

277 AICPA Legal

TYPE:

169

CHAPTER 14: MISTAKES, FRAUD, AND VOLUNTARY CONSENT

A9.

May is a stockbroker. Due to May’s statements, Nora believes that the price of OK Goods, Inc. (OKGI), a widely traded stock, is going to increase substantially. Nora buys 500 shares of OKGI at $10 per share, but the price soon drops to $2. Nora can successfully recover a. b. c. d.

nothing. the amount of the purchase price. the amount of the purchase price plus the expected increase. the amount of the purchase price plus the unexpected decrease.

ANSWER: A NAT: AACSB Reflective

PAGE:

277 AICPA Legal

TYPE:

A10. Gina induces Hu to enter into a contract for the purchase of a condominium about which Gina knowingly misrepresents a number of material features. When Hu discovers the truth, Hu can a. b. c. d.

not rescind the contract. rescind the contract on the basis of fraud. rescind the contract on the basis of mistake. rescind the contract on the basis of undue influence.

ANSWER: B NAT: AACSB Reflective

PAGE:

277 AICPA Legal

TYPE:

A11. In selling paving stones to Yard & Garden Supply, Trey tells Yard & Garden’s buying representative that the stones are “soft as carpet.” This is a. b. c. d.

adhesion. fraud. mistake. puffery.

ANSWER: D NAT: AACSB Reflective

PAGE:

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TYPE:

170

TEST BANK A: UNIT THREE: CONTRACTS AND E-CONTRACTS

A12. Olin, a professional artist and art teacher, convinces Plato, who has no artistic ability, that he has considerable talent and induces him to pay Olin $10,000 for art lessons. When Plato realizes the truth, he files a suit against Olin. Plato is most likely to recover on the basis of a. b. c. d.

fraud. mistake. undue influence. none of the choices.

ANSWER: A NAT: AACSB Reflective

PAGE:

278 AICPA Legal

TYPE:

A13. Bret is convicted of arson for burning down his warehouse to collect the insurance. On an application for insurance from Cover-All Insurance Company on a new building, in answer to a question about prior convictions, Bret does not disclose his conviction. This makes the contract a. b. c. d.

binding because the omission is immaterial to Cover-All’s decision to issue coverage. binding due to Cover-All’s failure to discover Bret’s conviction. voidable by Bret because the omission is immaterial to Cover-All’s decision to issue coverage. voidable by Cover-All because the omission is material to its decision to issue coverage.

ANSWER: D NAT: AACSB Reflective

PAGE:

278 AICPA Legal

TYPE:

A14. Nero makes an honest but erroneous statement that misrepresents a material fact in a contractual transaction with Odell. Nero is guilty of a. b. c. d.

a unilateral mistake. duress. fraud. innocent misrepresentation.

ANSWER: D NAT: AACSB Reflective

PAGE:

280 AICPA Legal

TYPE:

CHAPTER 14: MISTAKES, FRAUD, AND VOLUNTARY CONSENT

171

172

TEST BANK A: UNIT THREE: CONTRACTS AND E-CONTRACTS

A15. Veronica offers to sell Rowena her luxury sedan and says that it has never been in an accident. Rowena hires Laszlo, a mechanic, to appraise the vehicle. Laszlo says that it most likely has been in an accident. In spite of this information, Rowena buys the car. Later, when it develops mechanical problems, she can a. b. c. d.

not rescind the contract. rescind the contract on the basis of fraud. rescind the contract on the basis of mistake. rescind the contract on the basis of unconscionability.

ANSWER: A NAT: AACSB Reflective

PAGE:

281 AICPA Legal

TYPE:

Fact Pattern 14-A3 (Questions A16–A17 apply) Flip, an accountant, certifies an audit for Erstwhile Corporation, Flip’s client, knowing that Erstwhile will use the audit to obtain a loan from Deepwater Bank. Flip believes that the audit is true and does not intend to deceive the bank, but does not check the audit before certifying it. A16. Refer to Fact Pattern 14-A3. On learning the truth, Deepwater’s chief loan officer confronts Flip, who says, “I didn’t know.” This is a. b. c. d.

a mistake of value. innocent misrepresentation. negligent misrepresentation. unconscionable.

ANSWER: C NAT: AACSB Reflective

PAGE:

281 AICPA Legal

TYPE:

A17. Refer to Fact Pattern 14-A3. Under these circumstances, Deepwater’s best course of action is most likely to a. b. c. d.

exert economic duress on Flip to retire from accounting. rescind the loan on the ground of unconscionability. recover damages from Flip for any loss on the loan. undercut Flip’s career with negative puffery.

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ANSWER: C NAT: AACSB Reflective

PAGE:

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TYPE:

A18. Cartier, an accountant, convinces his client Bianca to sign a contract to invest her savings in a nonexistent social-networking Web site. When Bianca learns the truth, she can a. b. c. d.

impose her own scam on Cartier without liability. induce Cartier to give her his other clients’ funds without recourse. rescind the contract to invest in the Web site. sabotage Cartier’s career in any way possible.

ANSWER: C NAT: AACSB Reflective

PAGE:

283 AICPA Legal

TYPE:

A19. Gary threatens physical harm to force Hugh to sell his business, Imports from Asia, Inc., to Gary for a below-market price. This is a. b. c. d.

duress. fraud. puffery. undue influence.

ANSWER: A NAT: AACSB Reflective

PAGE:

283 AICPA Legal

TYPE:

A20. Sam uses duress to force Tanya to agree to pay him for protecting her retail store—Tanya’s Trends—against vandalism and destruction. Tanya may a. b. c. d.

avoid the contract or choose to carry it out. do nothing once she has agreed to pay. recover from her insurer for the cost recover from the local police for a failure to protect her store.

ANSWER: A NAT: AACSB Reflective

PAGE:

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TYPE:

174

A1.

TEST BANK A: UNIT THREE: CONTRACTS AND E-CONTRACTS

Alpha Investments, Inc., offers to buy Beta Computer Corporation. On May 1, Beta gives Alpha copies of Beta’s financial statements for the previous year. The statements show an inventory of $1 million. On May 15, Beta discovers that the previous year’s inventory is overstated by $500,000, but does not inform Alpha. On June 1, Alpha, relying on the financial statements, buys Beta. On June 10, Alpha discovers the inventory overstatement. Can Alpha succeed in a suit against Beta for fraud? ANSWER: Yes, Alpha can succeed in a suit against Beta for fraud, because Beta had a duty to disclose that the inventory was overstated as soon as Beta learned of that fact. Ordinarily, no party to a contract has a duty to come forward and disclose facts. Each party is responsible for the use of common sense and normal business sense in negotiating a contract. An action for fraud can be based on a failure to disclose material facts if there is a certain relationship between the parties such as between partners in a partnership or a party could not reasonably discover a fact known to the other party. An action may also be maintained if, as here, a party who misstates a material fact later learns of the misstatement. The elements of an action for fraud are (1) the misrepresentation of a material fact, (2) the intent to deceive, and (3) the innocent party’s justifiable reliance on the misrepresentation. Here, by providing financial statements, Beta made certain representations. Those representations were false, however, as Beta learned. Beta’s knowledge of the overstated inventory and failure to disclose this to Alpha evidenced intent to deceive. Alpha’s reliance on Beta’s statements was reasonable and justifiable. PAGES: 278–280 NAT: AACSB Reflective

A2.

TYPE: = AICPA Decision Modeling

Eagle Properties, a real estate investment and sales firm, presents a form contract to its customer Floyd, who wants to buy a certain quarter acre of land in a proposed housing subdivision that Eagle is marketing. Eagle does not pressure Floyd to sign a contract, but offers its form on a take-it-orleave basis. If Floyd signs the form, is it enforceable? ANSWER: Possibly, but not under all circumstances. This standard form contract is not enforceable if enforcement would be unfair or oppressive. A standard form contract is often an adhesion contract, which may not be

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175

enforced if the adhering party—the buyer in this situation—shows that the parties were in substantially unequal bargaining positions and enforcement would be unfair or oppressive. Such a contract may be avoided on grounds of fraud, undue influence, duress, or unconscionability. Unconscionability is the most likely possibility in this question because the seller did not pressure its customer to sign the contract. PAGE: 284 NAT: AACSB Reflective

TYPE: = AICPA Decision Modeling

Chapter 15 The Statute of Frauds— Writing Requirement and Electronic Records N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

Under the Statute of Frauds, any contract that is not in writing is void. ANSWER: F NAT: AACSB Analytic

A2.

289 AICPA Legal

TYPE:

The Statute of Frauds requires that statutes must be in writing. ANSWER: F NAT: AACSB Analytic

A3.

PAGE:

289 AICPA Legal

TYPE:

A contract involving property of any kind must be in writing to be enforceable. ANSWER:

PAGE:

290

TYPE:

174

TEST BANK A: UNIT THREE: CONTRACTS AND E-CONTRACTS

NAT: AACSB Analytic

AICPA Legal

175

CHAPTER 15: THE STATUTE OF FRAUDS

A4.

A contract involving a lease is the only contract relating to an interest in land that must be in writing to be enforceable. ANSWER: F NAT: AACSB Reflective

A5.

PAGE:

290 AICPA Legal

TYPE:

PAGE:

291 AICPA Legal

TYPE:

PAGE:

291 AICPA Legal

TYPE:

If a contract to do something in certain intervals over a period of less than one year is not in writing, it is not enforceable. ANSWER: F NAT: AACSB Analytic

A9.

A contract may have to be in writing to be enforceable even if its performance is possible within a year. ANSWER: T NAT: AACSB Analytic

A8.

TYPE:

A contract that by its own terms cannot be performed within a year must be in writing to be enforceable. ANSWER: T NAT: AACSB Analytic

A7.

290 AICPA Legal

An oral contract for a transfer of an interest in land is never enforceable. ANSWER: F NAT: AACSB Reflective

A6.

PAGE:

291 AICPA Legal

TYPE:

A contract must be in writing to be enforceable if performance is impossible within one year. ANSWER: T NAT: AACSB Analytic

PAGE:

291 AICPA Legal

TYPE:

A10. All collateral promises must be in writing to be enforceable. ANSWER: F NAT: AACSB Analytic

PAGE:

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TYPE:

176

TEST BANK A: UNIT THREE: CONTRACTS AND E-CONTRACTS

A11. A party’s oral agreement to pay another’s debt is never enforceable. ANSWER: F NAT: AACSB Reflective

PAGE:

292 AICPA Legal

TYPE:

177

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A12. To be enforceable, a contract for a sale of goods priced at $50 or more must be in writing. ANSWER: F NAT: AACSB Analytic

PAGE:

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TYPE:

A13. An oral contract for a sale of land may be enforceable if the contract has been partially performed. ANSWER: T NAT: AACSB Analytic

PAGE:

293 AICPA Legal

TYPE:

A14. There are no exceptions to the Statute of Frauds. ANSWER: F NAT: AACSB Analytic

PAGE:

293 AICPA Legal

A15. An oral contract that must be in writing to be enforceable is not enforceable even if the parties admit to its existence in court. ANSWER: F NAT: AACSB Analytic

PAGE:

295 AICPA Legal

TYPE:

A16. To be enforceable, a memorandum evidencing an oral contract that would otherwise be unenforceable must include the essential terms. ANSWER: T NAT: AACSB Analytic

PAGE:

296 AICPA Legal

TYPE:

A17. Evidence of prior agreements that differ from the written terms of a contract can be introduced in court to alter the contract. ANSWER: F NAT: AACSB Analytic

PAGE:

297 AICPA Legal

TYPE:

A18. Parol evidence includes testimony of communications between the parties that is not contained in the contract itself. ANSWER:

PAGE:

297

TYPE:

178

TEST BANK A: UNIT THREE: CONTRACTS AND E-CONTRACTS

NAT: AACSB Analytic

AICPA Legal

179

CHAPTER 15: THE STATUTE OF FRAUDS

A19. Oral evidence to “fill in the gaps” of a contract with incomplete terms can be introduced at a trial. ANSWER: T NAT: AACSB Analytic

PAGE:

297 AICPA Legal

TYPE:

A20. An integrated contract is a contract with more than one subject or part. ANSWER: F NAT: AACSB Analytic

PAGE:

300 AICPA Legal

TYPE:

MULTIPLE CHOICE QUESTIONS A1.

Lyra induces Moe to enter into a contract for the sale of an apartment about which Lyra fraudulently misrepresents a number of material facts. Lyra tells Moe that her commission is 6 percent, but their signed, written contract states “12 percent.” The Statute of Frauds governs a. b. c. d.

contracts that are induced by fraud. contracts that must be in writing to be enforceable. the admissibility in court of oral evidence. the reformation of oral and written statements into one contract.

ANSWER: B PAGE: NAT: AACSB Reflective A2.

289 AICPA Legal

TYPE:

Grandiloquent Properties, Inc., and Investment Capital Corporation enter into a contract for a sale of land. To be enforceable, the contract must be in writing if the land is valued at a. b. c. d.

more than $500. more than $5,000. more than $50,000. any price.

ANSWER: D NAT: AACSB Reflective

PAGE:

289 AICPA Legal

TYPE:

180 A3.

TEST BANK A: UNIT THREE: CONTRACTS AND E-CONTRACTS

Timber Farms, Inc., and Wood Products Corporation enter into an oral contract for the sale of a lumber mill and the land on which it is situated from Timber to Wood. Under the Statute of Frauds, this contract is enforceable by a. b. c. d.

the seller. the buyer. any interested third party, such as the mortgagee or title company. none of the choices.

ANSWER: D NAT: AACSB Reflective A4.

291 AICPA Legal

TYPE:

Kirk Custodial Service and Green Energy Company enter into an oral contract under which Kirk agrees to provide custodial service for Green’s facilities for two years. This contract is enforceable by a. b. c. d.

Kirk. Green. any interested third party, such as a janitorial supplies provider. none of the choices.

ANSWER: D NAT: AACSB Reflective A5.

PAGE:

291 AICPA Legal

TYPE:

Garden & Yard Landscaping and Penelope enter into an oral contract under which she agrees to work on a Garden & Yard project on Valley Country Club’s golf course for sixteen months. This contract is enforceable by a. b. c. d.

Garden & Yard. Penelope. any interested third party, such as Valley Country Club. none of the choices.

ANSWER: D NAT: AACSB Reflective

PAGE:

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TYPE:

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CHAPTER 15: THE STATUTE OF FRAUDS

A6.

Natalie agrees to assume Orina’s debt to Consumer Credit Corporation. Natalie does not get any personal benefit for the agreement. To be enforceable, the promise must be in writing if the debt is for a. b. c. d.

more than $500. more than $5,000. more than $50,000. any amount.

ANSWER: D NAT: AACSB Reflective A7.

292 AICPA Legal

TYPE:

Steve agrees to assume a debt of Thumb Grippers Company to Main Street Bank. The agreement is not in writing. To be enforceable, the promise must be for the benefit of a. b. c. d.

any party. Steve. Thumb Grippers. Main Street.

ANSWER: B NAT: AACSB Reflective A8.

PAGE:

292 AICPA Legal

TYPE:

Niche Credit, Inc., is one of Cut-Rite Notching Corporation’s two major creditors. Niche guarantees Cut-Rite’s debt to the firm’s other major creditor, Manufacturers Capital Bank, to forestall litigation. To be enforceable, this guarantee a. b. c. d.

must be in writing. need not be in writing if it benefits Niche Credit. need not be in writing if it benefits Cut-Rite Notching. need not be in writing if it benefits Manufacturers Capital Bank.

ANSWER: B NAT: AACSB Reflective

PAGE:

292 AICPA Legal

TYPE:

182 A9.

TEST BANK A: UNIT THREE: CONTRACTS AND E-CONTRACTS

Clay buys an MP3 player for $200 and a pair of stereo speakers for $600 from a Discount City store, and downloads $300 worth of digital music from E-Music.com. To be enforceable, the contract that must be in writing is the purchase of a. b. c. d.

the digital music, the MP3 player, and the speakers. the MP3 player and the speakers only. the MP3 player only. the speakers only.

ANSWER: D PAGE: NAT: AACSB Reflective

293 AICPA Legal

TYPE:

A10. Elle buys a new textbook for $100 and a used car for $5,000, and signs a one-year lease for an apartment for $1,000 monthly rent to start at the beginning of the next month. The Statute of Frauds covers a. b. c. d.

the apartment lease, and the textbook and car purchases. the apartment lease and the car purchase only. the apartment lease only. the textbook and car purchases only.

ANSWER: B PAGE: NAT: AACSB Reflective

293 AICPA Legal

TYPE:

A11. Pablo and Melia enter into an oral contract for Pablo’s sale to Melia of a laptop computer for $400. Assuming the terms can be proved, the contract is enforceable by a. b. c. d.

the seller or the buyer. the manufacturer of the laptop. any third party who overheard the parties making the agreement. none of the choices.

ANSWER: A NAT: AACSB Reflective

PAGE:

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TYPE:

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A12. Nori files a suit against Mica to enforce an oral contract that would otherwise be unenforceable under the Statute of Frauds. The court could enforce such a contract if a. b. c. d.

Nori foreseeably and justifiably relied on Mica’s promise to her detriment. Mica denies the existence of any contract. neither party has begun to perform. the deal does not involve customized goods.

ANSWER: A NAT: AACSB Reflective

PAGE:

295 AICPA Legal

TYPE:

Fact Pattern 15-A1 (Questions A13-A14 apply) Macro Marketing, Inc., and National Food Corporation (NFC) discuss the terms of a contract. Macro then faxes NFC a memo on Macro’s letterhead that summarizes the items on which they agreed, including a two-year term. Macro begins to perform, but NFC refuses to pay. Macro files a suit to collect. NFC claims that there is no contract. A13. Refer to Fact Pattern 15-A1. The transaction between Macro and NFC falls within the Statute of Frauds’ a. b. c. d.

collateral-promise provision. one-year rule. sales-of-goods stipulation. secondary-contracts section.

ANSWER: B NAT: AACSB Reflective

PAGE:

295 AICPA Legal

TYPE:

A14. Refer to Fact Pattern 15-A1. Between Macro and NFC, there is a. b. c. d.

an oral contract only. a pre-contract only. a written contract. no contract.

ANSWER:

PAGE:

296

TYPE:

184

TEST BANK A: UNIT THREE: CONTRACTS AND E-CONTRACTS

NAT: AACSB Reflective

AICPA Legal

185

CHAPTER 15: THE STATUTE OF FRAUDS

A15. Uri and Vicky orally agree on the sale of Uri’s Nite Club to Vicky and note terms on a pair of the Club’s napkins, which they both sign. A written memorandum evidencing an oral contract that would otherwise be unenforceable must contain a. b. c. d.

every term. the essential terms. the preliminary terms. the qualitative terms.

ANSWER: B PAGE: NAT: AACSB Reflective

296 AICPA Legal

TYPE:

A16. Shady Oaks Development, LLC, and Rural Acres, Inc., sign a written contract for a sale of land. In some states, to be enforceable, this contract must include a. b. c. d.

a correct title, such as “Land Transfer” or “Real Estate Agreement.” a declaration of the contract’s purpose. a statement of the consideration. a description of the land.

ANSWER: D NAT: AACSB Reflective

PAGE:

296 AICPA Legal

TYPE:

Fact Pattern 15-A2 (Questions A17–A18 apply) Radford and Serenity sign a written contract for the sale of Rad’s Coffee & Bagels business to Serenity. The parties intend their written contract to be a final statement of the terms of their agreement. A17. Refer to Fact Pattern 15-A2. Serenity later disputes some of the provisions in the deal with Radford. If the dispute results in litigation, a court will most likely exclude evidence that a. b. c. d.

buttresses the written terms. contradicts the written terms. duplicates the written terms. reinforces the written terms.

186

TEST BANK A: UNIT THREE: CONTRACTS AND E-CONTRACTS

ANSWER: B PAGE: NAT: AACSB Reflective

297 AICPA Legal

TYPE:

A18. Refer to Fact Pattern 15-A2. The writing that Radford and Serenity signed is a. b. c. d.

a completely integrated contract. a divisibly integrated contract. a partially integrated contract. a severably integrated contract.

ANSWER: A PAGE: NAT: AACSB Reflective

300 AICPA Legal

TYPE:

A19. Glenn and Haji sign a written contract. Glenn claims that the parties later orally agreed to modify it. Any oral modification is likely not enforceable if it falls under a. b. c. d.

the doctrine of promissory estoppel. the “main purpose” exception. the “partial performance” exception. the Statute of Frauds.

ANSWER: D NAT: AACSB Reflective

PAGE:

297 AICPA Legal

TYPE:

A20. Ginamarie files a suit against Gaming Innovators Unlimited, Inc., to enforce a written contract between the parties. If the court finds that the parties intended the contract to be the final statement of their agreement, parol evidence can be admitted to prove a. b. c. d.

an orally agreed-on condition precedent. terms discussed orally before the contract but not contained in it. terms discussed orally at the time of the contract that contradict the written terms. nothing.

ANSWER: A NAT: AACSB Reflective

PAGE:

297 AICPA Legal

TYPE:

CHAPTER 15: THE STATUTE OF FRAUDS

187

ESSAY QUESTIONS A1.

Downspout Drainage Company hires Earl to design a Web page for Downspout for $400. Before the project is started, Downspout asks Earl to trouble-shoot Downspout’s computer operating system software for an additional $400. Earl agrees. The entire contract is oral. Earl completes the work, but Downspout refuses to pay. Earl files a suit against Downspout, which raises the Statute of Frauds as a defense. Can Earl recover from Downspout? If so, how much, and on what basis? ANSWER: Yes, Earl can recover from Downspout for its breach of their oral contract. An oral contract is enforceable unless it falls within the Statute of Frauds. In that situation, it may not be enforced unless it is evidenced by a writing that sufficiently evidences the contract and that has been signed by the party against whom enforcement is sought. Contracts that come under the Statute of Frauds include contracts for transfers of interests in land, contracts that cannot be performed within a year of their making, contracts in consideration of marriage, contracts that involve collateral promises, and contracts for sales of goods priced at $500 or more. The original contract in this question (for the design of a Web page) does not fall within the Statute of Frauds. It is not a contract for the transfer of an interest in land, it could be (and was) performed within a year of its making, it was not entered into in consideration of marriage, it does not include a collateral promise, and it does not involve a sale of goods (it involves services). Thus, it is enforceable even though it is not in writing. The oral modification of the contract (to trouble-shoot the operating system software) is also enforceable for that reason. If Earl can prove the terms of the deal, Earl should recover $800, on the ground that Downspout breached their contract. PAGES: 289–290 NAT: AACSB Reflective

A2.

TYPE: = AICPA Decision Modeling

Frances has lived in an apartment for ten years when she decides to buy a house. Her one-year lease will end on May 1. On April 15, she orally contracts to buy Smith’s house for $100,000, with the closing (transfer of the deed) to take place on June1. Smith’s lawyer, who is out of town on vaca-

188

TEST BANK A: UNIT THREE: CONTRACTS AND E-CONTRACTS

tion, is to draft a written contract of sale on his return to his office on May 15. Because Frances’s lease is terminating, Smith agrees to let her take possession of the house on May 1 if Frances gives him a “down payment” on the house of $5,000. Frances agrees and gives Smith the $5,000. She moves into the house on May 2, and the following weekend plants trees in the back yard. On May 10, Smith receives a written offer from Green to buy Smith’s house for $120,000. Smith accepts Green’s offer, asks Frances to move out of the house, and tries to return the $5,000 to Frances. Frances claims that she has an enforceable contract to buy the house. Smith claims that any such contract must be in writing to be enforceable under the Statute of Frauds. Who is correct and why? ANSWER: This situation involves a contract for a sale of land, which in most circumstances must be in writing to be enforceable. In this case, however, the buyer has paid part of the price, taken possession, and made permanent improvements (planted trees), and arguably the parties cannot be returned to their pre-contract status quo. A court might therefore grant the remedy of specific performance to the buyer. Whether a court would enforce this oral contract would be determined by the degree of injury that the court perceived would be suffered if the court did not enforce it. Being homeless is a serious consequence. PAGES: 290–291 NAT: AACSB Reflective

TYPE: = AICPA Decision Modeling

Chapter 16 Third Party Rights N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

A transfer of contract rights to a third party is an assignment. ANSWER: T NAT: AACSB Analytic

A2.

TYPE:

PAGE:

304 AICPA Legal

TYPE:

The person to whom rights in a contract are assigned is the assignor. ANSWER: F NAT: AACSB Analytic

A4.

304 AICPA Legal

When rights under a contract are assigned unconditionally, the rights of the assignor are extinguished. ANSWER: T NAT: AACSB Reflective

A3.

PAGE:

304 AICPA Legal

TYPE:

An assignee’s rights are free of the defenses that the obligor has against the assignor. 185

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TEST BANK A: UNIT THREE: CONTRACTS AND E-CONTRACTS

ANSWER: F NAT: AACSB Reflective A5.

PAGE:

305 AICPA Legal

TYPE:

PAGE:

308 AICPA Legal

TYPE:

PAGE:

308 AICPA Legal

TYPE:

An assignment is effective only after notice is given to the obligor. ANSWER: F NAT: AACSB Analytic

A9.

Alienation is a transfer of the ownership of land. ANSWER: T NAT: AACSB Reflective

A8.

TYPE:

A contract can prevent an assignment of a right to receive funds. ANSWER: F NAT: AACSB Reflective

A7.

305 AICPA Legal

Oral assignments are prohibited. ANSWER: F NAT: AACSB Analytic

A6.

PAGE:

308 AICPA Legal

TYPE:

Contract duties cannot be assigned but they can be delegated. ANSWER: T NAT: AACSB Analytic

PAGE:

308 AICPA Legal

TYPE:

A10. An “assignment of all rights” creates an assignment of rights but not a delegation of duties. ANSWER: F NAT: AACSB Reflective

PAGE:

310 AICPA Legal

TYPE:

A11. When the parties to a contract agree that its performance should directly benefit a third person, the third person is an intended third party beneficiary. ANSWER:

PAGE:

311

TYPE:

187

CHAPTER 16: THIRD PARTY RIGHTS

NAT: AACSB Analytic

AICPA Legal

A12. An intended third party beneficiary can sue a promisor directly for breach of contract. ANSWER: T NAT: AACSB Analytic

PAGE:

311 AICPA Legal

TYPE:

A13. In a bilateral contract, a party who makes a promise that benefits a third party is a promisor. ANSWER: T NAT: AACSB Analytic

PAGE:

311 AICPA Legal

TYPE:

A14. A creditor beneficiary benefits from a contract in which one party promises another to pay a debt that the promisee owes to a third party. ANSWER: T NAT: AACSB Analytic

PAGE:

311 AICPA Legal

TYPE:

A15. A donee beneficiary cannot sue a promisor directly for breach of contract. ANSWER: F NAT: AACSB Analytic

PAGE:

311 AICPA Legal

TYPE:

A16. The vesting of contractual rights in a third party terminates the right of the original parties to change the contract. ANSWER: F NAT: AACSB Analytic

PAGE:

313 AICPA Legal

TYPE:

A17. If a contract requires that performance be rendered directly to a third party, the third party is an incidental beneficiary. ANSWER: F NAT: AACSB Analytic

PAGE:

313 AICPA Legal

TYPE:

A18. Any beneficiary who is not deemed an intended beneficiary is considered incidental. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

188

TEST BANK A: UNIT THREE: CONTRACTS AND E-CONTRACTS

ANSWER: T NAT: AACSB Analytic

PAGE:

313 AICPA Legal

TYPE:

A19. If a third party has the right to control the details of contract performance, the third party is an incidental beneficiary. ANSWER: F NAT: AACSB Analytic

PAGE:

313 AICPA Legal

TYPE:

189

CHAPTER 16: THIRD PARTY RIGHTS

A20. An incidental third party beneficiary can sue directly to enforce the contract. ANSWER: F NAT: AACSB Analytic

PAGE:

313 AICPA Legal

TYPE:

MULTIPLE CHOICE QUESTIONS A1.

Dwayne and Ewell enter into a contract for the design of an addition to Dwayne’s house for which he agrees to pay Ewell. Ewell transfers his right to payment under the contract to Flex Construction Company. Flex is a. b. c. d.

a delegatee. an assignee. an obligee. an alien.

ANSWER: B PAGE: NAT: AACSB Reflective A2.

304 AICPA Legal

TYPE:

Loren and Kendra enter into a contract for the distribution of Loren’s produce to local restaurants for which he agrees to pay Kendra. Kendra transfers her right to payment under the contract to County Bank. This transfer is a. b. c. d.

a delegation. an assignment. an alienation. prohibited.

ANSWER: B PAGE: NAT: AACSB Reflective

304 AICPA Legal

TYPE:

190 A3.

TEST BANK A: UNIT THREE: CONTRACTS AND E-CONTRACTS

Trudy and Uri enter into a contract for the sale of Trudy’s house for which Uri agrees to pay her $200,000. Uri wants to transfer his right to the ownership of the house to Val, his niece. This transfer a. b. c. d.

is prohibited. may be oral or written. must be implied. must be in writing.

ANSWER: D PAGE: NAT: AACSB Reflective A4.

TYPE:

Joaquin wants to transfer his right to the payment of his wages under an employment contract with Free-Flo Plumbing Company to Inez. In most states, this transfer a. b. c. d.

is prohibited. may be oral or written. must be implied. must be in writing.

ANSWER: D NAT: AACSB Reflective A5.

305 AICPA Legal

PAGE:

305 AICPA Legal

TYPE:

Ralph and Sven enter into a contract under which Sven agrees to guide Ralph’s expedition through Tibet for which Ralph agrees to pay Sven. This contract may not be assigned if a. b. c. d.

the assignment will significantly change the risk of nonperformance. the assignment is expressly prohibited by the terms of the contract. the contract is uniquely personal in nature. any of the choices.

ANSWER: D NAT: AACSB Analytic

PAGE:

307 AICPA Legal

TYPE:

191

CHAPTER 16: THIRD PARTY RIGHTS

A6.

Equity Company and Faye enter into a contract for Faye to cater a meeting of Equity’s shareholders. When Faye’s schedule conflicts, she asks Gudren to serve Faye’s coffee and pastries at the meeting. This transfer of duties is a. b. c. d.

a delegation. an assignment. an alienation. prohibited.

ANSWER: A PAGE: NAT: AACSB Reflective A7.

TYPE:

Rural Development Corporation (RDC) and Sid enter into a contract for the clear-cutting of RDC’s fifty-acre tract for which RDC agrees to pay Sid. Sid transfers his duty under this contract to Timber Logging Company. Timber is a. b. c. d.

a delegatee. an assignee. an obligee. an alien.

ANSWER: A PAGE: NAT: AACSB Reflective A8.

308 AICPA Legal

TYPE:

Jordan and Isabel enter into a contract under which Jordan agrees to cater Isabel’s wedding in exchange for $5,000. The contract can expressly prohibit and prevent the transfer of a. b. c. d.

Jordan’s right to receive funds. Isabel’s right to receive personal services. no rights under the contract. all rights under the contract.

ANSWER: B NAT: AACSB Reflective

PAGE:

308 AICPA Legal

TYPE:

192 A9.

TEST BANK A: UNIT THREE: CONTRACTS AND E-CONTRACTS

Phaedra and Raul contract with Sheldon to transfer the ownership of their lake cottage to him. This is a. b. c. d.

a delegation. an assignment. a third party beneficiary contract. an alienation.

ANSWER: D NAT: AACSB Reflective

PAGE:

308 AICPA Legal

TYPE:

A10. Floyd and Gert enter into a contract by which Floyd promises to deliver fertilizer to Gert. Floyd subsequently transfers this duty to Hazel. Floyd is a. b. c. d.

a delegatee. an obligee. an obligor. an assignee.

ANSWER: C NAT: AACSB Reflective

PAGE:

309 AICPA Legal

TYPE:

A11. Jean Paul and Hermosa enter into a contract under which Jean Paul agrees to provide greensward services for Hermosa’s Golf Links. Under an antidelegation clause, their contract can prohibit and prevent the transfer of a. b. c. d.

duties that are personal in nature. duties that are impersonal in nature. no duties under the contract. all duties under the contract.

ANSWER: A NAT: AACSB Analytic

PAGE:

309 AICPA Legal

TYPE:

193

CHAPTER 16: THIRD PARTY RIGHTS

A12. Peri, a world famous musician and composer, agrees to give ten piano lessons to Quinn in exchange for $1,000. Peri’s attempt to transfer her contract duties to Roth, an inexperienced pianist, will probably be a. b. c. d.

permitted because contracts may be freely delegated. permitted because the contract is concerned with music lessons. prohibited because contracts may not be freely delegated. prohibited because Peri and Roth have very different skill levels.

ANSWER: D NAT: AACSB Reflective

PAGE:

309 AICPA Legal

TYPE:

A13. Consumers Credit Company is a creditor beneficiary in a deal that involves Devon and Elena. Consumers Credit, like most creditor beneficiaries, is a. b. c. d.

a donee beneficiary. an incidental beneficiary. an intended beneficiary. one of the original contracting parties.

ANSWER: C NAT: AACSB Reflective

PAGE:

311 AICPA Legal

TYPE:

A14. Joy and Kris enter into a contract for Kris to lay sod in Joy’s yard for which she agrees to pay Kris. When Kris’s schedule conflicts, she contacts Leza, to whom Kris “assigns all rights under the contract.” Kris is a. b. c. d.

absolved of any liability under the contract. in breach of the contract with Joy. liable to Joy if Leza does not perform. liable to Leza for inducing a prohibited contract.

ANSWER: C PAGE: NAT: AACSB Reflective

311 AICPA Legal

TYPE:

194

TEST BANK A: UNIT THREE: CONTRACTS AND E-CONTRACTS

A15. Vicky contracts with Rashad for the delivery of hospice services to benefit Sigmund. This is a. b. c. d.

a delegation. an assignment. a third party beneficiary contract. an alienation.

ANSWER: C NAT: AACSB Reflective

PAGE:

311 AICPA Legal

TYPE:

A16. Dale signs a contract with Everbest Insurance Company that intentionally confers a benefit on Flo as the designated beneficiary. Flo’s rights under the contract will vest a. b. c. d.

automatically. if she demonstrates her consent to the promise at Dale’s request. if Everbest attempts to modify the terms of the contract. never.

ANSWER: B NAT: AACSB Reflective

PAGE:

313 AICPA Legal

TYPE:

A17. Nick contracts for the sale of this year’s strawberry crop to Phoenix, with payment to go to Rural Cooperative Association. The contract reserves to Nick and Phoenix the right to modify its terms. Rural Cooperative’s right to payment is a. b. c. d.

not affected by the reservation. subject to any change that Nick and Phoenix make. limited only if Rural Cooperative agrees to any changes. terminated by the reservation.

ANSWER: B NAT: AACSB Reflective

PAGE:

313 AICPA Legal

TYPE:

195

CHAPTER 16: THIRD PARTY RIGHTS

A18. Lois takes out a life insurance policy with Mega Insurance Corporation that names her son, Nero, as the beneficiary. This is a. b. c. d.

a delegation. an assignment. a third party incidental beneficiary contract. a third party intended beneficiary contract.

ANSWER: D NAT: AACSB Reflective

PAGE:

313 AICPA Legal

TYPE:

A19. Esther and Faisal agree that Esther will fix Faisal’s car in exchange for his paying a debt owed by Esther to Gladys. Gladys is a. b. c. d.

a delegatee. an intended beneficiary. an incidental beneficiary. an alien to the contract.

ANSWER: B NAT: AACSB Reflective

PAGE:

313 AICPA Legal

TYPE:

A20. Linus and Marlena agree that Linus will fix Marlena’s roof in exchange for $8,000. Linus spends half of the amount due under the contract to acquire the materials for the job from Natural Roofing Supplies. Natural Roofing is a. b. c. d.

a delegatee. an intended beneficiary. an incidental beneficiary. an alien to the contract.

ANSWER: C NAT: AACSB Reflective

PAGE:

313 AICPA Legal

TYPE:

ESSAY QUESTIONS A1.

Pam borrows $5,000 from Quality Auto Sales to buy a car. When Pam does not pay the loan or return the car, Quality wants to transfers the right to

196

TEST BANK A: UNIT THREE: CONTRACTS AND E-CONTRACTS

the payment to Rapid Collection Agency. Rapid agrees to pay Quality for this right, but for a price that is less than the amount owed. Can Quality transfer this right to Rapid without Pam’s consent? If so, and Quality committed fraud in the deal with Pam, could Pam legitimately refuse to pay Rapid? Explain. ANSWER: Quality can transfer the right to receive Pam’s payment in an assignment to Rapid. The parties in an assignment are the assignor, the assignee, and the obligor. The party originally entitled to the payment of the money is the assignor (Quality), the party who agreed to pay is the obligor (Pam), and the party who receives the right to the payment is the assignee (Rapid). The obligor’s consent is not necessary for an effective assignment. On an assignment, the rights of the assignor are extinguished, and the assignee has a right to demand performance—in this question, payment—from the obligor. The assignee takes only those rights that the assignor originally had, however, subject to the defenses that the obligor has against the assignor. Thus, if Quality fraudulently procured the right to Pam’s payment, Pam can raise this fraud as a defense against payment to Rapid. PAGES: 304–308 NAT: AACSB Reflective A2.

TYPE: = AICPA Decision Modeling

Evergreen Landscapers, Inc., owes Friendly Finance Company $5,000. Evergreen enters into a contract with Suburban Office Park under which Evergreen promises to maintain the landscaping on Suburban’s property. Under the contract, Suburban promises to pay Friendly Finance the amount that will be due Evergreen until Evergreen’s debt to Friendly Finance is paid. Evergreen performs as promised, but Suburban does not pay Friendly Finance. Can Friendly Finance succeed in a suit against Suburban? Why or why not? ANSWER: Friendly Finance could succeed in a suit against Suburban. When a party promises to perform under a contract with the express intent that the other party’s payment benefit a third party, the third party is a creditor beneficiary. Assuming a contract is otherwise enforceable, a creditor beneficiary can successfully sue to enforce the contract to which he or she is a third party. The contract between Evergreen and Suburban expressly states that Suburban’s payment for Evergreen’s performance is to

CHAPTER 16: THIRD PARTY RIGHTS

197

go directly to Friendly Finance. Thus, it is a third party beneficiary contract. Friendly Finance, the third party beneficiary, is, under the terms of the contract, a creditor beneficiary. As such, Friendly Finance can successfully sue Suburban to enforce Suburban’s promise to pay Evergreen’s debt. PAGES: 311–312 NAT: AACSB Reflective

TYPE: = AICPA Decision Modeling

Chapter 17 Performance and Discharge in Traditional and E-Contracts N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

In most contracts, promises of performance are not expressly conditioned. ANSWER: T NAT: AACSB Analytic

A2.

TYPE:

PAGE:

319 TYPE: AICPA Critical Thinking

Tender is an unconditional offer to perform. ANSWER: T NAT: AACSB Analytic

A4.

319 AICPA Legal

An event must be certain to occur to constitute a contractual condition. ANSWER: F NAT: AACSB Analytic

A3.

PAGE:

320 AICPA Legal

TYPE:

Express conditions are provided for by the parties’ agreement. 197

198

TEST BANK A: UNIT THREE: CONTRACTS AND E-CONTRACTS

ANSWER: T NAT: AACSB Analytic

PAGE:

320 AICPA Legal

TYPE:

199

CHAPTER 17: PERFORMANCE AND DISCHARGE

A5.

When a condition operates to terminate a party’s promise to perform, it is a condition subsequent. ANSWER: T NAT: AACSB Analytic

A6.

PAGE:

320 TYPE: AICPA Critical Thinking

PAGE:

321 AICPA Legal

TYPE:

A contract is substantially performed when performance creates substantially the same benefits as those promised in the contract. ANSWER: T NAT: AACSB Analytic

A9.

TYPE:

A party who substantially performs his or her duties under a contract can enforce the contract against the other party. ANSWER: T NAT: AACSB Analytic

A8.

320 AICPA Legal

A contract comes to an end when both parties fulfill their respective duties by performing the acts they have promised. ANSWER: T NAT: AACSB Analytic

A7.

PAGE:

321 AICPA Legal

TYPE:

Most contracts need to be performed to personally satisfy the party to whom performance is owed. ANSWER: F NAT: AACSB Reflective

PAGE:

323 TYPE: AICPA Critical Thinking

A10. Any breach excuses the nonbreaching party’s duty to perform. ANSWER: F NAT: AACSB Analytic

PAGE:

324 AICPA Legal

TYPE:

A11. Any breach allows the nonbreaching party to sue for damages. ANSWER: T NAT: AACSB Analytic

PAGE:

324 AICPA Legal

TYPE:

200

TEST BANK A: UNIT THREE: CONTRACTS AND E-CONTRACTS

A12. Anticipatory repudiation discharges a contract. ANSWER: F NAT: AACSB Analytic

PAGE:

324 AICPA Legal

TYPE:

201

CHAPTER 17: PERFORMANCE AND DISCHARGE

A13. A breach of contract occurs only when a party fails to perform all of his or her duties under a contract. ANSWER: F NAT: AACSB Analytic

PAGE:

324 AICPA Legal

TYPE:

A14. If no time for performance is stated in a contract, any time is acceptable. ANSWER: F NAT: AACSB Analytic

PAGE:

325 AICPA Legal

TYPE:

A15. A compromise that arises out of a dispute over the obligations under a contract may be substituted for the original contract. ANSWER: T NAT: AACSB Reflective

PAGE:

326 AICPA Legal

TYPE:

A16. When a contract party alters a written contract, the other party must adapt his or her performance accordingly. ANSWER: F NAT: AACSB Analytic

PAGE:

326 AICPA Legal

TYPE:

A17. A contract is discharged when a change in the law renders the performance illegal. ANSWER: T NAT: AACSB Analytic

PAGE:

327 AICPA Legal

TYPE:

A18. A contract will be discharged if foreseeable circumstances make it impossible to attain the contract’s purpose. ANSWER: F NAT: AACSB Analytic

PAGE:

327 AICPA Legal

TYPE:

A19. A discharge in bankruptcy will ordinarily bar enforcement of most of a debtor’s contracts by creditors. ANSWER:

PAGE:

328

TYPE:

202

TEST BANK A: UNIT THREE: CONTRACTS AND E-CONTRACTS

NAT: AACSB Analytic

AICPA Legal

203

CHAPTER 17: PERFORMANCE AND DISCHARGE

A20. A party’s obligations under a contract may be excused if, due to an unforeseen circumstance, the party’s benefit will be reduced. ANSWER: F NAT: AACSB Reflective

PAGE:

328 AICPA Legal

TYPE:

MULTIPLE CHOICE QUESTIONS A1.

Lark enters into a contract to mine limestone in Milena’s quarry, sell it, and share the profits on its sale with Milena. If the duties under this contract are discharged like those under most contracts, the duties will be a. b. c. d.

repudiated. breached. performed. rescinded.

ANSWER: C PAGE: NAT: AACSB Reflective A2.

TYPE:

Belle enters into a contract to subdivide and sell housing lots in Colin’s hillside field if Dell City annexes the property within the next year. Belle’s duty to perform is a. b. c. d.

absolute. conditional. illusional. irresolute.

ANSWER: B PAGE: NAT: AACSB Reflective A3.

319 AICPA Legal

TYPE:

Jen agrees to buy Kev’s Dirt Bike business on the express condition that Valley Credit Union approves the financing. This approval is a. b. c.

a concurrent condition. a condition precedent. a condition subsequent.

204

TEST BANK A: UNIT THREE: CONTRACTS AND E-CONTRACTS

an implied condition.

ANSWER: B NAT: AACSB Reflective

PAGE:

319 AICPA Legal

TYPE:

205

CHAPTER 17: PERFORMANCE AND DISCHARGE

A4.

Elton and Florida sign a contract by which Elton agrees to deliver and install a utility sink on May 15 in exchange for Florida’s promise to pay the $150 price on May 15. The delivery and installation of the sink and the payment of the price are examples of a. b. c. d.

conditions precedent. concurrent conditions. conditions subsequent. implied conditions.

ANSWER: B NAT: AACSB Reflective A5.

PAGE:

TYPE:

Lake Port Services enters into a contract to load Max’s Great Lakes barges with the cargo that Max designates. Lake Port’s offer to perform, when Lake Port is ready, willing, able to do so, is a. b. c. d.

complete. substantial. tender. tough.

ANSWER: C PAGE: NAT: AACSB Reflective A6.

320 AICPA Legal

TYPE:

Safe-T Guard Services enters into a contract to secure Taylor’s Business Park from vandalism and theft between 6 P.M. and 6 A.M. nightly for six months. At the end of the term, if there has been no vandalism or theft in the Park, Safe-T’s performance will have been a. b. c. d.

absolute. complete. conditional. substantial.

ANSWER: B PAGE: NAT: AACSB Reflective

321 AICPA Legal

TYPE:

206 A7.

TEST BANK A: UNIT THREE: CONTRACTS AND E-CONTRACTS

Even-Bilt Construction contracts to build a warehouse for Discount E-Sales Company. Even-Bilt completely performs. Discount E-Sales is entitled to a. b. c. d.

an accord. rescission. novation. nothing more.

ANSWER: D NAT: AACSB Reflective A8.

PAGE:

321 AICPA Legal

TYPE:

Real Cheap Painters, Inc., agrees to paint Quint’s house, using a particular brand of “discount” paint. Real Cheap completes the job but uses a different brand of discounted paint. This is most likely a. b. c. d.

an absolute excuse for Quint’s refusal to pay. a material breach. complete performance. substantial performance.

ANSWER: D NAT: AACSB Reflective

PAGE:

321 AICPA Legal

TYPE:

Fact Pattern 17-A1 (Questions A9–A10 apply) Mutual Company enters into a contract to employ Neil as an investment manager for two years. During the first year, Neil is often absent without explanation and when present fails to adequately monitor and manage Mutual’s investments. A9.

Refer to Fact Pattern 17-A1. With respect to Mutual’s duties, Neil’s performance most likely a. b. c. d.

discharges Mutual from the contract. has no effect on Mutual’s performance. increases Mutual’s duties under the contract. suspends Mutual’s duty to perform.

ANSWER: A PAGE: NAT: AACSB Reflective

324 AICPA Legal

TYPE:

207

CHAPTER 17: PERFORMANCE AND DISCHARGE

A10. Refer to Fact Pattern 17-A1. Neil’s performance is most likely a. b. c. d.

a material breach. a minor breach. Mutual’s breach. no breach.

ANSWER: A PAGE: NAT: AACSB Reflective

324 AICPA Legal

TYPE:

A11. Jane and Kelly want Lucy to replace Kelly as a party to their contract. They can best accomplish this by a. b. c. d.

a mutual agreement to rescind. an accord and satisfaction. a novation. an alteration of the contract.

ANSWER: C NAT: AACSB Reflective

PAGE:

325 AICPA Legal

TYPE:

A12. Quito contracts with Rewind Graphix, Inc., to pay $5,000 for its work on the animated film “Song.” After Rewind performs, they sign an accord, in which Quito promises to pay $4,000 within ten days instead of $5,000 later. But Quito does not pay. Rewind can sue Quito under a. b. c. d.

neither the accord nor the original obligation. the accord only. the accord or the original obligation. the original obligation only.

ANSWER: C NAT: AACSB Reflective

PAGE:

326 AICPA Legal

TYPE:

A13. Ruth contracts to provide Shelly with fifty hours of telepathic personal coaching. The state legislature subsequently passes a law making telepathic personal coaching illegal. This law will a. b.

discharge the contract. fulfill the contract.

208

TEST BANK A: UNIT THREE: CONTRACTS AND E-CONTRACTS

c. d.

not affect the contract. require immediate performance of the contract.

ANSWER: A NAT: AACSB Reflective

PAGE:

327 AICPA Legal

TYPE:

209

CHAPTER 17: PERFORMANCE AND DISCHARGE

A14. Commercial Construction, Inc. (CCI), contracts to build a store for Rita’s Pizza Company with Rita’s payment due on June 1. On June 1, Rita’s bank is closed, and for this reason, Rita’s claims it cannot pay on time. In this situation a. b. c. d.

CCI is in breach of contract. Rita’s is in breach of contract. the contract is discharged. the contract is suspended.

ANSWER: B NAT: AACSB Reflective

PAGE:

327 AICPA Legal

TYPE:

A15. Clyde contracts with Deephole Excavation, Inc., to dig an agricultural pond on his farm. Deephole is to keep the excavated gravel in payment. Clyde’s neighbor Eden challenges the dig as an illegal gravel pit. A court orders a halt to the dig. Clyde’s contract with Deephole is a. b. c. d.

breached. discharged. not affected. suspended.

ANSWER: B NAT: AACSB Reflective

PAGE:

327 AICPA Legal

TYPE:

Fact Pattern 17-A2 (Questions A16-A19 apply) Evelyn, who owns and operates Eve’s Farm & Garden Company, agrees to sell Hill & Dale Produce, Inc., fifty bushels of apples. A16. Refer to Fact Pattern 17-A2. Evelyn dies before the apples are delivered to Hill & Dale. Evelyn’s contract with Hill & Dale is a. b. c. d.

breached. discharged. not affected. suspended.

ANSWER:

PAGE:

327

TYPE:

210

TEST BANK A: UNIT THREE: CONTRACTS AND E-CONTRACTS

NAT: AACSB Reflective

AICPA Legal

211

CHAPTER 17: PERFORMANCE AND DISCHARGE

A17. Refer to Fact Pattern 17-A2. When bad weather destroys Eve’s Garden’s apple crop, the obligation to deliver apples to Hill & Dale is a. b. c. d.

breached. discharged. not affected. suspended.

ANSWER: B NAT: AACSB Reflective

PAGE:

327 AICPA Legal

TYPE:

A18. Refer to Fact Pattern 17-A2. A strike delays delivery of the apples by ten days. Evelyn’s contract with Hill & Dale is a. b. c. d.

breached. discharged. not affected. suspended.

ANSWER: D NAT: AACSB Reflective

PAGE:

327 AICPA Legal

TYPE:

A19. Refer to Fact Pattern 17-A2. When the market price for apples exceeds the price in the contract with Hill & Dale, Evelyn decides not to deliver the apples. Evelyn’s contract with Hill & Dale is a. b. c. d.

breached. discharged. not affected. suspended.

ANSWER: A NAT: AACSB Reflective

PAGE:

328 AICPA Legal

TYPE:

A20. Frisco agrees to lease an apartment from Gina for one day to see Harry, the president of the United States, deliver a speech in the street below. The speech is canceled ten days before its scheduled date. The contract a. b.

is discharged. is not affected.

212

TEST BANK A: UNIT THREE: CONTRACTS AND E-CONTRACTS

c. d.

is postponed until another event is scheduled. must be performed immediately.

ANSWER: A NAT: AACSB Reflective

PAGE:

330 AICPA Legal

TYPE:

CHAPTER 17: PERFORMANCE AND DISCHARGE

213

ESSAY QUESTIONS A1.

Elin contracts to buy six cases of vintage Fertile Valley wine from Grapes & Vines Winery for $1,200. The contract states that delivery is to be made at Elin’s residence "on or before May 1, to be used for daughter's wedding reception on May 2." On May 1, Grapes & Vines’s delivery van is involved in an accident, and no wine is delivered that day. On the morning of May 2, Elin buys the wine from Happy Hill Winery. That afternoon, just before the reception, Grapes & Vines tenders delivery of the wine at Elin’s residence. Elin refuses tender. Grapes & Vines sues Elin for breach of contract. How is the court most likely to rule? ANSWER: In most courts, the decision will rest on whether the inclusion of the contract clause “to be used for daughter’s wedding reception on May 2” created an express condition rendering the time of performance vital to the purpose of the contract. If the time stated is of the essence, the time for performance must be strictly complied with. Any failure of full performance constitutes a material breach and discharges any duty or liability of the other party. If the time for performance is not of the essence, a reasonable time for performance is allowed. A late performance in such a case does not constitute a material breach, but the party rendering late performance is liable for damages caused by the delay. In this case, although May 2 would ordinarily be a reasonable time for performance, the inclusion of the phrase giving the use of the wine and date of the reception would render the time vital to performance and would require strict compliance. Grapes & Vines’s failure to deliver on May 1 is a material breach releasing Elin from any liability under the contract. PAGES: 319–324 NAT: AACSB Reflective

A2.

TYPE: = AICPA Decision Modeling

Investment Properties, Inc., hires Justus Construction Company to renovate the interior of Investment’s office building. Justus submits plans that Investment approves. Justus completes the major reconstruction, paints the interior, and buys the fixtures and furnishings. Investment rejects some of the furnishings because they do not match the plans, and subsequently refuses to allow Justus to finish the work or to collect payment. Could Justus sue successfully for payment for the entire contract?

214

TEST BANK A: UNIT THREE: CONTRACTS AND E-CONTRACTS

ANSWER: No, but Justus could sue successfully to collect for the value of the work actually performed. When the performance on a construction contract is substantial, the deviations are minor, and the failure to perform completely is not willful (that is, the performance is in good faith), the party who substantially performed is entitled to collect payment for that performance. The amount of the payment is the contract price less the costs to make the performance complete. When the cost to complete the performance is high in relation to the contract price, the party is entitled to the contract price less the amount by which the object of the contract is diminished in value by the failure to completely perform. In this problem, the “breach” may have been so minor that it was no breach at all, because Investment was not denied the benefit of its bargain by Justus’s conduct. In that case, Investment rejected Justus’s good faith tender of complete performance, and this rejection would allow Justus to collect payment for the work. PAGES: 321–322 NAT: AACSB Reflective

TYPE: = AICPA Decision Modeling

Chapter 18 Breach of Contract and Remedies N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

A breach of contract entitled the nonbreaching party to sue for monetary damages. ANSWER: T NAT: AACSB Analytic

A2.

334 AICPA Legal

TYPE:

Damages are designed to punish a breaching party and deter others from similar conduct. ANSWER: F NAT: AACSB Analytic

A3.

PAGE:

334 AICPA Legal

TYPE:

Most parties settle their lawsuits for damages or other remedies prior to trial. ANSWER: T NAT: AACSB Analytic

PAGE:

334 AICPA Legal

TYPE:

210 A4.

TEST BANK A: UNIT THREE: CONTRACTS AND E-CONTRACTS

The four broad types of damages in contract law are conciliatory, consecutive, punctual, and nominative. ANSWER: F NAT: AACSB Analytic

PAGE:

334 TYPE: AICPA Critical Thinking

211

CHAPTER 18: BREACH OF CONTRACT AND REMEDIES

A5.

Compensatory damages are foreseeable damages that arise from a party’s breach of a contract. ANSWER: F NAT: AACSB Analytic

A6.

PAGE:

334 AICPA Legal

TYPE:

PAGE:

334 AICPA Legal

TYPE:

The measure of damages for breach of a construction contract depends on which party breaches and when. ANSWER: T NAT: AACSB Reflective

A9.

TYPE:

A party seeking to recover compensatory damages cannot also recover incidental damages. ANSWER: F NAT: AACSB Analytic

A8.

334 AICPA Legal

Compensatory damages compensate an injured party for damages arising directly from the loss of a bargain caused by a breach of contract. ANSWER: T NAT: AACSB Analytic

A7.

PAGE:

335 AICPA Legal

TYPE:

Ordinarily, the remedy for a seller’s breach of a contract for a sale of real estate is damages. ANSWER: F NAT: AACSB Reflective

PAGE:

335 AICPA Legal

TYPE:

A10. Special damages are awarded for damage caused by special circumstances beyond a contract. ANSWER: T NAT: AACSB Analytic

PAGE:

336 AICPA Legal

TYPE:

A11. Punitive damages are recoverable in contract law for an intentional breach of contract.

212

TEST BANK A: UNIT THREE: CONTRACTS AND E-CONTRACTS

ANSWER: F NAT: AACSB Analytic

PAGE:

337 AICPA Legal

TYPE:

213

CHAPTER 18: BREACH OF CONTRACT AND REMEDIES

A12. A person’s actions may cause a breach of contract or a tort, but not both. ANSWER: F NAT: AACSB Analytic

PAGE:

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TYPE:

A13. The duty owed under the mitigation of damages doctrine depends on the nature of the contract. ANSWER: T NAT: AACSB Analytic

PAGE:

337 AICPA Legal

TYPE:

A14. A penalty provision specifies a certain amount to be paid in the event of a default or breach of contract. ANSWER: T NAT: AACSB Analytic

PAGE:

338 AICPA Legal

TYPE:

A15. The failure of one party to perform a contract entitles the other party to rescind it. ANSWER: T NAT: AACSB Analytic

PAGE:

340 AICPA Legal

TYPE:

A16. Specific performance is the remedy customarily used when one party has breached a contract for the sale of goods. ANSWER: F NAT: AACSB Analytic

PAGE:

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TYPE:

A17. The purpose of the doctrine of election of remedies is to permit double recovery. ANSWER: F NAT: AACSB Reflective

PAGE:

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TYPE:

A18. A party seeking to recover in quasi contract must show that there was an actual contract or agreement between the parties. ANSWER:

PAGE:

343

TYPE:

214

TEST BANK A: UNIT THREE: CONTRACTS AND E-CONTRACTS

NAT: AACSB Analytic

AICPA Legal

215

CHAPTER 18: BREACH OF CONTRACT AND REMEDIES

A19. A party who knowingly accepts defective performance of a contract waives the breach. ANSWER: T NAT: AACSB Analytic

PAGE:

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TYPE:

A20. A contract may include a clause stating that no damages can be recovered for a certain type of breach. ANSWER: T NAT: AACSB Analytic

PAGE:

345 AICPA Legal

TYPE:

MULTIPLE CHOICE QUESTIONS A1.

Even-Flo Hydraulics enters into a contract to repair valves and fittings in Fiesta Company’s plant. If Even-Flo breaches the contract, Fiesta can a. b. c. d.

do nothing but make a deal with .a different service provider. do nothing but temporarily suspend operations and wait. file a criminal complaint against Even-Flo. sue Even-Flo for damages.

ANSWER: D NAT: AACSB Reflective A2.

PAGE:

334 AICPA Legal

TYPE:

Consumer Credit Union pays Derby $10,000 to design an ad campaign. The next day, Derby tells the credit union that he has accepted a job in Boston and cannot design the campaign. As compensatory damages, the credit union can recover a. b. c. d.

$100,000. $10,000. $1,000. $0.

ANSWER: B NAT: AACSB Reflective

PAGE:

334 AICPA Legal

TYPE:

216 A3.

TEST BANK A: UNIT THREE: CONTRACTS AND E-CONTRACTS

Fidelio Corporation enters into a contract with Equi Insurance, Inc., to obtain health insurance for Fidelio employees. Equi breaches the contract. If Fidelio is awarded compensatory damages, the purpose would be to a. b. c. d.

establish, as a matter of principle, that Equi acted wrongfully. provide Fidelio with funds for a foreseeable loss beyond the contract. provide Fidelio with funds for its loss of the bargain. punish Equi and set an example to deter others from similar acts.

ANSWER: C NAT: AACSB Reflective A4.

334 AICPA Legal

TYPE:

Development Associates (DA) agrees to buy five acres of land from Eastside Properties for $15,000. Eastside fails to go through with the deal on the agreed date, when the market price of the land is $17,000. DA may recover a. b. c. d.

$17,000. $15,000. $2,000. $0.

ANSWER: C NAT: AACSB Reflective A5.

PAGE:

335 AICPA Legal

TYPE:

Dondi contracts to buy a custom espresso maker from Caffee Specialties, Inc., for $4,500, but Caffee fails to deliver. Dondi buys the appliance elsewhere for $5,500. Dondi’s measure of damages is a. b. c. d.

$1,000. $1,000 plus incidental damages. incidental damages only. $0.

ANSWER: B NAT: AACSB Reflective

PAGE:

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TYPE:

217

CHAPTER 18: BREACH OF CONTRACT AND REMEDIES

A6.

Rite Contractors, Inc., agrees to build a motel for Sleep Inn Corporation. The project proceeds according to plan, but before it is done, Sleep tells Rite to quit. Rite may recover a. b. c. d.

the contract price less costs of materials and labor. the contract price. the costs needed to complete construction. profits plus the costs incurred up to the time of the breach.

ANSWER: D NAT: AACSB Reflective A7.

335 AICPA Legal

TYPE:

Damon contracts to repair the turf on a soccer field for Carousel Sports Park. Damon knows that without the repair, Carousel will have to cancel an upcoming game. Damon does not perform as promised. As consequential damages, Carousel can recover a. b. c. d.

the cost of new turf. the difference between Damon’s price and the actual cost of repair. the loss of profit from the canceled game. nothing.

ANSWER: C NAT: AACSB Reflective A8.

PAGE:

336 AICPA Legal

TYPE:

Pure Oil Company enters into a contract with QuikBilt, Inc., to construct an offshore oil pipeline to withstand specific conditions. If QuikBilt fails to meet this standard, which is construed as a breach of contract and a breach of a duty of care, Pure might be awarded punitive damages to a. b. c. d.

establish, as a matter of principle, that QuikBilt acted wrongfully. provide Pure with funds for a foreseeable loss beyond the contract. provide Pure with funds for its loss of the bargain. punish QuikBilt and deter others from similar acts.

ANSWER: D NAT: AACSB Reflective

PAGE:

337 AICPA Legal

TYPE:

218 A9.

TEST BANK A: UNIT THREE: CONTRACTS AND E-CONTRACTS

Fashion Retail Center enters into a contract with Great Promotions, Inc., to provide Fashion with a plan to retool its merchandising strategy. If Great Promotions breaches the contract, Fashion has a duty to a. b. c. d.

reduce the damages that Fashion might otherwise suffer. reduce the loss that Great Promotions might otherwise suffer. punish Great Promotions and deter others from similar acts. take no action.

ANSWER: A NAT: AACSB Reflective

PAGE:

337 AICPA Legal

TYPE:

A10. Office Accounting, Inc., hires Perry to repair a computer on site for $400, but Perry does not show up as agreed. Office Accounting hires Raul to do the job for $350. Office Accounting may recover from Perry a. b. c. d.

compensatory damages. consequential damages. nominal damages. punitive damages.

ANSWER: C NAT: AACSB Reflective

PAGE:

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TYPE:

A11. Ray breaches his lease with Sunny Properties and vacates the premises six months before the end of the term. In some states, Sunny would have to a. b. c. d.

avoid reletting the premises to recover damages from Ray. make reasonable efforts to relet the premises to mitigate damages. relet the premises to recover damages from Ray. sell the premises to recover damages from Ray.

ANSWER: B NAT: AACSB Reflective

PAGE:

337 AICPA Legal

TYPE:

219

CHAPTER 18: BREACH OF CONTRACT AND REMEDIES

A12. SFX Paintball Games, Inc., and Truck & Trailer Delivery Corporation sign an agreement that provides for the payment of “$1,000 by whichever party commits a material breach of the contract that creates damages difficult to estimate but approximately $1,000.” This is a. b. c. d.

a liquidated damages clause. a mitigation of damages clause. a nominal damages clause. a penalty clause.

ANSWER: A NAT: AACSB Reflective

PAGE:

338 AICPA Legal

TYPE:

A13. Rural Power Utility, Inc., enters into a contract with Shovel Excavation Service to dig up, replace, and rebury Rural’s cables in a certain location. Rural advances Shovel 10 percent of its cost. The parties rescind the contract. Shovel’s refund of the payment is a. b. c. d.

a penalty. liquidated damages. restitution. a breach of contract.

ANSWER: C NAT: AACSB Reflective

PAGE:

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TYPE:

A14. Karif orally agrees to buy a unique collection of sports memorabilia for $1,000 from Jane and sends her $250 as a down payment. When Karif sends her the rest of the price, Jane refuses to ship the collection. Karif should seek a. b. c. d.

damages. reformation. rescission. specific performance.

ANSWER: D NAT: AACSB Reflective

PAGE:

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TYPE:

220

TEST BANK A: UNIT THREE: CONTRACTS AND E-CONTRACTS

A15. Lester and Myrtle want to rescind their contract under which Lester sold an MP3 player for $40. To rescind the contract a. b. c. d.

Lester must return the $40 and Myrtle must return the player. Lester must return the $40 only. Myrtle must return the player only. the parties can keep the “benefits” of their bargain.

ANSWER: A NAT: AACSB Reflective

PAGE:

340 AICPA Legal

TYPE:

A16. Grady enters into a contract to buy 440 acres from Hollis to expand Grady’s ranch. Hollis breaches the contract. Grady’s normal remedy is a. b. c. d.

damages. reformation. rescission. specific performance.

ANSWER: D NAT: AACSB Reflective

PAGE:

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TYPE:

A17. Refined Commodities, Inc., agrees to deliver ten tons of sheet metal to Select Builders Corporation. The agreement states that delivery is to be within “3” days, although the parties intend “30” days. Refined cannot convince Select to amend the contract. Refined should seek a. b. c. d.

damages. reformation. rescission. specific performance.

ANSWER: B NAT: AACSB Reflective

PAGE:

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TYPE:

221

CHAPTER 18: BREACH OF CONTRACT AND REMEDIES

A18. Vacation Vistas, Inc., agrees to sell certain acreage to Umiko, who intends to develop a destination resort. Vacation Vistas repudiates the deal. Umiko sues Vacation Vistas and recovers damages. She can now obtain a. b. c. d.

an amount in a quasi-contractual recovery. damages representing restitution. specific performance of the deal. nothing more.

ANSWER: D NAT: AACSB Reflective

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TYPE:

A19. Clear Creek Corporation enters into a contract with Brightside Management Associates to manage and maintain Clear Creek’s apartment complex. Their contract provides that neither party can recover damages for a non-fraudulent or unintentional breach. This is a. b. c. d.

a limitation-of-liability clause. an exculpatory clause. a liquidated damages clause. a quasi contract.

ANSWER: A NAT: AACSB Reflective

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A20. To avoid liability for intentional injuries, Northwest Power Corporation includes in its contracts an exculpatory clause. This is a. b. c. d.

enforceable if the other parties are protected from liability. enforceable if the other parties consent to it. enforceable if the other parties have equal bargaining power. not enforceable.

ANSWER: D NAT: AACSB Reflective

PAGE:

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TYPE:

ESSAY QUESTIONS

222 A1.

TEST BANK A: UNIT THREE: CONTRACTS AND E-CONTRACTS

National Drilling Company ships its only pump to American Hydraulics Corporation, the manufacturer, for repair. National hires Overland Transport, Inc., to take the pump to American Hydraulics and to return it to National as soon as the repair is complete. National is forced to suspend operations without a pump, but Overland does not know this. National expects to be without the pump for five days and to lose profits of $5,000. When the pump is not returned by the end of the fifth day, National rents a pump at a cost of $100 per day. Overland delays five more days before returning the pump. National files a suit against Overland, asking for compensatory, consequential, and punitive damages. Will National recover? ANSWER: Yes and no. National will succeed in recovering damages, but not all of the damages that it seeks. Overland’s failure to perform promptly is a breach of contract for which National can recover damages. Because of Overland’s late delivery of the pump, National is entitled to recover the cost of renting the pump for the five days that Overland delayed. Expenses that are caused directly by a breach of contract—such as the cost to rent the replacement pump after Overland breached the contract—are recoverable as compensatory damages. These expenses were foreseeable. Consequential damages—damages caused by special circumstances beyond the contract— are recoverable only if the breaching party knew or should have known at the time of contracting of their possibility. In this problem, National’s shutdown of its operations is a special circumstance, but Overland did not know of these circumstances so National’s consequent loss of profits is not recoverable. Also, National cannot recover punitive damages, which are not usually recoverable in breach of contract suits. Punitive damages are intended to punish wrongdoing. The purpose of damages in a breach of contract suit is to place the nonbreaching party in the position he or she would have occupied if the contract had been performed, not to punish the breaching party. PAGES: 334–337 NAT: AACSB Reflective

A2.

TYPE: = AICPA Decision Modeling

Owen buys a used Prius from Quality Motors, Inc., paying $1,000 down and agreeing to pay off the balance in thirty-six monthly payments of $200 each. The terms of the agreement call for Owen to make a payment on or before the first of each month, beginning March 1. During the first six months, Quality receives a $200 payment before the first of each month.

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223

Starting in September, however, and continuing for the subsequent five months, Owen’s payment is never made until the fifth of the month. Quality accepts and cashes the payment check each time. Before the next payment is due, Quality decides that it is no longer willing to accept late payments. Can Quality sue Owen immediately for breach? Can Owen continue to make late payments without liability? Explain. ANSWER: The dispute between these parties turns on whether Quality’s acceptance of six late payments constitutes a waiver of Owen’s agreement to pay on or before the first of each month. When a nonbreaching party waives the breach, he or she relinquishes the legal right to claim failure of full performance. Quality’s acceptance of six late payments not only constitutes a waiver but also constitutes a pattern of conduct of waiver, and thus the waiver extends to the thirteenth and future payments—until such time as Quality gives notice to Owen that full compliance with the contract will be required in the future. Quality cannot immediately hold liable Owen for breach on the late thirteenth payment but can notify Owen that any further tender of late payments will constitute a breach. In other words, on notice from Quality, Owen can no longer make late payments without liability. PAGES: 344–345 NAT: AACSB Reflective

TYPE: = AICPA Decision Modeling

Chapter 19 The Formation of Sales and Lease Contracts N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

Article 2 of the UCC governs contracts for sales of goods. ANSWER: T NAT: AACSB Analytic

A2.

357 AICPA Legal

TYPE:

Under the UCC, a sale is the passing of title from a seller to a buyer for a price payable in cash, goods, or services. ANSWER: T NAT: AACSB Analytic

A3.

PAGE:

358 AICPA Legal

TYPE:

To be characterized as a “good” under the UCC, an item of property must be movable. ANSWER: T NAT: AACSB Analytic

PAGE:

358 AICPA Legal

TYPE:

226

TEST BANK A—UNIT 4: DOMESTIC AND INT’L SALES & LEASE CONTRACTS

227

CHAPTER 19: THE FORMATION OF SALES AND LEASE CONTRACTS

A4.

Goods associated with real estate never fall within the scope of UCC Article 2. ANSWER: F NAT: AACSB Reflective

A5.

PAGE:

359 AICPA Legal

TYPE:

PAGE:

361 AICPA Legal

TYPE:

PAGE:

361 AICPA Legal

TYPE:

A lessor is a party who acquires a right to the possession and use of goods under a lease. ANSWER: F NAT: AACSB Analytic

A9.

The UCC imposes special business standards on casual and inexperienced sellers and buyers. ANSWER: F NAT: AACSB Reflective

A8.

TYPE:

UCC Article 2 applies to sales transactions between all buyers and sellers. ANSWER: T NAT: AACSB Analytic

A7.

358 AICPA Legal

If a contract in which goods and services are combined is primarily a goods contract, any dispute over it will be decided under the UCC. ANSWER: T NAT: AACSB Reflective

A6.

PAGE:

361 AICPA Legal

TYPE:

Certain provisions of UCC Article 2A apply only to consumer leases. ANSWER: T NAT: AACSB Analytic

PAGE:

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TYPE:

A10. Under the UCC, a sales or lease contract will fail for indefiniteness if one or more terms are left open. ANSWER: F NAT: AACSB Reflective

PAGE:

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TYPE:

228

TEST BANK A—UNIT 4: DOMESTIC AND INT’L SALES & LEASE CONTRACTS

229

CHAPTER 19: THE FORMATION OF SALES AND LEASE CONTRACTS

A11. If the parties to a contract for a sale of goods have not agreed on a price, a court will determine a reasonable price at the time for delivery. ANSWER: T NAT: AACSB Reflective

PAGE:

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TYPE:

A12. The UCC imposes a good faith limitation on requirements contracts. ANSWER: T NAT: AACSB Analytic

PAGE:

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TYPE:

A13. When an offeror does not specify a means of acceptance, acceptance can be made by any means of communication that is reasonable. ANSWER: T NAT: AACSB Reflective

PAGE:

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TYPE:

A14. In a contract between merchants, additional terms in the parties’ separate standard forms always automatically become part of the contract. ANSWER: T NAT: AACSB Reflective

PAGE:

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TYPE:

A15. Under the UCC, an agreement modifying a contract needs no consideration to be binding. ANSWER: T NAT: AACSB Analytic

PAGE:

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TYPE:

A16. No oral contract is enforceable under the UCC. ANSWER: F NAT: AACSB Analytic

PAGE:

368 AICPA Legal

A17. The terms of a fully integrated contract can be contradicted only by evidence of any prior agreements. ANSWER: F NAT: AACSB Analytic

PAGE:

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TYPE:

230

TEST BANK A—UNIT 4: DOMESTIC AND INT’L SALES & LEASE CONTRACTS

231

CHAPTER 19: THE FORMATION OF SALES AND LEASE CONTRACTS

A18. In interpreting a commercial agreement, a court will assume that the course of dealing between the parties was taken into account. ANSWER: T NAT: AACSB Analytic

PAGE:

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TYPE:

A19. If a court deems any clause in a contract to have been unconscionable at the time it was made, the court can limit its application. ANSWER: T NAT: AACSB Analytic

PAGE:

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A20. Whenever the parties to an international transaction fail to specify in writing the precise terms of the contract, the United Nations Convention on Contracts for the International Sale of Goods (CISG) will be applied. ANSWER: T NAT: AACSB Analytic

PAGE:

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TYPE:

MULTIPLE CHOICE QUESTIONS A1.

Bild-Rite, Inc., is a Colorado-based firm that does business with clients throughout North America. Bild-Rite oversees construction projects, and buys and sells commercial buildings, undeveloped land, and construction supplies and other goods. Bild-Rite has had to deal with work-site theft and vandalism. With respect to these circumstances, the Uniform Commercial Code (UCC) provides a framework for a. b. c. d.

commercial transactions for the sale of and payment for goods. international construction contracts. domestic and foreign transactions in real estate. prosecuting crimes against business interests.

ANSWER: A NAT: AACSB Reflective

PAGE:

356 AICPA Legal

TYPE:

232

TEST BANK A—UNIT 4: DOMESTIC AND INT’L SALES & LEASE CONTRACTS

A2.

Omni Corporation is a Pennsylvania-based firm that does business throughout the United States. With respect to this circumstance, the UCC has been adopted by, and applies in, a. b. c. d.

a few of the states. all of the states, in whole or in part. half of the states. none of the states, to date.

ANSWER: B NAT: AACSB Reflective A3.

356 AICPA Legal

TYPE:

Over the course of a year, Retail Market, Inc., sells goods from its inventory and one of its warehouses. In exchange, Retail receives checks and other items that substitute for cash, which Retail uses to repay a loan from Savers Bank. Article 2 of the UCC governs a. b. c. d.

the checks. the payment of the loan. the sale of the buildings. the sale of the goods.

ANSWER: D NAT: AACSB Reflective A4.

PAGE:

357 AICPA Legal

TYPE:

Trina pays Urban Edge Electronics store $1,500 for a laptop computer. Under the UCC, this is a. b. c. d.

a gift. a lease. a sale. a crime.

ANSWER: C NAT: AACSB Reflective

PAGE:

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TYPE:

233

CHAPTER 19: THE FORMATION OF SALES AND LEASE CONTRACTS

A5.

In a dispute over a sale involving a bicycle, Dain argues that as to this deal Emory’s Hobby Shop, where Dain bought the bike, is a merchant. A court may determine whether Emory’s is a merchant by assessing whether a. b. c. d.

it has sold any bikes within the last year. it holds itself out by occupation as having knowledge or skill unique to the bike in the transaction. its owner enjoys biking. it subscribes to Bike, a biweekly trade magazine.

ANSWER: B NAT: AACSB Reflective A6.

361 AICPA Legal

TYPE:

Cleo sells kitchen appliances to persons who come into her store, Buy n’ Sell Appliances. One afternoon, Cleo sells a used display shelf to Earline. At a garage sale at her home, Cleo sells a used sofa to Flavia. Under the UCC, Cleo is a merchant of a. b. c. d.

kitchen appliances only. kitchen appliances and display shelves only. kitchen appliances, display shelves, and sofas. none of the choices.

ANSWER: A NAT: AACSB Reflective A7.

PAGE:

361 AICPA Legal

TYPE:

Curtis enters into a contract with Drive-Away Lease Company for a threeyear lease of a car. This contract is subject to a. b. c. d.

Article 2 of UCC. Article 2A of the UCC. Article 11 of the CISG. the common law only.

ANSWER: B NAT: AACSB Reflective

PAGE:

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TYPE:

234

TEST BANK A—UNIT 4: DOMESTIC AND INT’L SALES & LEASE CONTRACTS

A8.

Rio Engineering Corporation pays PC Technologies, Inc., $1,000 to use a computer for a month. For purposes of the UCC, this is a. b. c. d.

a crime. a consignment. a lease. a sale.

ANSWER: C NAT: AACSB Reflective A9.

PAGE:

361 AICPA Legal

TYPE:

Rally Corporation enters into a contract to sell ski gear to SnoSportz Company, which sells a pair of the skis to Tyra, a consumer, who later sells them to Uli, another consumer. Article 2 of the UCC applies to the sales transactions between a. b. c. d.

all of the buyers and sellers. Rally and SnoSportz only. SnoSportz and Tyra only. Tyra and Uli only.

ANSWER: A NAT: AACSB Reflective

PAGE:

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TYPE:

A10. Sunny Glass Company and Collision Repair Center enter into a contract under which Sunny agrees to deliver a certain quantity of auto glass to Collision Repair each month. The contract does not include a price term. In a suit between the parties over the price, a court will a. b. c. d.

determine a reasonable price. impose the lowest market price. impose the highest market price. return the parties to the positions they held before the contract.

ANSWER: A NAT: AACSB Reflective

PAGE:

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TYPE:

235

CHAPTER 19: THE FORMATION OF SALES AND LEASE CONTRACTS

A11. Five Star Flooring orders carpet from Textile Mills Corporation, but Textile does not deliver. Five Star will probably be unable to enforce the agreement if the parties omitted a. b. c. d.

the duration of the deal. a payment term. a quantity term. shipping arrangements.

ANSWER: C NAT: AACSB Reflective

PAGE:

363 AICPA Legal

TYPE:

A12. Fresh Harvest, Inc., agrees to sell to Gina’s Bed & Breakfast Inn a certain amount of locally grown produce each week but no mention is made of where the goods are to be delivered. In general, the UCC requires that the delivery take place at a. b. c. d.

a neutral place of business halfway between the parties’ locations. a “reasonable” place of delivery. Fresh Harvest’s place of business. Gina’s place of business.

ANSWER: C NAT: AACSB Reflective

PAGE:

363 AICPA Legal

TYPE:

A13. Pressing Music, Inc., offers to buy from Digital Media Corporation (DMC) one million blank CDs of a certain quality. Without notifying Pressing, DMC timely ships CDs of a different quality. With respect to the offer and a possible contract, this shipment is a. b. c. d.

an acceptance and a breach. an acceptance and an accommodation. an acceptance and complete performance. a rejection and a counteroffer.

ANSWER: A NAT: AACSB Reflective

PAGE:

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TYPE:

236

TEST BANK A—UNIT 4: DOMESTIC AND INT’L SALES & LEASE CONTRACTS

A14. Valley Farms offers to sell Whole Harvest Bakeries, Inc., five hundred bushels of wheat. Whole Harvest responds, “We agree to buy five hundred bushels only if the wheat is Grade A quality.” This statement is a. b. c. d.

a breach. a counteroffer. a confirmation. an acceptance.

ANSWER: B NAT: AACSB Reflective

PAGE:

367 AICPA Legal

TYPE:

A15. Pop Culture Clothiers, Inc., sells t-shirts to Trendwell Stores, Inc., under an existing contract. When textile costs increase, Trendwell agrees to a price increase, but later wants to cancel the contract. Trendwell may a. b. c. d.

cancel the contract immediately. cancel the contract only after accepting a final shipment. cancel the contract only on reasonable notice. not cancel the contract.

ANSWER: D NAT: AACSB Reflective

PAGE:

367 AICPA Legal

TYPE:

A16. Quinn enters into a series of agreements with Reba involving a sale of a Suite Dreams Motel, including the land, building, furnishings, shares of stock in Suite Dreams Company, and a contract with Trudy to create an ad campaign. Reba suspects that Quinn may be misrepresenting the facts. The UCC Statute of Frauds governs the sale of a. b. c. d.

any of the property evidenced by a writing. any of the property that may involve fraud. the furnishings priced at $500 or more. the land and the building.

ANSWER: C NAT: AACSB Reflective

PAGE:

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TYPE:

237

CHAPTER 19: THE FORMATION OF SALES AND LEASE CONTRACTS

A17. Sweet Tooth Pastries, Inc., and other bakers refer to a “baker’s dozen” as consisting of a collection of thirteen baked goods. This is an example of a. b. c. d.

course of dealing. course of performance. square dealing. usage of trade.

ANSWER: D NAT: AACSB Reflective

PAGE:

371 AICPA Legal

TYPE:

Fact Pattern 19-A1 (Questions A18–A19 apply) Olisa enters into a contract to buy a stove from Pay-to-Own Appliance store with the price to be paid in monthly installments. After thirty-six months of payments, Olisa has paid more than twice the price of a similar stove. Eighteen payments remain due under the contract. A18. Refer to Fact Pattern 19-A1. Olisa files a suit against Pay-to-Own, claiming that their contract is so unfair and one sided that it would be unreasonable to enforce it. Olisa is asserting a. b. c. d.

the concept of good faith. the principle of fair trade. the predominant-factor test. the doctrine of unconscionability.

ANSWER: D NAT: AACSB Reflective

PAGE:

372 AICPA Legal

TYPE:

A19. Refer to Fact Pattern 19-A1. Under the UCC, the court can evaluate the contract to determine whether it was unreasonably unfair and one sided a. b. c. d.

at the time it was made. at the end of its term. in the middle of its performance. at the time of Gail’s suit.

ANSWER: A NAT: AACSB Reflective

PAGE:

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TYPE:

238

TEST BANK A—UNIT 4: DOMESTIC AND INT’L SALES & LEASE CONTRACTS

239

CHAPTER 19: THE FORMATION OF SALES AND LEASE CONTRACTS

A20. Overseas Corporation (OC), a U.S. firm, orally agrees to sell six freezers to Pisa Pizza, Ltd., in Italy. OC fails to deliver. Under the CISG, Pisa Pizza can a. b. c. d.

enforce the agreement. not enforce the agreement because it is not in writing. not enforce the agreement because the price term is not specified. not enforce the agreement because there is no consideration.

ANSWER: A NAT: AACSB Reflective

PAGE:

375 AICPA Legal

TYPE:

ESSAY QUESTIONS A1.

Clean Machines Company makes washing machines. Over the phone, Clean offers to sell Dealers Appliance Outlet one hundred model EZ2000 washers at a price of $150 per unit. Clean says that it will keep the offer open for ninety days. Dealers responds that within two or three weeks it will decide whether to accept. One week later, Clean faxes, and Dealer receives, notice that the offer is withdrawn. Dealer immediately phones Clean to accept the $150-per-unit offer. When Clean refuses to deliver at that price, Dealer files a suit. Clean asserts, first, that there is no contract and, second, that if there is a contract, it is unenforceable. Discuss Clean’s assertions. ANSWER: Clean’s contention that there is no contract between it and Dealers is correct. An offeror can revoke an offer at any time before acceptance without liability unless the offer is irrevocable. For this offer to be considered irrevocable, Dealers would have to prove that it had an option, which requires consideration, or that the offer was irrevocable under UCC 2–205. Neither of these applies. Dealers gave no consideration for the offer to be kept open, and thus no option was created. And, for the offer to be irrevocable under the UCC without consideration, Clean—a merchant—would have had to give assurance that the offer would remain open for ninety days in a signed writing. Because the assurance was made orally, the offer was revocable. Thus, Dealers’s receipt of Clean’s revocation (withdrawal) of the offer before Dealers’s acceptance terminated the offer, and no contract was formed. Clean’s contention that even if a contract was created, the contract is unenforceable is also correct. Under UCC 2–201, any contract for the sale of

240

TEST BANK A—UNIT 4: DOMESTIC AND INT’L SALES & LEASE CONTRACTS

goods priced at $500 or more must be in writing, be supported by written evidence such as a memorandum, or be the object of an applicable exception (such as written confirmation between merchants, specially ordered or manufactured goods, admission under oath, or partial performance completed) to be enforceable. The contract in the case presented here is for the sale of goods (washing machines) priced at $500 or more ($15,000). It was not in writing; nor is there a writing signed by Clean that an oral contract was formed. Also, none of the exceptions apply. Thus, even if Dealers could prove that an oral contract had been made, the contract could not be enforced against Clean’s defense of the Statute of Frauds. PAGES: 365 & 368 NAT: AACSB Reflective A2.

TYPE: = AICPA Decision Modeling

Tune Products, Inc., offers to sell to Unlimited Sales Company one hundred MP3 players at $50 a piece, subject to certain specific delivery dates. Unlimited replies with a signed purchase order that reads, “Accept your offer for 100 I-appliances at $50 each. Must be delivered to our warehouse.” Tune does not respond or deliver the goods. Unlimited files a suit for breach of contract, to which Tune answers that there is no contract because Unlimited’s purchase order contained additional terms and is not signed by Tune. Can Unlimited recover? Explain. ANSWER: Yes. Additional or different terms in an unconditional acceptance, which is otherwise definite and timely, are interpreted as proposals for additional terms to a contract, unless the contract is between merchants. In that situation, the terms become part of the contract unless (1) the offer expressly limits acceptance to its terms, (2) the additional terms materially alter the contract, or (3) the offeree objects to the additional terms within a reasonable time. Here, the offer did not expressly limit the acceptance, the extra terms did not materially change the contract, and Tune did not object within a reasonable time. If either or both of the parties is not a merchant, a contract is formed according to the terms of the original offer. Thus, here, the additional term (delivery to Unlimited’s warehouse) would have become part of the contract even if one or both parties had not been merchants. Tune’s Statute of Frauds claim (that the purchase order was not signed by Tune) also fails. For a contract for a sale of goods between merchants, when one party sends a written confirmation within a reasonable time after terms have been reached orally, the confirmation is binding unless the recipient objects within ten days of

CHAPTER 19: THE FORMATION OF SALES AND LEASE CONTRACTS

241

receipt. The merchant receiving the communication must have reason to know its contents, but it needs to be signed only by the party who sends it. Here, Tune received the signed writing, but did not object within the ten days. PAGES: 366–367 & 368 NAT: AACSB Reflective

TYPE: = AICPA Decision Modeling

Chapter 20 Title, Risk, and Insurable Interest N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

The UCC has replaced the common law concept of title in part with the concept of risk of loss. ANSWER: T NAT: AACSB Analytic

A2.

384 AICPA Legal

TYPE:

If a sale involves crops that are to be harvested within twelve months, identification takes place when the crops are planted. ANSWER: T NAT: AACSB Reflective

A3.

PAGE:

384 AICPA Legal

TYPE:

If a sale involves unborn animals to be born within twelve months after contracting, identification takes place when the animals are born. ANSWER: F NAT: AACSB Reflective

PAGE:

384 AICPA Legal

TYPE:

238

A4.

TEST BANK A—UNIT 4: DOMESTIC & INT’L SALES & LEASE CONTRACTS

Fungible goods are goods that can be delivered only by transport. ANSWER: F NAT: AACSB Analytic

PAGE:

385 AICPA Legal

TYPE:

239

CHAPTER 20: TITLE, RISK, AND INSURABLE INTEREST

A5.

If an owner holds fungible goods as a tenant in common, he or she cannot pass title to the goods without the other owners’ acquiescence. ANSWER: F NAT: AACSB Reflective

A6.

PAGE:

386 AICPA Legal

TYPE:

PAGE:

386 AICPA Legal

TYPE:

A lessee acquires whatever title the lessor has to the goods. ANSWER: F NAT: AACSB Analytic

A9.

TYPE:

A seller with voidable title can transfer good title to a good faith purchaser for value. ANSWER: T NAT: AACSB Analytic

A8.

385 AICPA Legal

A receipt issued by a warehouser for goods stored in a warehouse is a bill of lading. ANSWER: F NAT: AACSB Analytic

A7.

PAGE:

386 AICPA Legal

TYPE:

Under a shipment contract, the risk of loss passes to the buyer when the goods are delivered to the carrier. ANSWER: T NAT: AACSB Analytic

PAGE:

390 AICPA Legal

TYPE:

A10. Under the UCC, the risk of los necessarily passes with title. ANSWER: F NAT: AACSB Analytic

PAGE:

390 AICPA Legal

TYPE:

A11. When a seller keeps the goods for pickup, if the seller is a merchant, the risk of loss passes to a buyer on tender of delivery. ANSWER: F NAT: AACSB Analytic

PAGE:

392 AICPA Legal

TYPE:

240

TEST BANK A—UNIT 4: DOMESTIC & INT’L SALES & LEASE CONTRACTS

241

CHAPTER 20: TITLE, RISK, AND INSURABLE INTEREST

A12. If a lessor is a merchant, the risk of loss passes to a lessee on the lessee’s receipt of the goods. ANSWER: T NAT: AACSB Analytic

PAGE:

392 AICPA Legal

TYPE:

A13. In a sale on approval, a buyer takes goods primarily for resale, with a right to return any goods that fail to sell. ANSWER: F NAT: AACSB Analytic

PAGE:

393 AICPA Legal

TYPE:

A14. In a sale or return, title and risk of loss remain with the seller until the buyer accepts the goods. ANSWER: F NAT: AACSB Analytic

PAGE:

393 AICPA Legal

TYPE:

A15. A consignment is treated as a sale or return and governed by Article 2. ANSWER: F NAT: AACSB Analytic

PAGE:

394 AICPA Legal

TYPE:

A16. When a buyer breaches a contract, the risk of loss immediately shifts to the buyer. ANSWER: T NAT: AACSB Analytic

PAGE:

396 AICPA Legal

TYPE:

A17. If a buyer accepts a shipment of goods and later discovers a defect, acceptance can be revoked. ANSWER: T NAT: AACSB Reflective

PAGE:

396 AICPA Legal

TYPE:

A18. If the tender or delivery of goods is so nonconforming that the lessee has the right to reject them, the risk of loss remains with the lessor until cure or acceptance.

242

TEST BANK A—UNIT 4: DOMESTIC & INT’L SALES & LEASE CONTRACTS

ANSWER: T NAT: AACSB Analytic

PAGE:

396 AICPA Legal

TYPE:

A19. Both the buyer and the seller can have an insurable interest in identical goods at the same time. ANSWER: T NAT: AACSB Analytic

PAGE:

397 AICPA Legal

TYPE:

A20. A seller has an insurable interest in goods as long as the goods are in existence. ANSWER: F NAT: AACSB Analytic

PAGE:

397 AICPA Legal

TYPE:

MULTIPLE CHOICE QUESTIONS A1.

Leasing Equipment Corporation (LEC) agrees to lease five computer workstations to Mapmakers, Inc. Before any interest in the workstations can pass from LEC to Mapmakers, they must be a. b. c. d.

in existence and identified as the goods in the contract. in LEC’s physical possession. in Mapmakers’s physical possession. listed in a document of title and filed in the appropriate state office.

ANSWER: A NAT: AACSB Reflective A2.

PAGE:

384 AICPA Legal

TYPE:

Wild Alaskan sockeye salmon that fill the hold of Dexter’s fishing boat are fungible if the fish are a. b. c. d.

alike naturally, by agreement, or by trade usage. fundamentally different. fun, good, and edible. rotting due to a broken freezer in the hold.

ANSWER:

PAGE:

385

TYPE:

CHAPTER 20: TITLE, RISK, AND INSURABLE INTEREST

NAT: AACSB Reflective

AICPA Legal

243

244 A3.

TEST BANK A—UNIT 4: DOMESTIC & INT’L SALES & LEASE CONTRACTS

Laraby, a representative for Merchandise Shipping Company, delivers a bill of lading to Caitlin, the owner of Dockside Warehouse. A bill of lading is a. b. c. d.

an invoice for payment for loading and carting verified by a seller. an order to ship goods signed by a buyer. a receipt for goods signed by a carrier. a receipt issued by a warehouser for goods in a warehouse.

ANSWER: C NAT: AACSB Reflective A4.

386 AICPA Legal

TYPE:

Suki leaves a Update-brand watch at Timepiece Sales & Repair to be fixed. Timepiece sells the watch to Vera, who does not know that the watch belongs to Suki. Suki can recover from a. b. c. d.

no one. Timepiece. Vera. Update.

ANSWER: B NAT: AACSB Reflective A5.

PAGE:

387 AICPA Legal

TYPE:

Uri sells 100 cases of vitamins to Wanda, but before she takes physical possession, the cases are lost. Under the UCC, the parties’ rights and obligations with respect to the loss depend on the concept of a. b. c. d.

identification. insurable interest. risk of loss. title.

ANSWER: C NAT: AACSB Reflective

PAGE:

389 AICPA Legal

TYPE:

245

CHAPTER 20: TITLE, RISK, AND INSURABLE INTEREST

A6.

Catchy Gadgets Corporation and Discount Outlets, Inc., enter into a contract for a sale of kitchenware. The contract requires Catchy to deliver the goods to Rapido Carrier Company for transport to Discount’s warehouse. Risk of loss passes to Discount when a. b. c. d.

Catchy delivers the goods to Rapido. Catchy and Discount enter into their contract. Rapido transports the goods to Discount’s warehouse. Discount sells the goods to its customers.

ANSWER: A NAT: AACSB Reflective A7.

390 AICPA Legal

TYPE:

Harley’s Home Store buys furniture from Relax-a-by Furniture, Inc. The parties agree that the furniture will be shipped “F.O.B. Relax-a-by’s warehouse” to Harley’s via Jiffy Shipping Corporation. The furniture is lost in transit. The loss is suffered by a. b. c. d.

Jiffy Shipping. Relax-a-by Furniture. Harley’s Home Store. F.O.B.

ANSWER: C NAT: AACSB Reflective A8.

PAGE:

390 AICPA Legal

TYPE:

Matrix Material Corporation in New Jersey sells fifty tons of fabric to Natural Fit Clothing, Inc., in Ohio, “F.O.B. New Jersey.” Matrix arranges with Outbound Truckline to transport the goods. The cost of the transport will be paid by a. b. c. d.

Matrix. Natural Fit. New Jersey. Outbound.

ANSWER: A NAT: AACSB Reflective

PAGE:

390 AICPA Legal

TYPE:

246 A9.

TEST BANK A—UNIT 4: DOMESTIC & INT’L SALES & LEASE CONTRACTS

Mitchell buys 100 bales of hay from New Grain Fields. The parties agree that the hay will be transported “F.O.B. New Grain Fields” via Farm County Trucking Company. Farm County’s truck and the hay are lost in a fire following an accident. The loss is suffered by a. b. c. d.

Mitchell. New Grain Fields. Farm County Trucking. all of the parties as tenants in common in equal measure.

ANSWER: A NAT: AACSB Reflective

PAGE:

390 AICPA Legal

TYPE:

A10. Delicioso Tea Company and Savory Stores, Inc., enter into a contract for a sale of organic tea. The contract includes the term “F.O.B. River City,” which is Savory’s location. This means that the contract is a. b. c. d.

a bill of lading. a destination contract. a shipment contract. a warehouse receipt.

ANSWER: B NAT: AACSB Reflective

PAGE:

392 AICPA Legal

TYPE:

A11. Finished Furnishings, Inc., agrees to lease an Oak Top-brand desk to Research Resources, Inc. (RRI), which agrees to pick it up at Streetside Warehouse. Before RRI retrieves the desk, it is stolen. The loss is suffered by a. b. c. d.

Perfect Furnishings. Oak Top. Streetside Warehouse. RRI.

ANSWER: D NAT: AACSB Reflective

PAGE:

392 AICPA Legal

TYPE:

247

CHAPTER 20: TITLE, RISK, AND INSURABLE INTEREST

A12. Twyla buys a Voracious-brand bicycle from U-Pik-It Bike Store, which agrees to keep the bike for Twyla until she picks it up. Before Twyla gets the bike, a fire destroys the store and the bike. The loss of the bike is suffered by a. b. c. d.

no one. Voracious. Twyla. U-Pik-It.

ANSWER: D NAT: AACSB Reflective

PAGE:

392 AICPA Legal

TYPE:

A13. Marine Recreation, Inc., allows Nels to take a Marine Recreation boat for a “test run.” Nels tries the boat for a few hours, returns, and buys it. This is a. b. c. d.

a bailment. a consignment. a sale on approval. a sale or return.

ANSWER: C NAT: AACSB Reflective

PAGE:

393 AICPA Legal

TYPE:

A14. Dragonaire Corporation contracts with Excel Trucking Company to take goods to Fly-By Airlines, Inc., with Fly-By to transport the goods to a Geo Storage Company warehouse. Excel, Fly-By, and Geo each acknowledge possession of the goods by a document of title. Excel, Fly-By, and Geo are a. b. c. d.

bailees. consignees. lessees. sellers.

ANSWER: A NAT: AACSB Reflective

PAGE:

393 AICPA Legal

TYPE:

248

TEST BANK A—UNIT 4: DOMESTIC & INT’L SALES & LEASE CONTRACTS

A15. Crest Jewelers buys diamonds from Paramount Gems to resell with the right to return the unsold stones in lieu of payment. This is a. b. c. d.

a bailment. a consignment. a sale on approval. a sale or return.

ANSWER: D NAT: AACSB Reflective

PAGE:

394 AICPA Legal

TYPE:

A16. Open Road Showroom sells new and used motorcycles. Some of the motorcycles are held on consignment, including six consigned by Pedro Cycles, Inc. Like most consignments, Open Road’s deal with Pedro Cycles is a. b. c. d.

a bailment. a sale. a delivery ex-ship. a lease.

ANSWER: A NAT: AACSB Reflective

PAGE:

394 AICPA Legal

TYPE:

A17. Town Style Stores orders Hidebound-brand leather jackets from Cowhide & Cotton Company (CCC). CCC mistakenly ships denim jackets, which Town rejects and returns via Valu Transport, Inc. During the return, the jackets are lost. The loss is suffered by a. b. c. d.

Town. Hidebound. Valu. CCC.

ANSWER: D NAT: AACSB Reflective

PAGE:

396 AICPA Legal

TYPE:

249

CHAPTER 20: TITLE, RISK, AND INSURABLE INTEREST

A18. NuStores accepts a shipment of QuikView-brand 3D HD DVD players from Open-Ur-Eyes, Inc. NuStores later discovers a defect in the players, revokes acceptance, and returns the players via Playback, Inc. During the return, the players are lost. The loss is suffered by a. b. c. d.

NuStores. Playback. QuikView. Open-Ur-Eyes.

ANSWER: D NAT: AACSB Reflective

PAGE:

396 AICPA Legal

TYPE:

A19. Essen Corporation buys from Fallow Farms, Inc., a rice crop that Fallow plans to plant and harvest during the next growing season. Essen plans to sell the rice to Gourmet Grocery Stores. After the rice is planted, but before it is harvested, an insurable interest in the rice exists in a. b. c. d.

Essen and Fallow, but not Gourmet Grocery. Essen, Fallow, and Gourmet Grocery. Essen only. Fallow only.

ANSWER: A NAT: AACSB Reflective

PAGE:

397 AICPA Legal

TYPE:

A20. Pie Sales Corporation orders ReadyMade-brand pies from Savory Foods Company. Savory identifies the goods. Before they are shipped to Pie Sales, an insurable interest in the goods exists in a. b. c. d.

Pie Sales and Savory Foods. ReadyMade and Savory Foods. Pie Sales and ReadyMade. all of the parties as tenants in common.

ANSWER: A NAT: AACSB Reflective

PAGE:

397 AICPA Legal

TYPE:

250

TEST BANK A—UNIT 4: DOMESTIC & INT’L SALES & LEASE CONTRACTS

ESSAY QUESTIONS A1.

In the following situations, two parties claim the same goods. Who is most likely to prevail in each circumstance? Explain. (a) Olan steals Phil’s television set and sells it to Quincy, an innocent purchaser, for value. Phil learns Quincy has the set and demands its return. (b) Riley takes his television set for repair to Silky, a merchant who sells new and used television sets. By accident, one of Silky’s employees sells the set to Tuna, an innocent purchaser-customer, who takes possession. Riley wants his set back from Tuna. ANSWER: (a) A buyer acquires whatever title the seller has to the goods sold. If the seller is a thief, the seller’s title is void (seller has no title). Thus, the buyer can acquire no title, and the real owner has superior rights. Under those principles, Phil can recover the television set from Quincy. (b) When a person “entrusts” goods to a merchant (a person who deals in goods of that kind), the merchant has the power to transfer a good title to any purchaser who acquires the goods in the ordinary course of business. Riley entrusted his set to merchant Silky. Silky deals in goods of that kind. Therefore, Silky could pass good title to the set sold to a customer (Tuna) because Tuna purchased the goods in the ordinary course of business. Consequently, Riley cannot get the set back from Tuna. (But Silky the merchant is liable to the true owner, Riley, for the equivalent value of the set). PAGES: 386–389 NAT: AACSB Reflective

A2.

TYPE: = AICPA Decision Modeling

Quality Computer Company agrees to sell one hundred hard drives to Retail Electronics, Inc. The hard drives, which Retail Electronics expressly requires to have certain amounts of memory, are to be shipped “F.O.B. Retail Electronics distribution center in Memphis, TN.” When the drives arrive, Retail Electronics rejects them and informs Quality Computer, claiming that the drives do not conform to Retail Electronics’ memory requirement. A few hours later, the drives are destroyed in a fire at Retail Electronics’ distribution center. Will Quality Computer succeed in a suit against Retail Electronics for the cost of the goods?

CHAPTER 20: TITLE, RISK, AND INSURABLE INTEREST

251

ANSWER: No, because the goods were nonconforming, and so the cost of their loss will be borne by Quality Computer, the seller. When goods are shipped and destroyed while in the possession of the buyer, if a contract does not state who bears the risk of loss, the determining factor is whether there has been a breach of the contract. There is a breach if the goods are so nonconforming as to give the buyer a right of rejection. In that situation, the risk of loss belongs to the seller until the defects are cured or until the buyer accepts the goods in spite of their defects. It makes no difference, in these circumstances, whether the agreement is a shipment contract or a destination contract. Here, the goods were destroyed without their defects being cured and without the buyer’s accepting them anyway. PAGE: 396 NAT: AACSB Reflective

TYPE: = AICPA Decision Modeling

Chapter 21 Performance and Breach of Sales and Lease Contracts N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

The duties and obligations under the terms of a contract include those specified by custom. ANSWER: T NAT: AACSB Analytic

A2.

400 AICPA Legal

TYPE:

The UCC’s good faith provision can never be disclaimed. ANSWER: T NAT: AACSB Analytic

A3.

PAGE:

400 AICPA Legal

A shipment contract requires a seller to deliver goods at a particular destination. ANSWER: F NAT: AACSB Analytic

PAGE:

401 AICPA Legal

TYPE:

250

TEST BANK A—UNIT 4: DOMESTIC & INT’L SALES & LEASE CONTRACTS

CHAPTER 21: PERFORMANCE & BREACH OF SALES & LEASE CONTRACTS

A4.

If goods or tender of delivery fail in any respect to conform to a contract, the buyer or lessee loses the right to accept the goods. ANSWER: F NAT: AACSB Analytic

A5.

PAGE:

402 AICPA Legal

TYPE:

PAGE:

403 AICPA Legal

TYPE:

PAGE:

405 AICPA Legal

TYPE:

Unless the parties agree otherwise, the buyer or lessee has an absolute right to inspect the goods before making payment. ANSWER: T NAT: AACSB Analytic

A9.

TYPE:

Occurrences unforeseen by either party when a contract was made may make performance commercially impracticable, but the perfect tender rule still applies. ANSWER: T NAT: AACSB Analytic

A8.

402 AICPA Legal

With an installment contract, a buyer or lessee cab reject an installment on any pretext. ANSWER: F NAT: AACSB Analytic

A7.

PAGE:

Once the time for performance under a contract has expired, the seller or lessor loses the right to cure. ANSWER: F NAT: AACSB Analytic

A6.

251

PAGE:

406 AICPA Legal

TYPE:

If some of the goods delivered do not conform to a contract and the seller or lessor has failed to cure, the buyer or lessee can make a partial acceptance. ANSWER: T NAT: AACSB Analytic

PAGE:

407 AICPA Legal

TYPE:

252

TEST BANK A—UNIT 4: DOMESTIC & INT’L SALES & LEASE CONTRACTS

A10. If, before the time for contract performance, one party clearly communicates to the other the intention not to perform, such an action is a breach of the contract. ANSWER: T NAT: AACSB Analytic

PAGE:

408 AICPA Legal

TYPE:

CHAPTER 21: PERFORMANCE & BREACH OF SALES & LEASE CONTRACTS

253

A11. If a buyer breaches a contract and the seller resells the goods to another party, the seller cannot hold the breaching buyer liable for any loss. ANSWER: F NAT: AACSB Analytic

PAGE:

409 AICPA Legal

TYPE:

A12. If a lessee breaches a contract, the lessor can choose to simply cancel the contract. ANSWER: T NAT: AACSB Analytic

PAGE:

409 AICPA Legal

TYPE:

A13. If a buyer repudiates a contract, the seller cannot recover damages. ANSWER: F NAT: AACSB Analytic

PAGE:

410 AICPA Legal

TYPE:

A14. If a lessee is insolvent, a lessor can stop a carrier or bailee from delivering the goods regardless of the quantity shipped. ANSWER: T NAT: AACSB Analytic

PAGE:

410 AICPA Legal

TYPE:

A15. When a lessor refuses to deliver the goods, a lessee can obtain specific performance only if the goods are not unique. ANSWER: F NAT: AACSB Analytic

PAGE:

411 AICPA Legal

TYPE:

A16. A buyer may reject a seller’s goods only if they fail to conform to a material term of the contract. ANSWER: F NAT: AACSB Analytic

PAGE:

414 AICPA Legal

TYPE:

A17. Revocation of acceptance is not effective until notice is given to the seller or lessor. ANSWER:

PAGE:

414

TYPE:

254

TEST BANK A—UNIT 4: DOMESTIC & INT’L SALES & LEASE CONTRACTS

NAT: AACSB Analytic

AICPA Legal

CHAPTER 21: PERFORMANCE & BREACH OF SALES & LEASE CONTRACTS

255

A18. If the parties to a sales contract state that a certain remedy is exclusive, then it is the sole remedy. ANSWER: T NAT: AACSB Analytic

PAGE:

415 AICPA Legal

TYPE:

A19. A buyer or lessee who has accepted nonconforming goods may keep the goods and recover for any loss resulting in the ordinary course of events. ANSWER: T NAT: AACSB Analytic

PAGE:

415 AICPA Legal

TYPE:

A20. Under the UCC, parties to a contract cannot limit or exclude consequential damages. ANSWER: F NAT: AACSB Analytic

PAGE:

416 AICPA Legal

TYPE:

MULTIPLE CHOICE QUESTIONS A1.

Price-Cut Discount Stores are open to consumers. The UCC requirement of good faith imposes a. b. c. d.

a higher duty on consumers than Price-Cut. a higher duty on Price-Cut than on consumers. no duty on either Price-Cut or consumers. the same duty on Price-Cut and consumers.

ANSWER: B NAT: AACSB Reflective A2.

PAGE:

400 AICPA Legal

TYPE:

Rocky and Slim enter into a contract for a sale of five rowboats. Circumstances make it difficult for Rocky to perform, and the contract is breached. Slim looks for remedies. Unlike the common law, under the UCC, remedies are a. b.

cumulative. exclusive.

256

TEST BANK A—UNIT 4: DOMESTIC & INT’L SALES & LEASE CONTRACTS

c. d.

limited. unlimited.

ANSWER: A NAT: AACSB Reflective

PAGE:

400 AICPA Legal

TYPE:

CHAPTER 21: PERFORMANCE & BREACH OF SALES & LEASE CONTRACTS

A3.

Clear Day Company, which is based in Delaware, agrees to sell fifty windows, currently stored in Florida, to Great Vu, Inc., which is based in Hawaii. Absent an agreement to the contrary, the place of delivery is in a. b. c. d.

California. Delaware. Florida. Hawaii.

ANSWER: C NAT: AACSB Reflective A4.

PAGE:

401 AICPA Legal

TYPE:

Hydraulic Leasing Corporation (HLC) and Dockside Offloading Company enter into a contract for a lease of ten hydraulic lifts. Under the perfect tender rule, HLC must ship or tender goods to the lessee that a. b. c. d.

approximately conform to the contract description. entirely conform to the contract description in most ways. conform to the contract description in every way. substantially conform to the contract description.

ANSWER: C NAT: AACSB Reflective A5.

257

PAGE:

401 AICPA Legal

TYPE:

Recycle Packaging, Inc., agrees to sell 50,000 6-ounce yogurt containers to Organic Dairy Company. Recycle can obtain only 20,000 of the 6-ounce containers, but also ships 30,000 more expensive 8-ounce containers for the same price. Organic rejects the 8-ounce containers. With time for performance not yet expired, Recycle can a. b. c. d.

attempt to cure the defect. cancel the contract. recover the purchase price plus incidental damages. resell or dispose of the goods and hold Organic liable for any loss.

ANSWER: A NAT: AACSB Reflective

PAGE:

402 AICPA Legal

TYPE:

258 A6.

TEST BANK A—UNIT 4: DOMESTIC & INT’L SALES & LEASE CONTRACTS

Screen Perfect, Inc., and Vibrant View Stores enter into a contract for a sale of 3D HD TVs with certain specifications. Screen Perfect ships TVs that are not 3D but otherwise meet the specifications. Vibrant View a. b. c. d.

cannot reject the entire shipment. can reject the entire shipment. must accept the entire shipment. must reject the entire shipment.

ANSWER: B NAT: AACSB Reflective A7.

402 AICPA Legal

TYPE:

Primo Pools Company and Aquatic Recreation, Inc., enter into a contract for a sale of prefabricated swimming pools. Under either a shipment contract or a destination contract, the seller must a. b. c. d.

allow the buyer to reject the goods for any reason. deliver the goods to a particular destination. place the goods into the hands of a carrier. provide the buyer with any necessary documents of title.

ANSWER: D NAT: AACSB Reflective A8.

PAGE:

402 AICPA Legal

TYPE:

Mitch and Nadine enter into a contract for a sale of seventy-six specially made motion detectors. When Nadine does not deliver within a reasonable time after the agreed delivery date, Mitch files a suit for breach. Nadine asserts the doctrine of commercial impracticability. This doctrine extends only to problems that are a. b. c. d.

foreseen. preventable. unforeseen. ordinarily assumed by a seller or lessor.

ANSWER: C NAT: AACSB Reflective

PAGE:

403 AICPA Legal

TYPE:

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259

Fact Pattern 21-A1 (Questions A9-A10 apply) Internet Cafés, Inc., contracts to buy all of its requirements for coffee, at a minimum of 1 million pounds per year, from Java Corporation for six years. After three years, Internet tells Java that it plans to sell its assets to Bagel Bistros, Inc. Bagel Bistros refuses to assure Java that it will continue Internet’s contract. A9.

Refer to Fact Pattern 21-A1. Bagel Bistros’s refusal is a. b. c. d.

a justified response based on Bagel Bistros’s relation to the contract. an assignment of Internet’s rights under the contract. a reasonable suspension of performance under the contract. a repudiation of the contract.

ANSWER: D NAT: AACSB Reflective

PAGE:

408 AICPA Legal

TYPE:

A10. Refer to Fact Pattern 21-A1. Java can a. b. c. d.

assign its rights under the contract but cannot terminate it. terminate the contract and seek damages. suspend performance under the contract until Java is fully paid. do nothing.

ANSWER: B NAT: AACSB Reflective

PAGE:

409 AICPA Legal

TYPE:

A11. Richman Manufacturing Company contracts to sell sweaters to Sweet Sweaters store. Before the sweaters are delivered, Sweet Sweaters indicates that it will not be able to pay. Richman can a. b. c. d.

force Sweet Sweaters to accept and pay for the sweaters. require Sweet Sweaters to find a buyer for the sweaters. resell the sweaters and recover any damages from Sweet Sweaters. do nothing.

ANSWER: C NAT: AACSB Reflective

PAGE:

409 AICPA Legal

TYPE:

260

TEST BANK A—UNIT 4: DOMESTIC & INT’L SALES & LEASE CONTRACTS

A12. Amble Country Stables contracts to buy 1,000 horseshoes from Burleigh Blacksmith, Inc., for $1 per shoe. When the market price decreases to 50 cents per shoe, Amble refuses to go through with the deal. Burleigh can recover a. b. c. d.

$1,500. $1,000. $500. $0.

ANSWER: C NAT: AACSB Reflective

PAGE:

410 AICPA Legal

TYPE:

A13. Double D Ranch and Esau enter into a contract on August 1 for the sale of 200 cattle. Esau cancels the contract ten days later. Double D is unable to sell the cattle to another buyer. Double D can a. b. c. d.

force Esau to accept the cattle and pay for them. recover the contract price from Esau but must hold the cattle for him. recover the contract price from Esau and keep the cattle. recover the contract price from Esau but must destroy the cattle.

ANSWER: B NAT: AACSB Reflective

PAGE:

410 AICPA Legal

TYPE:

A14. Field Gardens and Gourmet Restaurant, Inc., enter into a contract for a sale of lettuce. When Field learns that Gourmet is insolvent, Field can stop delivery of the goods in transit a. b. c. d.

only if the quantity is at least a carload. only if the quantity is at least a planeload. only if the quantity is at least a truckload. regardless of the quantity.

ANSWER: D NAT: AACSB Reflective

PAGE:

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A15. Consuelo and Gabriela enter into a contract for a sale of saxophones and other brass instruments. Consuelo delivers, but Gabriela does not pay. Consuelo can normally recover as damages a. b. c. d.

any profit lost minus any loss avoided. whatever amount the seller wishes to claim. the purchase price plus incidental damages. the market price at the place at which the seller delivered the goods.

ANSWER: C NAT: AACSB Reflective

PAGE:

411 AICPA Legal

TYPE:

A16. Cheesy Pizza Company contracts to sell 1,000 cases of frozen pizzas to Roller Rinks, Inc., but refuses to deliver. Due to a spice shortage, Roller Rinks cannot obtain pizza elsewhere. Roller Rinks’s right to recover the goods from Cheesy is the right of a. b. c. d.

cover. cure. replevin. specific performance.

ANSWER: C NAT: AACSB Reflective

PAGE:

413 AICPA Legal

TYPE:

A17. Owen and Pablo enter into a contract for a sale of fifty Western saddles. Owen does not deliver. Pablo can normally recover as damages the difference between a. b. c. d.

any loss avoided and any profit gained. the actual price and the hoped-for price. the contract price and the market price. the current prices in the parties’ locations.

ANSWER: C NAT: AACSB Reflective

PAGE:

413 AICPA Legal

TYPE:

262

TEST BANK A—UNIT 4: DOMESTIC & INT’L SALES & LEASE CONTRACTS

A18. Bayou Boats, Inc., contracts for the sale of seven swamp boats to Tidal Flats Fishing Tours. Bayou repudiates the contract. Tidal Flats’s recovery of damages is measured at the time a. b. c. d.

Bayou advertised the goods. Tidal Flats ordered the goods. Tidal Flats learned of the breach. Bayou knew that it would repudiate the contract.

ANSWER: C NAT: AACSB Reflective

PAGE:

413 AICPA Legal

TYPE:

A19. Nature’s Foods, Inc., orders “Grade A” oil from Olive Grove Farms to process and sell to Pic ‘N Pay Grocers. Olive Grove ships “Grade B” oil, which Nature’s Foods accepts. To recover damages for the nonconformity, Nature’s Foods must give notice of the breach within a reasonable time to a. b. c. d.

Olive Grove. Pic ‘N Pay. no one. the appropriate government agency.

ANSWER: A NAT: AACSB Reflective

PAGE:

415 AICPA Legal

TYPE:

A20. Nash buys a car under a warranty from Rough Ride Motors. Nash soon discovers that the car has a defect that significantly affects its value and use. In all states and the District of Columbia, Nash may have remedies under a. b. c. d.

a lemon law. a letter of credit. Article 74 of the CISG. the Automobile Dealers’ Day in Court Act.

ANSWER: A NAT: AACSB Reflective

PAGE:

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263

ESSAY QUESTIONS A1.

Midstates Utility Corporation contracts with North American Energy Company to buy 50,000 gallons of heating oil. North American agrees to deliver the oil in five equal installments between October 1 and the following March 15. The winter is the warmest on record, however, and after the last agreed delivery, Midstates has accepted only 30,000 gallons of the oil. When North American tenders the rest of the oil, Midstates refuses to take it, citing the weather and claiming to be acting in good faith. Will North American succeed in a suit against Midstates for breach of contract? ANSWER: Yes, North American will succeed in a suit against Midstates, based on breach of contract, because the change in the weather that caused a change in Midstates’ needs could reasonably have been taken into consideration when the parties entered the contract for the oil. An occurrence unforeseen by either party when a contract is made can make performance commercially impracticable. A possibility that a buyer might require less than a contracted-for amount, however, can be a risk that is foreseeable at the time of contracting. An unusually warm winter and other weather changes are generally not impossible to contemplate in a business situation. This is the kind of risk normally assumed by parties when they do business. In other words, Midstates’ performance in this problem was not made commercially impracticable by the occurrence of a contingency (unusually warm weather) the nonoccurrence of which was a basic assumption on which the contract was made. Midstates’ breach is not excusable on that basis. Whether Midstates acted in good faith is not an excuse for its failure to perform. PAGES: 403–405 NAT: AACSB Reflective

A2.

TYPE: = AICPA Decision Modeling

Signal Sets Company contracts to deliver one hundred 55-inch 3D HD television sets to a new retail customer, Tuner TV Store, on May 1, with payment to be made on delivery. Signal tenders delivery in its own truck. Tuner’s manager notices that some of the cartons have scrape marks. Tuner’s owner phones Signal’s office and asks whether the sets might have been damaged as they were being loaded. Signal assures Tuner that the sets are in perfect condition. Tuner tenders Signal a check, which Signal refuses, claiming that the first delivery to new customers is always for cash.

264

TEST BANK A—UNIT 4: DOMESTIC & INT’L SALES & LEASE CONTRACTS

Tuner promises to pay the cash within two days. Signal leaves the sets with Tuner, which stores them in its warehouse pending its "Grand Opening Sale" on May 15. Two days later, Tuner’s stocker opens some of the cartons and discovers that a number of the sets are damaged beyond ordinary repair. Signal claims Tuner has accepted the sets and is in breach by not paying on delivery. Will Signal succeed on these claims? Explain. ANSWER: Signal will lose on both claims. Acceptance of the goods by a buyer takes place when the buyer either signifies that the goods are conforming after inspection or fails to reject after a reasonable time for inspection or acts inconsistently with the seller’s ownership. Once the goods are accepted, the buyer loses the right to revoke acceptance of nonconforming goods unless acceptance was based on a reasonable assurance that the goods were conforming. In this case, although Tuner accepted the goods, it did so on Signal’s assurance that the sets were in perfect condition. Thus, on discovery of the damaged sets, Tuner can revoke acceptance on the basis of substantial impairment of value. In addition, although the contract called for payment on delivery, no method of payment was specified. Therefore, tender of payment is sufficient if it is by any means currently used in the ordinary course of business—a check is such a means. Signal does have a right to demand cash but must give Tuner a reasonable extension of time in which to procure the cash. Thus, Signal’s claim of Tuner’s breach for nonpayment on delivery is not valid. PAGES: 406 & 413–414 NAT: AACSB Reflective

TYPE: = AICPA Decision Modeling

Chapter 22 Warranties and Product Liability N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

In most sales, sellers warrant that they have good and valid title to the goods sold. ANSWER: T NAT: AACSB Analytic

A2.

421 AICPA Legal

TYPE:

A warranty is an assurance by the buyer to the seller that he or she will pay valid consideration for a product. ANSWER: F NAT: AACSB Analytic

A3.

PAGE:

421 AICPA Legal

TYPE:

Promises of fact made during the bargaining process are not express warranties. ANSWER: F NAT: AACSB Analytic

PAGE:

422 AICPA Legal

TYPE:

262

A4.

TEST BANK A—UNIT 4: DOMESTIC & INT’L SALES & LEASE CONTRACTS

Express warranties can be found in a seller’s brochure ANSWER: T NAT: AACSB Analytic

PAGE:

422 AICPA Legal

TYPE:

263

CHAPTER 22: WARRANTIES AND PRODUCT LIABILITY

A5.

To be merchantable, goods must be at least average, fair, or medium-grade quality. ANSWER: T NAT: AACSB Analytic

A6.

PAGE:

423 AICPA Legal

TYPE:

PAGE:

425 AICPA Legal

TYPE:

Every seller is required to provide a written warranty for consumer goods sold. ANSWER: F NAT: AACSB Analytic

A9.

TYPE:

Goods that are merchantable are fit for any purpose. ANSWER: F NAT: AACSB Reflective

A8.

423 AICPA Legal

Every sale or lease by a merchant who deals in goods of the kind sold or leased automatically gives rise to an implied warranty of merchantability. ANSWER: T NAT: AACSB Analytic

A7.

PAGE:

426 AICPA Legal

TYPE:

Implied warranties can arise as a result of a course of dealing. ANSWER: T NAT: AACSB Analytic

PAGE:

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TYPE:

A10. Generally, the implied warranties of merchantability and fitness for a particular purpose cannot be disclaimed. ANSWER: F NAT: AACSB Analytic

PAGE:

428 AICPA Legal

TYPE:

A11. A product liability action based on negligence requires the injured plaintiff and the negligent defendant-manufacturer to be in privity of contract. ANSWER: F NAT: AACSB Analytic

PAGE:

429 AICPA Legal

TYPE:

264

TEST BANK A—UNIT 4: DOMESTIC & INT’L SALES & LEASE CONTRACTS

265

CHAPTER 22: WARRANTIES AND PRODUCT LIABILITY

A12. A product liability action may be based on warranty theories. ANSWER: T NAT: AACSB Analytic

PAGE:

429 AICPA Legal

TYPE:

A13. The majority of states limit the application of strict product liability theory to situations involving personal injuries. ANSWER: F NAT: AACSB Analytic

PAGE:

430 AICPA Legal

TYPE:

A14. A public policy underlying the imposition of strict product liability is that consumers should be protected against unsafe products. ANSWER: T NAT: AACSB Analytic

PAGE:

430 AICPA Legal

TYPE:

A15. Sellers or lessors are liable only for products that are reasonably dangerous. ANSWER: F NAT: AACSB Analytic

PAGE:

430 AICPA Legal

TYPE:

A16. An action in strict product liability requires that the product not be in a defective condition when the defendant sells it. ANSWER: F NAT: AACSB Analytic

PAGE:

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TYPE:

A17. An action in strict product liability requires that the defendant fail to exercise reasonable care. ANSWER: T NAT: AACSB Analytic

PAGE:

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TYPE:

A18. The types of product defects that have traditionally been recognized in product liability law include inadequate warnings. ANSWER: T NAT: AACSB Analytic

PAGE:

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TYPE:

266

TEST BANK A—UNIT 4: DOMESTIC & INT’L SALES & LEASE CONTRACTS

267

CHAPTER 22: WARRANTIES AND PRODUCT LIABILITY

A19. Courts in many jurisdictions will consider the negligent actions of both the plaintiff and the defendant when apportioning liability in a product liability action. ANSWER: T NAT: AACSB Analytic

PAGE:

436 AICPA Legal

TYPE:

A20. A statute of limitation may restrict the time within which an action in product liability may be brought. ANSWER: T NAT: AACSB Analytic

PAGE:

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TYPE:

MULTIPLE CHOICE QUESTIONS A1.

City Cab Company and Dave’s Autos enter into a contract for a sale of motor vehicles. City assures Dave’s that it has valid title to the vehicles. Under the UCC, warranties of title arise a. b. c. d.

automatically in most sales contracts. only if the buyer asks for such a warranty. only if the seller expresses such a warranty. only in conjunction with lease contracts, not sales contracts.

ANSWER: A NAT: AACSB Reflective A2.

PAGE:

421 AICPA Legal

TYPE:

Concrete Products, Inc., assures Deepwater Construction Company (DCC) that Concrete’s cement will not crack within a certain range of pressure. DCC uses the product. When cracks develop within the stated range, DCC files a suit against Concrete. The court is most likely to rule in favor of a. b. c. d.

Concrete, because its statement was an expression of opinion. Concrete, because DCC chose Concrete’s product voluntarily. DCC, because Concrete’s statement was an express warranty. DCC, because Concrete’s statement constituted puffery.

ANSWER:

PAGE:

422

TYPE:

268

TEST BANK A—UNIT 4: DOMESTIC & INT’L SALES & LEASE CONTRACTS

NAT: AACSB Reflective A3.

Sari buys a new sport utility vehicle (SUV) from ‘Tastic Cars & Trucks, Inc. The most important factor in determining whether an express warranty is created is whether a. b. c. d.

Sari expresses to ‘Tastic what she wants warranted. Sari’s desire for the SUV becomes part of her motivation to deal. ‘Tastic expresses to Sari what it expects of its customers. ‘Tastic’s promise becomes part of the basis of the bargain.

ANSWER: D NAT: AACSB Reflective A4.

PAGE:

422 AICPA Legal

TYPE:

Rent-all Trucks & Trailers, Inc. (RT&T), and United Delivery Service enter into a contract for a lease of trucks. RT&T is a merchant who deals in goods of the kind leased. Under the UCC, an implied warranty of merchantability arises a. b. c. d.

automatically in lease contracts. only if the lessee asks for it. only if the lessor does not expressly disclaim it. only in conjunction with sales contracts, not lease contracts.

ANSWER: A NAT: AACSB Reflective A5.

AICPA Legal

PAGE:

423 AICPA Legal

TYPE:

Dependable Appliances, Inc., and Elain enter into a contract for a sale of kitchen appliances. Dependable, a merchant who deals in goods of the kind sold, notes that its goods come with an implied warranty of merchantability. Under the UCC, this means that the goods are reasonably a. b. c. d.

fit for the buyer’s particular purpose. fit for the ordinary purpose for which such goods are used. suitable for resale at an acceptable price. the best quality that money can buy.

ANSWER: B NAT: AACSB Reflective

PAGE:

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TYPE:

CHAPTER 22: WARRANTIES AND PRODUCT LIABILITY

269

270 A6.

TEST BANK A—UNIT 4: DOMESTIC & INT’L SALES & LEASE CONTRACTS

Olga, a salesperson for Pre-owned Cars & Trucks, Inc., tells Quincy, “This is the best car I’ve ever seen.” This statement is a. b. c. d.

an express warranty. an implied warranty. a warranty of title. puffery.

ANSWER: D NAT: AACSB Reflective A7.

423 AICPA Legal

TYPE:

Neil goes to Oil Shop to change the oil in his car. Pat, the service technician, learns that Neil plans to take a trip and advises the use of a certain type of oil. The oil breaks down during the trip, damaging the car. Neil may recover from Oil Shop for breach of a. b. c. d.

an express warranty. an implied warranty of fitness for a particular purpose. an implied warranty of merchantability. a warranty of title.

ANSWER: B NAT: AACSB Reflective A8.

PAGE:

425 AICPA Legal

TYPE:

Woodgrain Products Company and Sylvia enter into a contract for a sale of lumber. Woodgrain knows the purpose for which Sylvia will use the goods. Under the UCC, an implied warranty of fitness of a particular purpose arises a. b. c. d.

if the buyer is relying on the seller to select suitable goods. if the buyer asks for it. if the seller is a merchant who deals in goods of the kind sold. in conjunction with lease contracts, not sales contracts.

ANSWER: A NAT: AACSB Reflective

PAGE:

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TYPE:

271

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A9.

Mountain Bikes, Inc. (MBI), and Nero enter into a contract for a sale of a mountain bike. MBI, a merchant who deals in goods of the kind sold, makes implied and express warranties in connection with the sale. The Magnuson-Moss Warranty Act was designed to prevent deception in warranties by a. b. c. d.

displacing the UCC as the primary source of warranty rules. making warranties easier to understand. prohibiting disclaimers of warranties. requiring sellers to give written warranties for consumer goods.

ANSWER: B NAT: AACSB Reflective

PAGE:

426 AICPA Legal

TYPE:

A10. Longlast Tools, Inc., sells power tools, power tool parts, and related supplies under “full” warranties. Under the Magnuson-Moss Warranty Act, this means that Longlast must provide a. b. c. d.

free repair or replacement of any defective part. a toll-free number for a Longlast-approved service company. a complete catalog of products and parts available for sale. repair or replacement of any defective part at a reduced charge.

ANSWER: A NAT: AACSB Reflective

PAGE:

426 AICPA Legal

TYPE:

A11. Imported Carpets Store and Jill enter into a contract for a sale of an Oriental rug. Imported Carpets, a merchant who deals in goods of the kind sold, generally describes the goods, details technical specifications, and shows a sample. Under the UCC, if these are inconsistent a. b. c. d.

the general description displaces the sample. the general description displaces the technical specifications. the sample takes precedence over the general description. the sample takes precedence over the technical specifications.

ANSWER: C NAT: AACSB Reflective

PAGE:

426 AICPA Legal

TYPE:

272

TEST BANK A—UNIT 4: DOMESTIC & INT’L SALES & LEASE CONTRACTS

A12. GR8 Skates Company makes and sells a pair of skates to Homer. GR8 fails to exercise “due care” to make the skates safe, and Homer is injured as a result. GR8 is most likely liable for a. b. c. d.

assumption of risk. knowledgeable use. negligence. foreseeable misuse.

ANSWER: C NAT: AACSB Reflective

PAGE:

429 AICPA Legal

TYPE:

A13. Farm Equip, Inc., makes farming machinery. Gail discovers that her Farm Equip tractor is defective and sues the maker for product liability based on negligence. To win, Gail must show that a. b. c. d.

Farm Equip sold the tractor to Gail. Gail knew and appreciated the risk caused by the defect. Gail suffered an injury caused by the defect. the “defect” was a commonly known danger.

ANSWER: C NAT: AACSB Reflective

PAGE:

429 AICPA Legal

TYPE:

A14. Green Glass Corporation makes glass bottles for food and beverage makers to package their products for wholesale distribution and retail sale. Liability may be imposed on Green Glass based on a. b. c. d.

the “reasonableness” of the manufacturer’s quality control efforts. the type of the manufacturer’s insurance coverage. a manufacturing defect. the opinion and testimony of non-experts.

ANSWER: C NAT: AACSB Reflective

PAGE:

431 AICPA Legal

TYPE:

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A15. Welding Systems, Inc. (WSI), makes welding torches, masks, and related products. A WSI product may be unreasonably dangerous due to a. b. c. d.

a defect in its design. the expectations of its seller. the intentions of its distributor. the method of accounting of its maker.

ANSWER: A NAT: AACSB Reflective

PAGE:

431 AICPA Legal

TYPE:

A16. Safe-T-Made Company makes electrical cords and other connectors for electronic devices. Rowena files a product liability suit against Safe-Rite, alleging a warning defect. Under the Restatement (Third) of Torts: Products Liability, in deciding whether to hold Safe-T-Made liable, the court may consider a. b. c. d.

the expectations of the seller. the identities of the company’s owner. the intentions of the manufacturer. the characteristics of expected users.

ANSWER: D NAT: AACSB Reflective

PAGE:

432 AICPA Legal

TYPE:

A17. Pharma Company, Quitox Corporation, and Renal, Inc., are drug makers. Med Sales Company and National OTC, Inc., are drug distributors. In a suit against all of these parties in which market-share liability is imposed, most likely to be liable are a. b. c. d.

neither the distributors nor the makers. the distributors and the makers. the distributors only. the makers only.

ANSWER: B NAT: AACSB Reflective

PAGE:

434 AICPA Legal

TYPE:

274

TEST BANK A—UNIT 4: DOMESTIC & INT’L SALES & LEASE CONTRACTS

A18. Fun Toyz Corporation makes skateboards, which it sells to consumers, including Gitana. Gitana is injured due to a defect in the board that causes an accident in which Haley, a bystander, is also injured. In a product liability suit based on strict product liability, Fun Toyz may be liable to a. b. c. d.

Gitana and Haley. Gitana only. Haley only. no one.

ANSWER: A NAT: AACSB Reflective

PAGE:

435 AICPA Legal

TYPE:

A19. Grady, an obese individual, files a suit against Fry Fast Food Corporation (FFFC), alleging that FFFC’s food is unhealthy because, as Grady knows, it contains high levels of cholesterol and saturated fat. Grady is most likely to a. b. c. d.

lose, because Grady assumed the risk when he bought FFFC’s food. lose, because Grady knows of the food’s unhealthiness. win, because FFFC’s food poses an unhealthy risk to Grady. win, because Grady knows of the food’s unhealthiness.

ANSWER: B NAT: AACSB Reflective

PAGE:

437 AICPA Legal

TYPE:

A20. Air Navigation, Inc., makes aviation guidance systems. Ollie is injured in a crash caused by a defective Air Navigation product. A statute restricts the time within which Ollie may file a product liability suit against Air Navigation regardless of when he was injured. This is a statute of a. b. c. d.

limitations. preemption. repose. suspension.

ANSWER: C NAT: AACSB Reflective

PAGE:

437 AICPA Legal

TYPE:

ESSAY QUESTIONS

275

CHAPTER 22: WARRANTIES AND PRODUCT LIABILITY

A1.

Darrow purchases a new car from Slippery Motors. The retail installment contract states immediately above the buyer’s signature in large, bold type: "There are no warranties that extend beyond the description on the face hereof" and "There are no express warranties that accompany this sale unless expressly written in this contract." Before purchasing the car, Darrow specifically informed Slippery's salesperson that he wanted a car that could be driven in a dusty area without needing mechanical repairs. Slippery's salesperson said to Darrow, "Nothing will go wrong with this car, but if it does, return it to us, and we will repair it without cost to you." Neither this statement nor any similar statement appears in the retail sales contract. Darrow drives the car into a dust storm. The air filter gets plugged up, and the car engine overheats, causing motor damage. Slippery Motors refuses to repair the engine under any warranty. Darrow claims that Slippery is liable for breach of the implied warranty of fitness for a particular purpose, that the Magnuson-Moss Warranty Act prohibits disclaiming this implied warranty, and that the salesperson’s express warranty has also been breached. What are the problems with Darrow’s claims? ANSWER: Darrow has a number of problems with these claims. First, the Magnuson-Moss Warranty Act applies only to written express warranties made by a seller of consumer goods. Because no written express warranties were made, the act does not apply. (Had a written express warranty been made, Darrow’s claim that Slippery cannot disclaim implied warranties would be correct.) Second, a seller can specifically disclaim the implied warranty of fitness if the disclaimer is in writing and is conspicuous. The word fitness does not have to appear in the disclaimer, and the statement “There are no warranties that extend beyond the description on the face hereof” is specifically designated by the UCC as effectively disclaiming the warranty of fitness. The bold print would seem to serve as notice of disclaimer. Therefore, Darrow cannot claim breach of the warranty of fitness. Third, the UCC also allows for negation of express warranties if the negation is in clear, specific, and unambiguous language. Although a valid argument can be made that the buyer deserves protection from unauthorized oral warranties, if the buyer signed the contract with knowledge of the conspicuous disclaimer, the buyer’s claim will not be supported. PAGES:

426 & 428

TYPE:

276

TEST BANK A—UNIT 4: DOMESTIC & INT’L SALES & LEASE CONTRACTS

NAT: AACSB Reflective A2.

AICPA Decision Modeling

Delta Company makes and sells table saws, which are designed to be safe if used properly. Erin buys a Delta saw and lends it to her neighbor Frank. To reach a toolbox on a high shelf in his garage, Frank props the saw at an angle against a cabinet and climbs onto the saw. Frank loses his footing, slips off the saw, falls on the blade, and is injured. He files a product liability suit against Delta, on the ground of negligence. On what basis could Delta prevail? ANSWER: A manufacturer or seller can prevail in a product liability suit based on negligence if the manufacturer designed its product to be safe for proper uses, even if the product was not designed to be safe for unforeseeable, improper uses, such as the use in this question. A manufacturer is negligent if it breaches the duty to exercise reasonable care in the design or manufacture of its product, or warnings about the product, and this breach causes injuries. In other words, liability may be found if a product is unsafe because of negligence in its manufacture, assembly, testing, or inspection. Even if all reasonable care is taken, the manufacturer may be liable if the design of the product makes it unreasonably dangerous for the uses for which the product is made. A manufacturer must also include a warning if the manufacturer knows the product is dangerous when used as intended or as could reasonably be foreseen, and users are not likely to be aware of the danger. A manufacturer has no liability, however, when its product is reasonably safe for proper uses and foreseeable, improper uses, but is used in an unforeseeable, improper way. PAGES: 429 & 436 NAT: AACSB Reflective

TYPE: = AICPA Decision Modeling

Chapter 23 International Law in a Global Economy N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

International law is a body of law that governs relations among nations. ANSWER: T NAT: AACSB Analytic

A2.

441 AICPA Legal

TYPE:

An international custom is a general practice accepted in the international arena as law. ANSWER: T NAT: AACSB Analytic

A3.

PAGE:

441 AICPA Legal

TYPE:

A treaty is a contract or other agreement between two or more nations that must be ratified by the United Nations to take effect. ANSWER: F NAT: AACSB Analytic

PAGE:

442 AICPA Legal

TYPE:

274

TEST BANK A—UNIT 4: DOMESTIC & INT’L SALES & LEASE CONTRACTS

275

CHAPTER 23: INTERNATIONAL LAW IN A GLOBAL ECONOMY

A4.

Legal systems around the globe are generally divided into common law and civil law systems. ANSWER: T NAT: AACSB Analytic

A5.

PAGE:

443 AICPA Legal

TYPE:

PAGE:

444 AICPA Legal

TYPE:

PAGE:

444 AICPA Legal

TYPE:

The doctrine of sovereign immunity can immunize a foreign nation from the jurisdiction of U.S. courts. ANSWER: T NAT: AACSB Analytic

A9.

Firms overseas have almost total legal protection against government acts in the countries in which they operate, under the act of state doctrine. ANSWER: F NAT: AACSB Analytic

A8.

TYPE:

Confiscation occurs when a government seizes private property for an illegal purpose and without just compensation. ANSWER: T NAT: AACSB Analytic

A7.

442 AICPA Legal

Under the principle of comity, a foreign business that deals with a U.S. business may be subject to U.S. law. ANSWER: T NAT: AACSB Analytic

A6.

PAGE:

444 AICPA Legal

TYPE:

A foreign state is immune from the jurisdiction of U.S. courts as long as the state is involved in commercial activity in the United States. ANSWER: F NAT: AACSB Analytic

PAGE:

444 AICPA Legal

TYPE:

A10. The simplest way for a U.S. firm to do business in a foreign market is to export its products directly to that market.

276

TEST BANK A—UNIT 4: DOMESTIC & INT’L SALES & LEASE CONTRACTS

ANSWER: T NAT: AACSB Reflective

PAGE:

444 TYPE: AICPA Critical Thinking

A11. A party to a licensing agreement generally agrees to pay royalties on some basis. ANSWER: T NAT: AACSB Reflective

PAGE:

445 TYPE: AICPA Critical Thinking

A12. Confiscating property without compensation does not normally violate principles of international law. ANSWER: F NAT: AACSB Analytic

PAGE:

446 AICPA Legal

TYPE:

A13. Few nations have restrictions on imports. ANSWER: F NAT: AACSB Reflective

PAGE:

447 AICPA Legal

A14. Congress cannot impose any restrictions on exports except taxes. ANSWER: F NAT: AACSB Analytic

PAGE:

447 AICPA Legal

TYPE:

A15. Restrictions on imports may include tariffs. ANSWER: T NAT: AACSB Analytic

PAGE:

448 AICPA Legal

A16. Restrictions on imports may include quotas. ANSWER: T NAT: AACSB Analytic

PAGE:

448 AICPA Legal

A17. Dumping is the sale of imported goods at “greater than fair value.” ANSWER: F NAT: AACSB Reflective

PAGE:

450 TYPE: AICPA Critical Thinking

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A18. The chief aim of the European Union and other trade organizations is to minimize trade barriers among their members. ANSWER: T NAT: AACSB Reflective

PAGE:

450 TYPE: AICPA Critical Thinking

A19. A foreign citizen can bring a civil suit in a U.S. court for a violation of a treaty of the United States. ANSWER: T NAT: AACSB Analytic

PAGE:

451 AICPA Legal

TYPE:

A20. U.S. antidiscrimination laws, as they affect employment relationships, generally do not apply extraterritorially. ANSWER: F NAT: AACSB Analytic

PAGE:

453 AICPA Legal

TYPE:

MULTIPLE CHOICE QUESTIONS A1.

The government of the United States and the governments of other nations have the power to enforce their respective national laws within their borders. The power to enforce international law within the borders of all nations rests with a. b. c. d.

no court or international organization. the European Union. the International Court of Justice. the United Nations General Assembly.

ANSWER: A NAT: AACSB Reflective A2.

PAGE:

441 AICPA Legal

TYPE:

In the global environment of business, the law of a particular nation, such as Brazil, China, or India, is classified as a.

environmental law.

278

TEST BANK A—UNIT 4: DOMESTIC & INT’L SALES & LEASE CONTRACTS

b. c. d.

global law. international law. national law.

ANSWER: D NAT: AACSB Analytic

PAGE:

441 AICPA Legal

TYPE:

279

CHAPTER 23: INTERNATIONAL LAW IN A GLOBAL ECONOMY

A3.

The Association of Southeast Asian Nations is a regional trade association that was created through a. b. c. d.

a bilateral agreement. a lateral agreement. a multilateral agreement. a unilateral agreement.

ANSWER: C NAT: AACSB Reflective A4.

TYPE:

a bilateral agreement. a lateral agreement. a multilateral agreement. a unilateral agreement.

ANSWER: A NAT: AACSB Reflective

PAGE:

442 AICPA Legal

TYPE:

Yokima, Ltd., and Zenota, S.A., transact an international sale of goods. For these parties, and other international buyers and sellers, the United Nations Convention on Contracts for the International Sale of Goods spells out the duties that apply a. b. c. d.

if Article 2 of the Uniform Commercial Code does not apply. if a dispute is submitted to the International Court of Justice. if the parties have not agreed otherwise in their contracts. under all circumstances.

ANSWER: C NAT: AACSB Analytic A6.

442 AICPA Legal

China and India form an agreement to govern their commercial exchanges with one another. This is a. b. c. d.

A5.

PAGE:

442 AICPA Legal

TYPE:

Chile has a civil law system. In theory, in this system, the courts a. b. c.

are obligated to follow the doctrine of stare decisis. may not develop their own laws. must create new rules of law.

280

TEST BANK A—UNIT 4: DOMESTIC & INT’L SALES & LEASE CONTRACTS

must develop legal concepts by case law.

ANSWER: B NAT: AACSB Analytic

PAGE:

442 AICPA Legal

TYPE:

281

CHAPTER 23: INTERNATIONAL LAW IN A GLOBAL ECONOMY

A7.

Business Abroad, Inc., a U.S. firm, obtains a judgment in a U.S. court against Quang Tri, Ltd., a Vietnamese business. Whether the court’s judgment will be enforced by a court in Vietnam depends on the Vietnamese court’s application of a. b. c. d.

the act of state doctrine. the doctrine of sovereign immunity. the principle of comity. the World Trade Organization .

ANSWER: C NAT: AACSB Reflective A8.

443 AICPA Legal

TYPE:

Sudan seizes the assets of Triage Medico, Inc., a U.S. firm. Triage’s recovery from Sudan in a U.S. court may be prevented by a. b. c. d.

the act of state doctrine. the doctrine of sovereign immunity. the Foreign Corrupt Practices Act. the principle of comity.

ANSWER: A NAT: AACSB Reflective A9.

PAGE:

443 AICPA Legal

TYPE:

Michael, a citizen of Ireland, and Nina, a citizen of the United States, enter into a contract. When Nina breaches the contract, Michael obtains an award of damages in an Irish court. He asks a U.S. court to enforce the award. The U.S. court defers to and enforces the Irish court’s decree. This is a. b. c. d.

a travesty of justice. the act of state doctrine. the doctrine of sovereign immunity. the principle of comity.

ANSWER: D NAT: AACSB Reflective

PAGE:

443 AICPA Legal

TYPE:

282

TEST BANK A—UNIT 4: DOMESTIC & INT’L SALES & LEASE CONTRACTS

A10. Noggin Development Corporation, a U.S. firm, wishes to participate, but limit its involvement, in Middle Eastern markets. Noggin empowers Ousai, Ltd., a Dubai firm, to enter into contracts in certain countries on Noggin’s behalf. This is a. b. c. d.

a distribution agreement. an agency relationship. indirect exporting. licensing.

ANSWER: B NAT: AACSB Reflective

PAGE:

444 AICPA Legal

TYPE:

A11. Significant business develops in Mexico for Natural Beauty Cosmetics, Inc., a U.S. firm. Natural Beauty appoints Ojos, Ltd., a Mexican firm, to act as Natural Beauty’s marketing representative in Mexico. This is a. b. c. d.

a joint venture. franchising. indirect exporting. licensing.

ANSWER: C NAT: AACSB Reflective

PAGE:

444 AICPA Legal

TYPE:

A12. Diners Corporation, a U.S. firm, signs a contract with Essen, A,G., a German firm, to give Essen the right to use Diners’ trademark in restaurants in Germany. This is a. b. c. d.

a distribution agreement. a joint venture. direct exporting. licensing.

ANSWER: D NAT: AACSB Reflective

PAGE:

445 AICPA Legal

TYPE:

283

CHAPTER 23: INTERNATIONAL LAW IN A GLOBAL ECONOMY

A13. Simpatico Business, Inc., a U.S. firm, expands into international markets through a joint venture. In the venture, Simpatico shares a. b. c. d.

both the profits and liabilities. none of the profits or liabilities. the profits but not the liabilities. the liabilities but not the profits.

ANSWER: D NAT: AACSB Reflective

PAGE:

445 AICPA Legal

TYPE:

A14. Continents Two Corporation, a U.S. firm, establishes a wholly owned subsidiary firm in Argentina. In this situation, Continents Two retains complete control and authority over a. b. c. d.

all of the operation. only the part of the operation in the United States. none of the operation. about half of the operation.

ANSWER: A NAT: AACSB Analytic

PAGE:

445 AICPA Legal

TYPE:

A15. Agro Co-op, Inc., and Bio Feed Corporation are exporting firms that join together to export a line of products. Agro Co-op and Bio Feed apply to Charter Bank for a loan to fund their effort. Under federal law, Charter and other U.S. banks are a. b. c. d.

encouraged by credit guaranties to lend such funds. discouraged by administrative rules to make such loans. asked by enforcement agencies to report such requests. banned by statute from opening such credit lines.

ANSWER: A NAT: AACSB Reflective

PAGE:

447 AICPA Legal

TYPE:

284

TEST BANK A—UNIT 4: DOMESTIC & INT’L SALES & LEASE CONTRACTS

A16. Senator Smith and other politicians want to restrict the flow of technologically advanced products and data from the United States to other countries. To restrict or encourage exports, Congress can a. b. c. d.

do nothing. assess antidumping duties. impose export taxes. set export quotas.

ANSWER: D NAT: AACSB Reflective

PAGE:

447 AICPA Legal

TYPE:

A17. The United States taxes each barrel of imported oil at a flat rate. This is a. b. c. d.

an antidumping duty. a dumping duty. a quota. a tariff.

ANSWER: D NAT: AACSB Analytic

PAGE:

448 AICPA Legal

TYPE:

A18. Wang Ltd., a Chinese firm, imports its goods into the United States and offers those goods for sale at “less than fair value.” This is a. b. c. d.

confiscation. defalcation. dumping. expropriation.

ANSWER: C NAT: AACSB Reflective

PAGE:

450 AICPA Legal

TYPE:

A19. Nick, or Nora, or any U.S. citizen, can bring a civil suit in a U.S. court against a foreign entity a. b. c.

for a tort allegedly committed in the United States only. for a tort allegedly committed in the United States or overseas. for a tort allegedly committed overseas only.

285

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under no circumstances.

ANSWER: B NAT: AACSB Analytic

PAGE:

451 AICPA Legal

TYPE:

286

TEST BANK A—UNIT 4: DOMESTIC & INT’L SALES & LEASE CONTRACTS

A20. Qang and other foreign citizens allege human rights violations committed overseas by the government of Burma on behalf of Railway Construction Company, a U.S. firm. To seek redress for their injuries in a U.S. court, these citizens can a. b. c. d.

subject the private company to the provisions of the Sherman Act. bring civil suits under the Alien Tort Claims Act. file criminal complaints under Title VII of the Civil Rights Act. do nothing.

ANSWER: B NAT: AACSB Reflective

PAGE:

451 AICPA Legal

TYPE:

ESSAY QUESTIONS A1.

When a nation moves from a state-controlled economy toward free enterprise, it must develop a new set of business laws. If you could start from scratch, what kind of business law system would you adopt—a civil law system or a common law system? What factors should be considered in deciding the business regulations to impose? ANSWER: Each system has its advantages and its disadvantages. In a common law system, the courts independently develop the rules governing certain areas of law, such as torts and contracts. This judge-made law exists in addition to the laws passed by a legislature. Judges must follow precedential decisions in their jurisdictions, but courts may modify or even overturn precedents when deemed necessary. Also, if there is no case law to guide a court, the court may create a new rule of law. In a civil law system, the only official source of law is a statutory code. Courts are required to interpret the code and apply the rules to individual cases, but courts may not depart from the code and develop their own laws. In theory, the law code will set forth all the principles needed for the legal system. Common law and civil law systems are not wholly distinct. For example, the United States has a common law system, but crimes are defined by statute as in civil law systems. Civil law systems may allow considerable room for judges to develop law: law codes cannot be so precise as to address every contested issue, so the judiciary must interpret the codes. There are also significant differences among common law countries. The judges of

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287

different common law nations have produced differing common law principles. The roles of judges and lawyers under the different systems should be taken into account. Among other factors that should be considered in establishing a business law system and in deciding what regulations to impose are the goals that the system and its regulations are intended to achieve and the expectations of those to whom both will apply, including foreign and domestic investors. PAGE: 442 NAT: AACSB Reflective A2.

TYPE: N AICPA Decision Modeling

International Diversified Corporation (IDC) owns assets in Tagistan, a new country in Asia. The government of Tagistan wants to nationalize all assets owned by foreign firms and investors. What can IDC do? Can it at least obtain payment for the assets? ANSWER: If a government decides to seize property within its borders, and not to pay for it, there are few remedies available. This is of course a confiscation, which results when a government takes private property for an illegal purpose without paying just compensation. (An expropriation, by contrast, occurs when a government seizes private assets or a private business for a legal purpose and pays for the seizure.) Under most circumstances, it is unlikely that a confiscating nation’s courts would order its government to pay just compensation, even if the court had the authority to do so. In a case alleging that a foreign government has wrongfully taken a business firm’s property, the defendant government has the burden to prove that the taking was an expropriation, not a confiscation. But the act of state doctrine can prevent a firm’s recovery in a court in the firm’s home country. Under that doctrine, a court in one country will not review the validity of a public act of a recognized foreign government within it own territory. (Some nations guarantee compensation to foreign investors in their constitutions, statutes, or treaties. Others (such as the United States) provide some insurance for their citizens’ investments abroad. Claims are often resolved by lump-sum settlements after negotiations, as between the United States and the confiscating nation.) PAGE: 444 NAT: AACSB Reflective

TYPE: = AICPA Decision Modeling

Chapter 24 The Function and Creation of Negotiable Instruments N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

A negotiable instrument can function as a substitute for cash. ANSWER: T NAT: AACSB Reflective

A2.

PAGE:

463 AICPA Legal

TYPE:

A time draft is payable at a definite future time. ANSWER: T NAT: AACSB Analytic

A4.

462 TYPE: AICPA Critical Thinking

On a trade acceptance, the drawer is also the drawee. ANSWER: F NAT: AACSB Analytic

A3.

PAGE:

463 AICPA Legal

A promissory note payable to “bearer” is not negotiable. 289

290

TEST BANK A—UNIT FIVE: NEGOTIABLE INSTRUMENTS

ANSWER: F NAT: AACSB Analytic A5.

PAGE:

464 AICPA Legal

TYPE:

PAGE:

466 AICPA Legal

TYPE:

PAGE:

TYPE:

466 AICPA Legal

To be negotiable, an instrument must not be on material that lends itself to permanence. ANSWER: F NAT: AACSB Reflective

A9.

For an instrument to be negotiable, it must be in writing. ANSWER: T NAT: AACSB Analytic

A8.

TYPE:

A certificate of deposit is a type of note. ANSWER: T NAT: AACSB Analytic

A7.

464 AICPA Legal

A check is a time instrument because it is payable in due time. ANSWER: F NAT: AACSB Reflective

A6.

PAGE:

466 AICPA Legal

TYPE:

For an instrument to be negotiable, it need not be signed. ANSWER: F NAT: AACSB Analytic

PAGE:

467 AICPA Legal

A10. A signature can consist of a word, mark, or symbol. ANSWER: T NAT: AACSB Reflective

PAGE:

467 AICPA Legal

A11. For an instrument to be negotiable, it must not contain an express promise or order to pay. ANSWER: F NAT: AACSB Analytic

PAGE:

468 AICPA Legal

TYPE:

CHAPTER 24: THE FUNCTION & CREATION OF NEGOTIABLE INSTRUMENTS

291

A12. To be negotiable, an instrument must have conditional promises attached to it. ANSWER: F NAT: AACSB Analytic

PAGE:

468 AICPA Legal

TYPE:

A13. A statement in an instrument that payment can be made only out of a particular fund or source renders it nonnegotiable. ANSWER: F NAT: AACSB Reflective

PAGE:

468 AICPA Legal

TYPE:

A14. A mere reference in an instrument to another writing makes the promise or order conditional. ANSWER: F NAT: AACSB Reflective

PAGE:

468 AICPA Legal

TYPE:

A15. To be negotiable, an order to pay must be addressed to only one person. ANSWER: F NAT: AACSB Reflective

PAGE:

468 AICPA Legal

TYPE:

A16. An instrument that promises to pay “in gold” can be negotiable. ANSWER: F NAT: AACSB Reflective

PAGE:

469 AICPA Legal

TYPE:

A17. An instrument is not negotiable if it is not payable at a definite time. ANSWER: F NAT: AACSB Analytic

PAGE:

469 AICPA Legal

TYPE:

A18. Any person in possession of a negotiable instrument payable to bearer is a holder. ANSWER: T NAT: AACSB Analytic

PAGE:

471 AICPA Legal

TYPE:

292

TEST BANK A—UNIT FIVE: NEGOTIABLE INSTRUMENTS

A19. An instrument payable “with interest” must specify a particular rate to be negotiable. ANSWER: F NAT: AACSB Analytic

PAGE:

475 AICPA Legal

TYPE:

A20. An undated instrument is not negotiable. ANSWER: F NAT: AACSB Reflective

PAGE:

475 AICPA Legal

CHAPTER 24: THE FUNCTION & CREATION OF NEGOTIABLE INSTRUMENTS

293

MULTIPLE CHOICE QUESTIONS Fact Pattern 24-1A (Questions A1–A2 apply) Flik draws a check payable to “DeliMart” to buy groceries. A1.

Refer to Fact Pattern 24-1A. Flik’s check is most likely a. b. c. d.

a certificate of deposit. an order to pay. a promise to pay. a promissory note.

ANSWER: B PAGE: NAT: AACSB Reflective A2.

463 AICPA Legal

TYPE:

Refer to Fact Pattern 24-1A. With respect to Flik’s check, DeliMart is a. b. c. d.

the drawee. the drawer. the maker. the payee.

ANSWER: D PAGE: NAT: AACSB Reflective

463 AICPA Legal

TYPE:

Fact Pattern 24-2A (Questions A3–A4 apply) Commodity Sales Corporation and Resource Purchasing Company enter a contract for a sale of unprocessed silver. Commodity Sales draws a draft unconditionally ordering Resource Purchasing to pay $50,000 to Commodity Sales’s order in sixty days. Resource Purchasing signs and dates the draft. A3.

Refer to Fact Pattern 24-2A. This instrument is a. b. c. d.

a banker’s acceptance. a nonnegotiable instrument. a promissory note. a trade acceptance.

ANSWER:

PAGE:

463

TYPE:

294

TEST BANK A—UNIT FIVE: NEGOTIABLE INSTRUMENTS

NAT: AACSB Reflective

AICPA Legal

CHAPTER 24: THE FUNCTION & CREATION OF NEGOTIABLE INSTRUMENTS

A4.

Refer to Fact Pattern 24-2A. On this instrument, Commodity Sales is a. b. c. d.

the banker. the drawer. the maker. the trader.

ANSWER: B PAGE: NAT: AACSB Reflective A5.

TYPE:

a conditional promise to pay money. an unconditional written order to pay money. a qualified promise to set aside a sum of money. a restricted promise to deliver goods at a future date.

ANSWER: B NAT: AACSB Analytic

PAGE:

463 AICPA Legal

TYPE:

Bagels n’ Coffee Café issues an instrument in favor of Eatery Supplies, Inc. For the instrument to be negotiable, it must a. b. c. d.

be a conditional promise or order to pay. be payable on demand or at a specific time. be signed by the payee. recite the consideration given in exchange for it.

ANSWER: B NAT: AACSB Reflective A7.

463 AICPA Legal

To obtain office supplies for Doctors Medical Clinic, Elmo executes a draft in favor of Flynn. A draft is a. b. c. d.

A6.

295

PAGE:

466 AICPA Legal

TYPE:

Rita owes $6,000 in unpaid taxes. In the sand of Seaside Beach, she executes an instrument for that amount that otherwise meets the requirements for negotiability. This instrument is likely a. b. c.

negotiable. nonnegotiable, because an instrument must be on paper. nonnegotiable, because sand is not sufficiently permanent.

296

TEST BANK A—UNIT FIVE: NEGOTIABLE INSTRUMENTS

nonnegotiable, because the government does not appreciate it.

ANSWER: C NAT: AACSB Reflective

PAGE:

466 AICPA Legal

TYPE:

CHAPTER 24: THE FUNCTION & CREATION OF NEGOTIABLE INSTRUMENTS

A8.

To finance the purchase of a car from Giant Auto Sales, Hoppy signs an instrument promising to pay to “Ideal Credit Union” $18,000 with interest in installments with the final payment due May 15, 2014. To be negotiable, this instrument must include on its face a. b. c. d.

any conditions on the sale of the car. any conditions to the disbursement of the funds. any conditions to the repayment of the loan. no conditions.

ANSWER: D PAGE: NAT: AACSB Reflective A9.

297

467 AICPA Legal

TYPE:

To finance the purchase of a house from Tuna, Uri signs an instrument promising to pay to “Verity Mortgage Service” $160,000 with interest in installments with the final payment due July 10, 2042. To be negotiable, this instrument must include the signature of a. b. c. d.

a non-party witness. Tuna or Tuna’s realtor. Uri. Verity’s chief financial officer.

ANSWER: C PAGE: NAT: AACSB Reflective

467 AICPA Legal

TYPE:

A10. Ryan signs an instrument using an “R” with a circle around it. With this mark for a signature, the instrument is a. b. c. d.

negotiable. nonnegotiable, because an initial does not state the signer’s name. nonnegotiable, because this mark is a symbol, not a signature. nonnegotiable, because a simple mark implies a lack of serious intent.

ANSWER: A NAT: AACSB Reflective

PAGE:

467 AICPA Legal

TYPE:

298

TEST BANK A—UNIT FIVE: NEGOTIABLE INSTRUMENTS

A11. Karen writes on a piece of paper, “I owe you $600,” signs it, and gives it to Lou. This instrument is a. b. c. d.

negotiable. nonnegotiable, because it does not include an express promise to pay. nonnegotiable, because it does not recite any consideration. nonnegotiable, because it does not state any conditions to payment.

ANSWER: B NAT: AACSB Reflective

PAGE:

468 AICPA Legal

TYPE:

A12. Jack signs an instrument that states it is being executed “as per a contract for the sale of three magic beans dated June 1.” This instrument is a. b. c. d.

negotiable. nonnegotiable, because banks cannot easily process commodities. nonnegotiable, because it includes the specific date of a contract. nonnegotiable, because it refers to an express contract.

ANSWER: A NAT: AACSB Reflective

PAGE:

468 AICPA Legal

TYPE:

A13. Kelly signs an instrument in favor of Leo that states it is “subject to a certain agreement between Kelly and Mona.” This instrument is a. b. c. d.

negotiable. nonnegotiable, because it is made subject to a separate agreement. nonnegotiable, because it refers to a separate agreement. nonnegotiable, because Kelly and Mona are not the same persons.

ANSWER: B NAT: AACSB Reflective

PAGE:

468 AICPA Legal

TYPE:

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299

A14. On behalf of Digital Cable Company, Elvin signs an instrument in which he promises to deliver 1,000 feet of optic fiber cable to Financiers eBank on March 1. This instrument is a. b. c. d.

negotiable. nonnegotiable, because cable is not a medium of exchange authorized or adopted by a government as currency. nonnegotiable, because it does not indicate a specific type of cable. nonnegotiable, because it does not recite any consideration.

ANSWER: B NAT: AACSB Reflective

PAGE:

469 AICPA Legal

TYPE:

A15. Rainey signs a promissory note for $10,000 in favor of State University (SU). The note is undated but specifies that it is “payable one month after date.” This note is a. b. c. d.

negotiable. nonnegotiable, because one month is not a reasonable time. nonnegotiable, because there is no option to pay early. nonnegotiable, because the maturity date cannot be determined from the face of the instrument.

ANSWER: D NAT: AACSB Reflective

PAGE:

471 AICPA Legal

TYPE:

A16. Hayley signs an instrument payable to the order of InstaCredit, Inc., that allows a holder to demand payment of the entire amount due, with interest, if Hayley fails to make a payment. This instrument is a. b. c. d.

negotiable. nonnegotiable, because a holder can move up the payment date. nonnegotiable, because moving up the payment date is conditional. nonnegotiable, because the exact payment date cannot be determined from the face of the instrument.

ANSWER: A NAT: AACSB Reflective

PAGE:

471 AICPA Legal

TYPE:

300

TEST BANK A—UNIT FIVE: NEGOTIABLE INSTRUMENTS

A17. Quincy draws a check payable to “Replay Stadium” to buy two season tickets to the next year’s State College football games. This instrument is a. b. c. d.

a bearer instrument. an order instrument. valid but nonnegotiable. void.

ANSWER: B PAGE: NAT: AACSB Reflective

473 AICPA Legal

TYPE:

A18. Shad signs a promissory note payable to Theresa “with interest” on which he conspicuously notes that it is “nonnegotiable.” This instrument is a. b. c. d.

negotiable. nonnegotiable, because it includes the notation “nonnegotiable.” nonnegotiable, because it does not specify a rate of interest. nonnegotiable, because the exact amount payable cannot be determined from the face of the instrument.

ANSWER: B NAT: AACSB Reflective

PAGE:

475 AICPA Legal

TYPE:

A19. Locke signs a check payable to the order of Metro Bank, filling in the blanks for the amount with the figures “$100” and “One thousand and 00/100 dollars.” This check is payable in the amount of a. b. c. d.

$0. $100. $1,000. $1,100.

ANSWER: C NAT: AACSB Reflective

PAGE:

475 AICPA Legal

TYPE:

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301

A20. On May 1, Doug signs a check that is payable to the order of Employees Credit Corporation and that is dated July 1. This check is a. b. c. d.

negotiable. nonnegotiable, because it is payable to a corporation. nonnegotiable, because it is postdated. nonnegotiable, because it is signed by the drawer.

ANSWER: A NAT: AACSB Reflective

PAGE:

475 AICPA Legal

TYPE:

ESSAY QUESTIONS A1.

The accounting department of Delta Sales Company receives an instrument that states, “March 16, 2011. Thirty days after date, I promise to pay to the order of cash, $700 (seven hundred and 00/100 dollars), in Denver, Colorado, with interest at the rate of 7% (seven percent) per year. This instrument is secured by a contract for the sale of a computer. Due April 15, 2011. [Signed] Edward Jones.” What type of instrument is this? Is it negotiable? If not, why not? ANSWER: This instrument is a promissory note and a bearer note, and it is negotiable. A promissory note is an instrument with two parties: a maker and a payee. The maker of this note is Edward Jones. The payee is “cash.” A note that is payable to “cash” is a bearer note. To be negotiable, an instrument must be in writing, signed by the maker or drawer, an unconditional promise or order to pay, state a fixed amount of money, payable on demand or at a definite time, and payable to order or to bearer (unless it is a check). This instrument meets all of these requirements. The notation on the instrument that it “is secured by a contract for the sale of a computer” is not a condition for payment and does not otherwise affect the negotiability of the instrument. PAGES: 464–466, 468 & 473–474 NAT: AACSB Reflective

A2.

TYPE: = AICPA Decision Modeling

On a sheet of paper, Elle writes, without her signature, “I acknowledge that I owe Frank $600, payable out of the proceeds of the sale of my car, a 1995 Honda Civic, which I promise to advertise ‘For Sale’ next week. Payment is

302

TEST BANK A—UNIT FIVE: NEGOTIABLE INSTRUMENTS

to be made on or before six months from today.” What type of instrument is this? Is it negotiable? If not, why not? ANSWER: This instrument is a promissory note, but it is nonnegotiable. A promissory note is an instrument with two parties—a maker and a payee. The maker of this note is Elle. The payee is Frank. The note is nonnegotiable because (1) Elle did not sign it; (2) it does not include a definite promise to pay but only acknowledges that a debt is owed; (3) it is undated, which means that the end of the six-month period is uncertain, making the note not payable at a definite time; and (4) it is payable only to Frank, not to his order or to bearer. Any of these alone would make the note nonnegotiable. (Payment is also conditioned on the sale of Elle’s car, but this does not make the note nonnegotiable [UCC 3–106(b)(ii)].) PAGES: 464–468 NAT: AACSB Reflective

TYPE: = AICPA Decision Modeling

Chapter 25 Transferability and Holder in Due Course N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

Under the UCC, a transfer of rights under a contract is a negotiation. ANSWER: F NAT: AACSB Reflective

A2.

TYPE:

PAGE:

479 AICPA Legal

TYPE:

Negotiation is a transfer in such form that the transferee becomes a holder. ANSWER: T NAT: AACSB Reflective

A4.

479 AICPA Legal

An order instrument is negotiated by delivery with any necessary indorsements. ANSWER: T NAT: AACSB Analytic

A3.

PAGE:

479 AICPA Legal

TYPE:

A negotiable instrument can only be transferred by negotiation. 301

302

TEST BANK A—UNIT FIVE: NEGOTIABLE INSTRUMENTS

ANSWER: F NAT: AACSB Analytic

PAGE:

479 AICPA Legal

TYPE:

303

CHAPTER 25: TRANSFERABILITY AND HOLDER IN DUE COURSE

A5.

A special indorsement does not specify a particular indorsee. ANSWER: F NAT: AACSB Analytic

A6.

PAGE:

481 AICPA Legal

TYPE:

PAGE:

483 AICPA Legal

TYPE:

Indorsement can convert an order instrument into a bearer instrument ANSWER: T NAT: AACSB Analytic

A9.

TYPE:

The effect of a conditional indorsement on the back of an instrument is the same as the effect of conditional language that appears on its face. ANSWER: F NAT: AACSB Analytic

A8.

480 AICPA Legal

An indorser who does not wish to be liable on an instrument can use a qualified indorsement. ANSWER: T NAT: AACSB Analytic

A7.

PAGE:

484 AICPA Legal

TYPE:

An instrument payable to two persons jointly requires the indorsement of only one of the payees for negotiation. ANSWER: F NAT: AACSB Analytic

PAGE:

486 AICPA Legal

TYPE:

A10. A person who receives an instrument as a gift normally becomes an ordinary holder. ANSWER: T NAT: AACSB Reflective

PAGE:

487 AICPA Legal

TYPE:

A11. An executory promise does not constitute sufficient value to make the promisor a holder. ANSWER: T NAT: AACSB Analytic

PAGE:

487 AICPA Legal

TYPE:

304

TEST BANK A—UNIT FIVE: NEGOTIABLE INSTRUMENTS

305

CHAPTER 25: TRANSFERABILITY AND HOLDER IN DUE COURSE

A12. A holder does not take an instrument for value if he or she gives a negotiable instrument as payment. ANSWER: F NAT: AACSB Reflective

PAGE:

487 AICPA Legal

TYPE:

A13. For an ordinary holder to become an HDC, the holder must have acted honestly in the process of acquiring the instrument. ANSWER: T NAT: AACSB Analytic

PAGE:

487 AICPA Legal

TYPE:

A14. An instrument is not defective simply because it is overdue. ANSWER: F NAT: AACSB Reflective

PAGE:

489 AICPA Legal

TYPE:

A15. If a person purchasing an instrument does not know and has no reason to know that it has been dishonored, the person cannot become an HDC. ANSWER: F NAT: AACSB Analytic

PAGE:

490 AICPA Legal

TYPE:

A16. A person who acquires a check stamped “insufficient funds” is put on notice and thereby acquires HDC status. ANSWER: F NAT: AACSB Reflective

PAGE:

490 AICPA Legal

TYPE:

A17. Knowledge of one defense precludes a holder from asserting HDC status in regard to all other defenses. ANSWER: T NAT: AACSB Analytic

PAGE:

490 AICPA Legal

TYPE:

A18. Any irregularity on the face of an instrument that calls into question its validity will bar HDC status. ANSWER:

PAGE:

492

TYPE:

306

TEST BANK A—UNIT FIVE: NEGOTIABLE INSTRUMENTS

NAT: AACSB Reflective

AICPA Legal

307

CHAPTER 25: TRANSFERABILITY AND HOLDER IN DUE COURSE

A19. A person who accepts an instrument that has been completed without knowing that it was incomplete when issued can take it as an HDC. ANSWER: T NAT: AACSB Reflective

PAGE:

492 AICPA Legal

TYPE:

A20. The shelter principle allows persons who formerly held instruments to improve their positions by later reacquiring the instruments from HDCs. ANSWER: F NAT: AACSB Analytic

PAGE:

493 AICPA Legal

TYPE:

MULTIPLE CHOICE QUESTIONS A1.

Ollie negotiates an order instrument to Phil by a. b. c. d.

assignment of its rights under a contract. delivery with any necessary indorsement. making an unconditional promise to pay. presenting it in response to a demand by B.

ANSWER: B NAT: AACSB Reflective A2.

PAGE:

479 AICPA Legal

Lauren transfers an instrument to Miguel in a form and by a means that makes Miguel a “holder.” This is a. b. c. d.

a holding. an assignment. negotiation. presentment.

ANSWER: C NAT: AACSB Reflective

PAGE:

479 AICPA Legal

TYPE:

308 A3.

TEST BANK A—UNIT FIVE: NEGOTIABLE INSTRUMENTS

Petra signs a check payable to Quincy, who indorses the back, gives it to Regional Credit Union, and receives cash. The transfer of the check from Quincy to the credit union is a. b. c. d.

an assignment. a negotiation. a payment. a sale.

ANSWER: B NAT: AACSB Reflective A4.

PAGE:

479 AICPA Legal

TYPE:

Ivy signs a check payable to Jon and gives it to him. Jon indorses the back, and transfers the check to Ked. To negotiate the check to Luis, Ked must a. b. c. d.

write “Ked” on the back. write “pay to the order of Luis [signed] Ked” on the back. deliver the check to Luis. obtain Luis’s signature on the back.

ANSWER: C NAT: AACSB Reflective

PAGE:

479 AICPA Legal

TYPE:

Fact Pattern 25-A1 (Questions A5–A8 apply) Rollo obtains a check payable to his order from Simone. Rollo signs the back and gives the check to Trey. Trey writes “Pay to Trey” above Rollo’s signature. A5.

Refer to Fact Pattern 25-A1. When Trey writes “Pay to Trey” above Rollo’s signature, Rollo’s signature becomes a. b. c. d.

a blank indorsement. a qualified indorsement. a special indorsement. a restrictive indorsement.

ANSWER: C NAT: AACSB Reflective

PAGE:

480 AICPA Legal

TYPE:

309

CHAPTER 25: TRANSFERABILITY AND HOLDER IN DUE COURSE

A6.

Refer to Fact Pattern 25-A1. When Trey writes “Pay to Trey” above Rollo’s signature, the check becomes a. b. c. d.

a bearer instrument. an order instrument. a promissory note. a nonnegotiable instrument.

ANSWER: B NAT: AACSB Reflective A7.

TYPE:

avoids the risk of loss from theft of the instrument. relieves himself from liability on the instrument. converts the check into a nonnegotiable instrument. locks the instrument into the bank collection process.

ANSWER: A NAT: AACSB Reflective

PAGE:

480 AICPA Legal

TYPE:

Refer to Fact Pattern 25-A1. After Trey writes “Pay to Trey” above Rollo’s signature, further negotiation of the check a. b. c. d.

requires Rollo’s re-indorsement and delivery. requires delivery alone. requires Trey’s indorsement and delivery. is not possible.

ANSWER: C NAT: AACSB Reflective A9.

480 AICPA Legal

Refer to Fact Pattern 25-A1. By writing “Pay to Trey” above Rollo’s signature, Trey a. b. c. d.

A8.

PAGE:

480 AICPA Legal

TYPE:

Tiffany transfers a draft by signing it and delivering it to Uma. Tiffany is a. b. c. d.

an indorser. a draft dodger. a drafter. a promisor.

310

TEST BANK A—UNIT FIVE: NEGOTIABLE INSTRUMENTS

ANSWER: A NAT: AACSB Reflective

PAGE:

480 AICPA Legal

TYPE:

A10. Velma transfers a note by signing it and delivering it to Woz. Woz is a. b. c. d.

a delivery person. an indorsee. a note passer. a promisee.

ANSWER: B NAT: AACSB Reflective

PAGE:

480 AICPA Legal

TYPE:

A11. Mike receives a payroll check from National Computer Systems, Inc., and indorses it by signing his name on the back of the check. This is a. b. c. d.

a blank indorsement. a qualified indorsement. a restrictive indorsement. a special indorsement.

ANSWER: A NAT: AACSB Reflective

PAGE:

480 AICPA Legal

TYPE:

A12. Dora receives a check from Eagle Corporation. Dora indorses the check to First National Bank by writing “pay to First Nat’l Bank only” and signing her name. This is a. b. c. d.

a blank indorsement. a qualified indorsement. a restrictive indorsement. a special indorsement.

ANSWER: C NAT: AACSB Reflective

PAGE:

483 AICPA Legal

TYPE:

A13. Gina writes and signs a check payable to “Happy Market.” Ira, Happy’s manager, indorses the check “For deposit only.” This is © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

311

CHAPTER 25: TRANSFERABILITY AND HOLDER IN DUE COURSE

a. b. c. d.

a blank indorsement. a qualified indorsement. a restrictive indorsement. a special indorsement.

ANSWER: C NAT: AACSB Reflective

PAGE:

483 AICPA Legal

TYPE:

312

TEST BANK A—UNIT FIVE: NEGOTIABLE INSTRUMENTS

A14. To pay for investment advice from financial consultants Smith and Jones, Tony signs a check payable to “Smith or Jones.” A proper indorsement of the check is a. b. c. d.

not possible. “Smith” and “Jones” only. “Smith” only, or “Jones” only, but not “Smith” and “Jones.” “Smith” only, or “Jones” only, or “Smith” and “Jones.”

ANSWER: D NAT: AACSB Reflective

PAGE:

486 AICPA Legal

TYPE:

A15. Blythe, an accountant for Credits & Debits, acquires a negotiable instrument from Eton by promising to pay its face value in thirty days. Blythe acquires the status of an HDC when she a. b. c. d.

acquires possession of the negotiable instrument. agrees with Eton to buy the negotiable instrument. pays the face value due on the instrument. transfers the instrument to another party.

ANSWER: C NAT: AACSB Reflective

PAGE:

487 AICPA Legal

TYPE:

A16. Jen makes a gift of a check to Kilroy who takes it in good faith and without notice of any claim, defense, or defect. With respect to this check, Kilroy is a. b. c. d.

an extraordinary holder in due course. an ordinary check passer. an ordinary holder. an ordinary holder in due course.

ANSWER: C NAT: AACSB Reflective

PAGE:

487 AICPA Legal

TYPE:

313

CHAPTER 25: TRANSFERABILITY AND HOLDER IN DUE COURSE

A17. Jill, in good faith and for value, gets from Kit a check “payable to the order of bearer.” Jill does not know that Kit stole the check. Jill is a. b. c. d.

an HDC. not an HDC, because Kit did not acquire the check for value. not an HDC, because Kit did not acquire the check in good faith. not an HDC, because the check is a bearer instrument.

ANSWER: A NAT: AACSB Reflective

PAGE:

489 AICPA Legal

TYPE:

A18. Florencia, who is not a GigaBank customer, attempts to cash a check drawn on the bank. The check is considered dishonored if GigaBank a. b. c. d.

refuses to pay it. charges a fee to cash it. asks Florencia for reasonable identification. asks Florencia to sign a receipt for the payment on the check.

ANSWER: A NAT: AACSB Reflective

PAGE:

490 AICPA Legal

TYPE:

A19. Bob receives a check from Chris. Without Bob’s knowledge, Dan indorses it in his own name and deposits it in his account at Elm City Bank. In Bob’s subsequent suit against the bank for the money, the court will most likely rule in favor of a. b. c. d.

Bob, because Dan’s signature is not authorized. Bob, because Elm City Bank is not a holder in due course. Elm City Bank, because Dan’s signature is not authorized. Elm City Bank, because it is a holder in due course.

ANSWER: A NAT: AACSB Reflective

PAGE:

492 AICPA Legal

TYPE:

314

TEST BANK A—UNIT FIVE: NEGOTIABLE INSTRUMENTS

A20. Clem gets a $100 check as a gift from Daria. Clem crudely increases the amount of the check to $1,00—the alteration is obvious—and transfers it to eReady Sets, Inc., in exchange for a 3D HD TV. eReady deposits the check in its bank account at First Town Bank. HDCs of this check include a. b. c. d.

Clem, eReady, and First Town Bank. Clem only. eReady and First Town Bank only. none of these parties.

ANSWER: D NAT: AACSB Reflective

PAGE:

493 AICPA Legal

TYPE:

ESSAY QUESTIONS A1.

Eppie gives a check to Fund Investments to buy 100 shares of stock in GR8 Tech Corporation for Eppie. The price of the shares is constantly fluctuating. Fund Investments asks Eppie to leave the amount of the check blank and allow it to fill in the price when making the purchase. Eppie agrees. Fund Investments buys the stock when the price is $4,000, but fills in the check for $5,000. The check is negotiated as payment for a $5,000 debt to Hasty Accounting Services, which takes the check in good faith and without notice of Fund Investments’s act. Hasty later learns that Fund Investments was not authorized to fill in the check for $1,000 over the price. Is Hasty an HDC? If so, for how much? ANSWER: Hasty is an HDC to the extent of $5,000, the amount of the preexisting debt that Fund Investments owed Hasty, and for which Hasty accepted the check as payment. To qualify as an HDC, a holder must give value for a negotiable instrument. Taking an instrument as payment for an antecedent claim is giving value. Hasty accepted the $5,000 check from Fund Investments as payment for the debt. This is value. Hasty accepted this check before receiving notice of Eppie’s defense against payment of it, so Hasty is an HDC for this amount. Even if Hasty had known that the check was incomplete when it was given to Fund Investments, Hasty would have qualified as an HDC. Knowledge that an incomplete instrument has been completed is not notice of a defense against payment. Eppie is liable to Hasty for the amount of the check as completed.

CHAPTER 25: TRANSFERABILITY AND HOLDER IN DUE COURSE

PAGES: 487 & 492 NAT: AACSB Reflective

TYPE: = AICPA Decision Modeling

315

316 A2.

TEST BANK A—UNIT FIVE: NEGOTIABLE INSTRUMENTS

Colby fraudulently induces Dian to sign a note. Colby sells the note to Elen, who does not know of the fraud and takes the note for value and in good faith, and thus becomes an HDC. Elen sells the note to Fred, who sells the note back to Colby. Does Colby acquire Elen’s HDC rights in the note? ANSWER: No. A person who does not qualify as an HDC but who acquires an instrument from an HDC or from someone with HDC rights receives the rights and privileges of an HDC. A holder who was a party to fraud affecting the instrument, however, knows of a defense against payment on it and cannot improve his or her status by buying it from a later HDC. Because of the fraud perpetrated on Dian, the signer of the note, Colby does not qualify as an HDC because he knows of a defense against payment on the note. Elen and Fred, both of whom apparently are not aware of the fraud, can become HDCs in the negotiation of the note to them. But Colby cannot improve his status by buying the note from either of them because he is aware of Dian’s defense against payment. PAGE: 493 NAT: AACSB Reflective

TYPE: = AICPA Decision Modeling

Chapter 26 Liability, Defenses, and Discharge N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

A signature can be made by use of any device or machine. ANSWER: T NAT: AACSB Reflective

A2.

TYPE:

PAGE:

498 AICPA Legal

TYPE:

Signature liability is contingent liability. ANSWER: T NAT: AACSB Analytic

A4.

498 AICPA Legal

A maker is secondarily liable on an instrument. ANSWER: F NAT: AACSB Analytic

A3.

PAGE:

499 AICPA Legal

A drawer’s liability does not arise until presentment and notice of dishonor. 313

314

TEST BANK A—UNIT FIVE: NEGOTIABLE INSTRUMENTS

ANSWER: T NAT: AACSB Analytic A5.

PAGE:

499 AICPA Legal

TYPE:

PAGE:

500 AICPA Legal

TYPE:

PAGE:

500 AICPA Legal

TYPE:

An authorized agent binds a principal on an instrument if the agent clearly names the principal in the signature. ANSWER: T NAT: AACSB Analytic

A9.

Failure to present an instrument on time is not improper presentment. ANSWER: F NAT: AACSB Reflective

A8.

TYPE:

Dishonor occurs if payment of an instrument is refused with the prescribed time. ANSWER: T NAT: AACSB Analytic

A7.

499 AICPA Legal

To properly present a draft for payment, the holder must present it to the drawer. ANSWER: F NAT: AACSB Analytic

A6.

PAGE:

501 AICPA Legal

TYPE:

An authorized agent is never personally liable on a negotiable instrument. ANSWER: F NAT: AACSB Analytic

PAGE:

501 AICPA Legal

TYPE:

A10. An unauthorized signature binds the person whose name is signed. ANSWER: F NAT: AACSB Analytic

PAGE:

503 AICPA Legal

TYPE:

A11. An imposter’s indorsement on an instrument can be effective against its drawer or maker.

315

CHAPTER 26: LIABILITY, DEFENSES, AND DISCHARGE

ANSWER: T NAT: AACSB Analytic

PAGE:

504 AICPA Legal

TYPE:

316

TEST BANK A—UNIT FIVE: NEGOTIABLE INSTRUMENTS

A12. Warranty liability is subject to the conditions of proper presentment, dishonor, and notice of dishonor. ANSWER: F NAT: AACSB Analytic

PAGE:

505 AICPA Legal

TYPE:

A13. Transfer of an order instrument by indorsement and delivery extends warranty liability to any subsequent holder who takes the instrument in good faith. ANSWER: T NAT: AACSB Analytic

PAGE:

506 AICPA Legal

TYPE:

A14. Presentment warranties protect the person to whom an instrument is presented for payment. ANSWER: T NAT: AACSB Reflective

PAGE:

507 AICPA Legal

TYPE:

A15. A person whose name is forged on an instrument is liable to pay only a holder in due course the value of the forged instrument. ANSWER: F NAT: AACSB Reflective

PAGE:

508 AICPA Legal

TYPE:

A16. An ordinary holder can recover nothing on an instrument that has been materially altered. ANSWER: T NAT: AACSB Analytic

PAGE:

509 AICPA Legal

TYPE:

A17. Personal defenses are used to avoid payment to an ordinary holder of a negotiable instrument, but not to an HDC or a holder through an HDC. ANSWER: T NAT: AACSB Analytic

PAGE:

511 AICPA Legal

TYPE:

A18. Discharge in bankruptcy is no defense on any instrument regardless of the status of the holder. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

317

CHAPTER 26: LIABILITY, DEFENSES, AND DISCHARGE

ANSWER: F NAT: AACSB Analytic

PAGE:

511 AICPA Legal

TYPE:

A19. All parties to a negotiable instrument will be discharged when the party primarily liable on it pays to a holder the full amount due. ANSWER: T NAT: AACSB Reflective

PAGE:

513 AICPA Legal

TYPE:

A20. Destruction or mutilation of a negotiable instrument by accident discharges it. ANSWER: F NAT: AACSB Reflective

PAGE:

513 AICPA Legal

TYPE:

MULTIPLE CHOICE QUESTIONS A1.

Ethel signs a note “payable to the order of Fidelity Bank.” Fidelity indorses the note in blank and negotiates it to Ghani, who sells it to Huck. Liability associated with the transfer of the note from Ghani to Huck is a. b. c. d.

fitness. quality. signature. warranty.

ANSWER: D NAT: AACSB Reflective A2.

PAGE:

498 AICPA Legal

TYPE:

Puck signs a check “pay to the order of Quik Mart” drawn on Puck’s account in Regional Bank. Puck shows the check to Silky, who agrees that the signature is Puck’s and that Quik Mart is owed the amount that the check represents. Quik Mart signs the back of the check. Liability on this check extends to a. b.

Puck, Quik Mart, and Regional Bank. Puck and Quik Mart only.

318

TEST BANK A—UNIT FIVE: NEGOTIABLE INSTRUMENTS

c. d.

Puck and Silky only. Silky only.

ANSWER: B NAT: AACSB Reflective A3.

TYPE:

immediate. imposed only after payment is demanded. postponed until the note is dishonored by United Credit Union. suspended until payment is due.

ANSWER: A NAT: AACSB Reflective

PAGE:

498 AICPA Legal

TYPE:

Derby Stables writes a check to Extendo Credit, Inc., that is drawn on Derby’s account at Farm & Ranch Bank. If the bank does not accept the check, liability for its amount is on a. b. c. d.

Derby. Extendo. Farm & Ranch. the holder of the check.

ANSWER: A NAT: AACSB Reflective A5.

498 AICPA Legal

Toby signs a note “payable to the order of United Credit Union.” Unless Toby has a valid defense against payment, Toby’s liability on this note is a. b. c. d.

A4.

PAGE:

499 AICPA Legal

TYPE:

Nero signs a check “pay to the order of Olive” drawn on Nero’s account in Peachtree Bank. Olive signs the back of the check. Secondary liability on this check extends to a. b. c. d.

Nero and Olive only. Nero and Peachtree Bank only. Nero only. Peachtree Bank only.

ANSWER:

PAGE:

499

TYPE:

CHAPTER 26: LIABILITY, DEFENSES, AND DISCHARGE

NAT: AACSB Reflective

AICPA Legal

319

320 A6.

TEST BANK A—UNIT FIVE: NEGOTIABLE INSTRUMENTS

Dirk is the maker of a note, on which Erv is secondarily liable. Friendly Credit Company is the current holder of the note. Erv will be obligated to pay the note if a. b. c. d.

Dirk defaults on the note. Friendly Credit breaches a transfer warranty. Friendly Credit negotiates the note to a third party. Friendly Credit presents the note for payment.

ANSWER: A NAT: AACSB Reflective

PAGE:

499 AICPA Legal

TYPE:

Fact Pattern 26-1A (Questions A7–A8 apply) Seymour writes a check on his account at Platinum Bank to Teri to pay a debt. Teri negotiates the check by indorsement to Rosanna, who presents it for payment to Onyx Bank. A7.

Refer to Fact Pattern 26-1A. Teri is a. b. c. d.

not liable for payment under any circumstances. primarily liable. secondarily liable. simultaneously liable.

ANSWER: C NAT: AACSB Reflective A8.

PAGE:

499 AICPA Legal

TYPE:

Refer to Fact Pattern 26-1A. If Onyx Bank dishonors the check, Rosanna can obtain payment from Teri a. b. c. d.

if Rosanna timely notifies Teri. only if Seymour refuses to pay the check. under any circumstances. under no circumstances.

ANSWER: A NAT: AACSB Reflective

PAGE:

500 AICPA Legal

TYPE:

321

CHAPTER 26: LIABILITY, DEFENSES, AND DISCHARGE

A9.

To borrow the money to buy a car, Klaus signs a note “payable to the order of Lake City Auto Financing.” Minnie cosigns the note to guarantee the repayment of the loan. Minnie’s liability on this note is a. b. c. d.

lateral. primary. secondary. tertiary.

ANSWER: B NAT: AACSB Reflective

PAGE:

500 AICPA Legal

TYPE:

A10. Audio Science Company’s agent Bailey is authorized to draw checks on Audio Science’s account in Citizen Bank. The checks are preprinted with the company name. Bailey writes a check “pay to the order of Darlene [signed] Bailey.” Darlene presents the check for payment. If Citizen Bank dishonors it, liability extends to a. b. c. d.

no one. Audio Science and Bailey. Audio Science only. Bailey only.

ANSWER: C NAT: AACSB Reflective

PAGE:

502 AICPA Legal

TYPE:

A11. Celia, an employee of Delite Dairy Company, forges the signature of Elin, Delite’s president, on a Delite check and cashes it at First Federal Bank. Elin would ratify Celia’s actions by a. b. c. d.

asking First Federal to prosecute Celia for forgery. discharging Celia from Delite ‘s employment. entering into a repayment agreement with Celia. filing criminal charges against Celia herself.

ANSWER: C NAT: AACSB Reflective

PAGE:

503 AICPA Legal

TYPE:

322

TEST BANK A—UNIT FIVE: NEGOTIABLE INSTRUMENTS

A12. Birdie, an accountant for Country Custom Furniture, Inc., issues company checks payable to nonexistent persons drawn on Country’s account at Debit Bank. Birdie indorses the checks and deposits them in her account. Country discovers the theft and demands that Debit recredit its account. Debit’s best defense is that a. b. c. d.

Birdie was not authorized to issue the checks. Country was in a better position than Debit to prevent the theft. Debit did not know that the checks were not to be paid. the checks were the property of Country, not Debit.

ANSWER: B NAT: AACSB Reflective

PAGE:

504 AICPA Legal

TYPE:

A13. Rodeo Ranch’s agent Slim is authorized to write checks on Rodeo Ranch’s account in Town Bank. Upper Range Corporation is a Rodeo Ranch supplier. Slim writes a check on Rodeo Ranch’s account “pay to the order of Upper Range [signed] Slim,” indorses it in Upper Range’s name, and deposits it in his own account in Verity Bank. If Verity Bank collects payment, the ultimate party most likely to suffer the loss is a. b. c. d.

no one. Rodeo Ranch. Town Bank. Upper Range.

ANSWER: B NAT: AACSB Reflective

PAGE:

505 AICPA Legal

TYPE:

A14. Cash National Bank is an HDC of a note for $1,000 on which there is the forged signature of “Dudley.” If sued on the note by Cash a. b. c. d.

Dudley must pay the note. Dudley’s best defense would be fraud in the execution. Dudley’s best defense would be material alteration. Dudley’s best defense would be forgery.

ANSWER: D NAT: AACSB Reflective

PAGE:

508 AICPA Legal

TYPE:

CHAPTER 26: LIABILITY, DEFENSES, AND DISCHARGE

323

324

TEST BANK A—UNIT FIVE: NEGOTIABLE INSTRUMENTS

A15. Opalina asks Paolo, who does not understand English, to sign what Opalina says is an application to open a bank account. In fact, the “application” is a note. If sued on the note by an HDC a. b. c. d.

Paolo must pay the note. Paolo’s best defense would be fraud in the execution. Paolo’s best defense would be fraud in the inducement. Paolo’s best defense would be mistake.

ANSWER: B NAT: AACSB Reflective

PAGE:

509 AICPA Legal

TYPE:

A16. Chris convinces Dion, who does not understand English, to sign a $1,000 note that Dion believes is an application for a credit card. Chris negotiates the note to EZ Finance Company. Dion a. b. c. d.

can avoid payment on the note even if EZ is an HDC. can avoid payment on the note only if EZ is a holder. must pay EZ the amount that it paid for the note. must pay the note in full.

ANSWER: A NAT: AACSB Reflective

PAGE:

509 AICPA Legal

TYPE:

A17. Dandy Lyin’ Furniture Store borrows $100,000 at 6 percent interest from Easy Loan Company and signs a promissory note for that amount. Easy changes the amount of the note to $120,000 and increases the rate to 8 percent. Easy materially altered the note when it changed a. b. c. d.

neither the amount nor the interest rate the amount and the interest rate. the amount only. the interest rate only.

ANSWER: B NAT: AACSB Reflective

PAGE:

509 AICPA Legal

TYPE:

325

CHAPTER 26: LIABILITY, DEFENSES, AND DISCHARGE

A18. Quincy signs a check payable to Richland Investors, Inc., and gives it to Richland, leaving the amount blank but authorizing Richland to fill in the check for $1,000. Richland fills in $1,500 and negotiates the check to Silverado Bank, to whom Richland owes $1,500. Silverado Bank, an HDC, can enforce the check for a. b. c. d.

$0. $500. $1,000. $1,500.

ANSWER: D NAT: AACSB Reflective

PAGE:

510 AICPA Legal

TYPE:

A19. Laptop Assembly Company gives a $3,000 promissory note to My-T-Fast Delivery Service to deliver a load of computer chips to Laptop’s plant. The chips are contaminated during transit, and are useless to Laptop on delivery. If My-T-Fast presents the note for payment a. b. c. d.

Laptop’s best defense would be breach of warranty. Laptop must pay the note. Laptop’s best defense would be nondelivery of an instrument. Laptop’s best defense would be failure of consideration.

ANSWER: A NAT: AACSB Reflective

PAGE:

511 AICPA Legal

TYPE:

A20. Bing signs a note payable to the order of Cameron. Cameron indorses the note and gives it to Daphne as payment for a debt. Daphne presents it to Bing, who pays it. Bing’s payment discharges a. b. c. d.

all of the parties. only Bing. only Cameron. only Daphne.

ANSWER: A NAT: AACSB Reflective

PAGE:

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TYPE:

326

TEST BANK A—UNIT FIVE: NEGOTIABLE INSTRUMENTS

CHAPTER 26: LIABILITY, DEFENSES, AND DISCHARGE

327

ESSAY QUESTIONS A1.

Dale issues a check for $4,000, dated June 1, to Evelyn. The check is drawn on First Federal Bank. Evelyn indorses the check and transfers it to Gene. What will trigger the liability of Dale and Evelyn on the check? ANSWER: In this question, Dale and Evelyn are secondarily liable parties. A party who is secondarily liable on an instrument promises to pay it only if the following events occur: (1) the instrument is properly and timely presented; (2) the instrument is dishonored; and (3) notice of dishonor is given in a timely manner to the party. Thus, to trigger Dale and Evelyn’s liability, Gene will need to properly and timely present the check for payment to First Federal, which would have to dishonor the instrument, and Gene would then have to give timely notice to Dale and Evelyn. PAGES: 499–500 NAT: AACSB Reflective

A2.

TYPE: = AICPA Decision Modeling

Ian transfers a note, for consideration, to Jock by blank indorsement and delivery. Jock transfers the note to Kelly, who takes it in good faith. What does Ian warrant to Kelly? ANSWER: Any person who transfers an instrument for consideration makes certain warranties to the transferee and, if the transfer is by indorsement, to all later transferees and holders who take the instrument in good faith. These are referred to as transfer warranties. In this problem, Ian warrants to Kelly that he is entitled to enforce the note, all signatures are authentic and authorized, the note has not been altered, the note is not subject to a defense or claim that can be asserted against him, and he has no knowledge of any insolvency proceedings against the maker. PAGES: 505–507 NAT: AACSB Reflective

TYPE: = AICPA Decision Modeling

Chapter 27 Checks and Banking in the Digital Age N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

A cashier’s check is an instrument in which a bank draws a check on itself. ANSWER: T NAT: AACSB Analytic

A2.

518 AICPA Legal

TYPE:

A certified checks is an instrument that has been accepted for payment by the bank on which it is drawn. ANSWER: T NAT: AACSB Analytic

A3.

PAGE:

521 AICPA Legal

TYPE:

A creditor-debtor relationship can exist between a bank and its customer. ANSWER: F NAT: AACSB Analytic

PAGE:

521 AICPA Legal

TYPE:

326 A4.

TEST BANK A—UNIT FIVE: NEGOTIABLE INSTRUMENTS

A drawer is liable to the holder of a check if the check is not honored. ANSWER: T NAT: AACSB Analytic

A5.

PAGE:

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TYPE:

PAGE:

523 AICPA Legal

TYPE:

PAGE:

523 AICPA Legal

TYPE:

Only a customer or a person authorized to draw on an account can order a bank not to pay a check when it is presented for payment. ANSWER: T NAT: AACSB Analytic

A9.

A check that is presented for payment more than one month from its date is a stale check. ANSWER: F NAT: AACSB Analytic

A8.

TYPE:

The death of a customer immediately revokes a bank’s authority to pay an item. ANSWER: F NAT: AACSB Analytic

A7.

522 AICPA Legal

Any failure of a bank to honor a check because it would create an overdraft is a wrongful dishonor. ANSWER: F NAT: AACSB Analytic

A6.

PAGE:

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TYPE:

When a bank pays a check on which the drawer’s signature is forged, generally the customer suffers the loss. ANSWER: F NAT: AACSB Analytic

PAGE:

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TYPE:

A10. A customer can escape liability for failing to notify the bank of forged or altered checks when the customer can prove that the bank was negligent. ANSWER: T NAT: AACSB Analytic

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327

A11. A bank that pays a customer’s check bearing a forged indorsement is not obligated to recredit the customer’s account. ANSWER: F NAT: AACSB Analytic

PAGE:

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TYPE:

A12. If a bank fails to detect an alteration on a customer’s check, it is liable to its customer for the loss. ANSWER: T NAT: AACSB Analytic

PAGE:

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TYPE:

A13. Any local check deposited must be available for withdrawal by check or as cash within one business day from the date of deposit. ANSWER: T NAT: AACSB Analytic

PAGE:

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TYPE:

A14. The first bank to receive a check for payment is the intermediary bank. ANSWER: F NAT: AACSB Analytic

PAGE:

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TYPE:

A15. Each bank in a collection chain must pass a check on before midnight of the next business day following its receipt. ANSWER: T NAT: AACSB Reflective

PAGE:

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A16. A bank that encodes information on an item after the item has been issued warrants to any subsequent bank that the encoded information is correct. ANSWER: T NAT: AACSB Analytic

PAGE:

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TYPE:

A17. Bank customers cannot demand that their original canceled checks be returned with their monthly statement. ANSWER:

PAGE:

534

TYPE:

TEST BANK A—UNIT FIVE: NEGOTIABLE INSTRUMENTS

328

NAT: AACSB Analytic

AICPA Legal

A18. The maximum time that a bank can hold funds from deposited checks before making them available to the depositor will not change. ANSWER: F NAT: AACSB Analytic

PAGE:

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TYPE:

A19. A customer has two days to discover and notify the bank of any error on the monthly statement involving an electronic transfer of funds. ANSWER: F NAT: AACSB Analytic

PAGE:

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TYPE:

A20. No financial institution can disclose nonpublic personal information about a consumer to an unaffiliated third party under any circumstances. ANSWER: F NAT: AACSB Reflective

PAGE:

538 TYPE: AICPA Critical Thinking

MULTIPLE CHOICE QUESTIONS A1.

Rikki signs a check “pay to the order of Scholar University” drawn on Rikki’s account in State Bank to pay her tuition. Rikki is a. b. c. d.

the certifier. the drawee. the drawer. the payee.

ANSWER: C NAT: AACSB Reflective A2.

PAGE:

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TYPE:

Elmo pays First National Bank $1,000 plus a service fee to draw a check on itself made payable to Go Delivery Service. This is a. b. c.

a cashier’s check. a certified check. a trade acceptance.

CHAPTER 27: CHECKS AND BANKING IN THE DIGITAL AGE

329

a traveler’s check.

ANSWER: A NAT: AACSB Reflective

PAGE:

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TYPE:

TEST BANK A—UNIT FIVE: NEGOTIABLE INSTRUMENTS

330 A3.

Scott presents an instrument that states “pay to the order of Scott” to Town Bank for payment. This instrument is the most common type of negotiable instrument, which is a. b. c. d.

a certificate of deposit. a check. a note. a trade acceptance.

ANSWER: B NAT: AACSB Reflective A4.

518 AICPA Legal

TYPE:

First Community Bank agrees to accept a check by setting aside sufficient funds to cover the amount. This check is considered a. b. c. d.

cashed. certified. deposited. provisionally credited.

ANSWER: B NAT: AACSB Reflective A5.

PAGE:

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TYPE:

Kareem writes a check for $1,000 drawn on Liberty Bank and presents it to Maris. Maris presents the check for payment to Liberty Bank, which dishonors it. The party most likely liable to Maris is a. b. c. d.

Kareem in a civil suit. Kareem in a criminal prosecution. Liberty Bank in an administrative proceeding. the Federal Reserve.

ANSWER: A NAT: AACSB Reflective

PAGE:

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CHAPTER 27: CHECKS AND BANKING IN THE DIGITAL AGE

A6.

Thelma signs a check “pay to the order of Uri” drawn on Thelma’s account in Verity Bank. Thelma has $400 in her account but the amount of the check is $500, which the bank pays. This is a. b. c. d.

a dishonored check. an overdraft. a postdated check. a stale check.

ANSWER: B NAT: AACSB Reflective A7.

PAGE:

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TYPE:

Liu signs a check “pay to the order of Marv” drawn on Liu’s account in National Bank. Liu later orders National not to pay the check, but the bank pays it over Liu’s order. Subsequent checks written on Liu’s account “bounce.” Most likely liable for the costs to Liu is a. b. c. d.

any party to whom a subsequent check was written. Liu. Marv. National.

ANSWER: D NAT: AACSB Reflective A8.

331

PAGE:

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TYPE:

Darwin signs a check “pay to the order of Eva Marie” drawn on Darwin’s account in First Funds Bank and dates the check “April 1.” Eva Marie presents the check to the bank for payment on November 12. This is a. b. c. d.

a stop-payment order. an overdraft. a postdated check. a stale check.

ANSWER: D NAT: AACSB Reflective

PAGE:

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TYPE:

TEST BANK A—UNIT FIVE: NEGOTIABLE INSTRUMENTS

332 A9.

Shakira issues a check drawn on Thrifty Bank to United Office Supply to pay for six computer desks. Later, Shakira discovers defects in the goods and orders Thrifty to stop payment on the check. Shakira does not renew the order, and the bank clears the check eight months later. The bank a. b. c. d.

must recredit Shakira’s account. must obtain funds from United to cover the amount of the check. must substitute acceptable goods. need not recredit Shakira’s account.

ANSWER: D NAT: AACSB Reflective

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A10. Johnny writes a check to Katie as payment for a 3D DVD player but soon discovers the player is broken. He goes to the drawee bank and orally authorizes Sissy, a bank officer, to stop payment on the check. This order is valid for a. b. c. d.

fourteen days. fourteen months. six days. six months.

ANSWER: A NAT: AACSB Reflective

PAGE:

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TYPE:

A11. Brandy forges Caleb’s signature on a check “payable to the order of Brandy” drawn on Caleb’s account in Delphi Bank. Caleb’s forged signature is a. b. c. d.

effective if an innocent third party accepts the check. effective to the degree that it matches Caleb’s genuine signature. effective to the extent that Downtown Bank debits Caleb’s account. not effective.

ANSWER: D NAT: AACSB Reflective

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333

A12. Elmer can write checks on his account at Finance City Bank. Gina steals the checks, forges Elmer’s signature, and cashes the checks at Finance City. The bank is excused from any liability if, after receipt of the first forged check, Elmer fails to report the forgeries within a. b. c. d.

five days. fourteen days. one year. three years.

ANSWER: C NAT: AACSB Reflective

PAGE:

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TYPE:

A13. Drew signs a check “pay to the order of Eppie” drawn on Drew’s account in Fidelity Bank. Greta forges Eppie’s indorsement. Fidelity pays the check. Most likely a. b. c. d.

Drew will be liable for the amount. Eppie will have to pay Drew for the amount. Fidelity will have to recredit Drew’s account. the Federal Reserve will reimburse all parties for their costs.

ANSWER: C NAT: AACSB Reflective

PAGE:

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A14. Roald writes a check for $700 to Savannah. Savannah indorses the check in blank and transfers it to Twitchell, who alters the check to read $7,000 and presents it to Union Bank, the drawee, for payment. The bank cashes it. Roald discovers the alteration and files a suit against the bank. Roald can recover a. b. c. d.

$7,000. $6,300. $700. 0.

ANSWER: B NAT: AACSB Reflective

PAGE:

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TYPE:

TEST BANK A—UNIT FIVE: NEGOTIABLE INSTRUMENTS

334

A15. On Monday morning, Bob deposits into his account at County Bank a $500 check from Dyna, who also has an account at County Bank. On that same day, this check is considered a. b. c. d.

cashiered. certified. paid. provisionally credited.

ANSWER: D NAT: AACSB Reflective

PAGE:

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TYPE:

A16. Smith & Jones Associates is a business customer of Superior Bank. Under federal law, Smith & Jones cannot demand a. b. c. d.

any proof of payment except Superior’s good faith. monthly statements. recrediting of its account on payment of a forged item. the return of its original checks with its monthly statements.

ANSWER: D NAT: AACSB Reflective

PAGE:

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TYPE:

Fact Pattern 27-1A (Questions A17 and A18 apply) Mike loses his National Bank access card. He realizes his loss the next day but waits a week to call National. Meanwhile, Opal finds and uses Mike’s card to withdraw $3,000 from Mike’s account. A17. Refer to Fact Pattern 27-1A. Mike is responsible for a. b. c. d.

$0. $50. $500. $3,000.

ANSWER: C NAT: AACSB Reflective

PAGE:

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TYPE:

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335

A18. Refer to Fact Pattern 27-1A. When Mike receives his National statement, he demands that the bank investigate the matter and recredit his account. The bank a. b. c. d.

has no duty to investigate. must investigate and, if the dispute is not resolved within ten days, recredit Mike’s account (at least until the dispute is resolved). must investigate and immediately recredit Mike’s account (at least until the dispute is resolved). must investigate but need not recredit Mike’s account.

ANSWER: B NAT: AACSB Reflective

PAGE:

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TYPE:

A19. Paris knowingly divulges to Media Exposure magazine information about Randy’s e-money payments to City Bank without the consent of Randy or City Bank. Paris may be in violation of federal law a. b. c. d.

if the e-payments were in transmission at the time. if the e-payments have not yet been made. if the e-payments are not represented by paper checks. under none of these circumstances.

ANSWER: A NAT: AACSB Reflective

PAGE:

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TYPE:

A20. eBank, an online financial institution, gives financial information about Frieda and other customers to a federal agency. eBank may be in violation of federal law a. b. c. d.

if the agency did not have a warrant. if the institution is not deemed to be a bank. if the institution did not issue its customers credit or debit cards. under none of these circumstances.

ANSWER: C NAT: AACSB Reflective

PAGE:

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TYPE:

ESSAY QUESTIONS

336 A1.

TEST BANK A—UNIT FIVE: NEGOTIABLE INSTRUMENTS

Hoppy steals two checks from Eagle Retail Stores, Inc.: a blank check and a check payable to the order of General Supplies Company (GSC), drawn on Eagle’s account with First National Bank. Hoppy forges Eagle’s signature on the blank check and makes it payable to himself. Hoppy forges GSC’s indorsement on the back of the check payable to GSC, and adds “Pay to the order of Hoppy.” At Friendly Credit, Inc., Hoppy indorses the back of both checks with his own name and gives them to Friendly for cash. Friendly does not know about the theft or the forged signatures and presents the checks to First National, which pays them. Eagle, which was not negligent, discovers the forgeries and asks First National to recredit its account. Who suffers the loss on each check? ANSWER: First National will suffer the loss of the amount on the blank check unless it can recover from Hoppy. Friendly will suffer the loss on the amount on the check with the forged indorsement of GSC unless Friendly, too, can recover from Hoppy. When the signature of a drawer is forged, the drawer has not been negligent, and the drawee bank pays the check over the forged signature, the party who bears the loss is the drawee bank. The bank has a right to recover from the party who forged the signature, or from any party who does not take the check in good faith and for value, or who changes his or her position in reliance on payment or acceptance. Here, regarding the blank check, Eagle, the drawer, was not negligent, its signature was forged, and First National, the drawee bank, paid the check over the forged signature. (First National cannot recover from Friendly on the basis of a breach of a presentment warranty, because Friendly warranted only that it did not know the drawer’s signature was forged.) First National has a right to recover from Hoppy, but in most cases, actual recovery from a thief is a remote possibility. Because Friendly took the check in good faith and for value, First National does not have a right to recover the amount of this check from Friendly. A bank that pays a customer’s check bearing a forged indorsement must recredit the customer’s account. A forged indorsement does not transfer title, however, and so whoever takes a check with a forged indorsement cannot become a holder and will likely suffer a loss on the check. (A subsequent transfer of the check breaches the presentment warranty that in effect there are no unauthorized indorsements.) In this problem, First National must recredit Eagle’s account, but First National can recover the amount from Friendly, who did not acquire title to the check and thus did not become a holder. Friendly has a right to recover from Hoppy, but again actual recovery is unlikely.

CHAPTER 27: CHECKS AND BANKING IN THE DIGITAL AGE

PAGES: 524–529 NAT: AACSB Reflective A2.

337

TYPE: = AICPA Decision Modeling

City Bank mistakenly transfers $1,000 from the account of Donna, its customer, to the account of Earl in First Federal Bank. The transfer is done electronically. When City Bank learns of the mistake, it credits Donna’s account and asks First Federal to “return” $1,000. First Federal refuses. City Bank files a suit against First Federal, claiming that it is in violation of the Electronic Fund Transfer Act. How might the court rule? ANSWER: The court will likely rule in favor of First Federal on City Bank’s claim under the Electronic Fund Transfer Act (EFTA). The EFTA does not apply because the plaintiff and defendant are financial institutions, not consumers. The EFTA covers only electronic fund transfers made by consumers. Transfers between financial institutions are not covered under the EFTA. City Bank may recover under other legal theories, however, possibly including a cause founded on Article 4A of the Uniform Commercial Code. PAGES: 536 & 537 NAT: AACSB Reflective

TYPE: = AICPA Decision Modeling

Chapter 28 Creditors’ Rights and Remedies N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

A mechanic’s lien can be enforced to recover payment from a debtor for labor and materials in the repair of personal property. ANSWER: F NAT: AACSB Analytic

A2.

TYPE:

PAGE:

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TYPE:

A default occurs when a debtor fails to pay a creditor as promised. ANSWER: T NAT: AACSB Analytic

A4.

546 AICPA Legal

If a debtor does not pay a mechanic’s lien, the debtor’s property can be sold to satisfy the debt. ANSWER: T NAT: AACSB Analytic

A3.

PAGE:

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TYPE:

An artisan’s lien is possessory. 341

342

TEST BANK A—UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY

ANSWER: T NAT: AACSB Analytic

PAGE:

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TYPE:

343

CHAPTER 28: CREDITORS’ RIGHTS AND REMEDIES

A5.

An attachment is a court-ordered seizure and taking into custody of property prior to the securing of a judgment for a past-due debt. ANSWER: T NAT: AACSB Analytic

A6.

PAGE:

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TYPE:

PAGE:

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TYPE:

548 AICPA Legal

TYPE:

All of a debtor’s pay can be garnished. ANSWER: F NAT: AACSB Analytic

A9.

TYPE:

Federal law governs garnishment actions. ANSWER: F NAT: AACSB Analytic

A8.

547 AICPA Legal

If a creditor obtains a judgment against a debtor and the debtor cannot or will not pay the judgment, the dispute is at an end. ANSWER: F NAT: AACSB Analytic

A7.

PAGE:

Creditors may contract with a debtor for discharge of the debtor’s liquidated debts. ANSWER: T NAT: AACSB Analytic

PAGE:

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TYPE:

A10. The distinctions between a surety and a guarantor have been abolished in all states. ANSWER: F NAT: AACSB Analytic

PAGE:

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TYPE:

A11. A surety is primarily liable for the debt of a principal. ANSWER: T NAT: AACSB Analytic

PAGE:

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344

TEST BANK A—UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY

A12. A guarantor can be required to pay an obligation only after the principal debtor defaults. ANSWER: T NAT: AACSB Analytic

PAGE:

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TYPE:

345

CHAPTER 28: CREDITORS’ RIGHTS AND REMEDIES

A13. A guaranty contract must be in writing to be enforceable. ANSWER: F NAT: AACSB Analytic

PAGE:

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TYPE:

A14. In a suretyship relationship, a third person’s credit becomes the security for a debt. ANSWER: T NAT: AACSB Analytic

PAGE:

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TYPE:

A15. Payment of the principal obligation will not discharge the surety from the obligation. ANSWER: F NAT: AACSB Analytic

PAGE:

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TYPE:

A16. If a creditor surrenders collateral to the debtor without the consent of the guarantor, this can reduce the obligation of the guarantor. ANSWER: T NAT: AACSB Analytic

PAGE:

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TYPE:

A17. If the debtor offers to pay the debt owed to a creditor but the creditor refuses the tender, the surety remains obligated on the debt. ANSWER: F NAT: AACSB Analytic

PAGE:

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TYPE:

A18. A homestead exemption allows a debtor to subtract the value of the family home from the amount of a debt. ANSWER: F NAT: AACSB Analytic

PAGE:

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TYPE:

A19. In a few states, statutes allow the homestead exemption only if the judgment debtor has a family. ANSWER: T NAT: AACSB Analytic

PAGE:

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TYPE:

346

TEST BANK A—UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY

A20. A debtor’s vehicle is never exempt from satisfaction of a judgment debt. ANSWER: F NAT: AACSB Analytic

PAGE:

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TYPE:

347

CHAPTER 28: CREDITORS’ RIGHTS AND REMEDIES

MULTIPLE CHOICE QUESTIONS A1.

Residence Painting Company has a claim against Stuart’s property to satisfy a debt that takes priority over other claims against the same property. This is a. b. c. d.

a lien. a violation of most state laws. a writ of attachment. a garnishment.

ANSWER: A NAT: AACSB Reflective A2.

546 AICPA Legal

TYPE:

Pruit performs a contract with Quint to reshingle the roof on Quint’s house, but Quint does not pay. Pruit notifies Quint that the property will be sold to satisfy the debt. This is a. b. c. d.

a judicial lien. a mechanic’s lien. an artisan’s lien. a violation of most state laws.

ANSWER: B NAT: AACSB Reflective A3.

PAGE:

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TYPE:

Diego performs a contract with Elwood to add a swimming pool to Elwood’s property, but Elwood does not pay. Diego can file a lien on Elwood’s property if, from the last date labor or materials were provided, he acts a. b. c. d.

immediately. within 60 to 120 days. within two years. within a reasonable time.

ANSWER: B NAT: AACSB Reflective

PAGE:

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TYPE:

348 A4.

TEST BANK A—UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY

Francie’s debt to Gage is past due. Gage brings a legal action against Francie to collect the debt. To ensure that a judgment in Gage’s favor will be collectible, Gage asks the court to order the seizure of Francie’s property. This is a request for a. b. c. d.

a guaranty (or suretyship) contract. an order that would violate most state laws. a writ of attachment. an order of receivership.

ANSWER: C NAT: AACSB Reflective A5.

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TYPE:

Delia refuses to pay Ewing $500 in cash on their contract to repair certain theater sets, which Ewing still possesses. Ewing’s lien on the sets will terminate a. b. c. d.

if Ewing continues to maintain possession. if Ewing does not file a written notice of lien within thirty days. if Ewing voluntarily surrenders possession. within thirty days.

ANSWER: C NAT: AACSB Reflective A6.

PAGE:

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TYPE:

Ping’s debt to Oak Furniture Warehouse is past due. Oak obtains a judgment against Ping, but Ping refuses to pay it. Oak asks the court for an order that directs the sheriff to seize and sell any of Ping’s nonexempt real or personal property that is within the court’s geographic jurisdiction. This is a request for a. b. c. d.

a writ of execution. a composition agreement. an order that would violate most state laws. an order of garnishment.

ANSWER: A NAT: AACSB Reflective

PAGE:

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TYPE:

349

CHAPTER 28: CREDITORS’ RIGHTS AND REMEDIES

A7.

Sydney borrows money from Rite Now Loan Company. For Rite Now to obtain a writ of execution, Sydney must a. b. c. d.

be unable or refuse to pay the amount of a judgment. be unable to redeem Sydney’s exempt property. notify Rite Now in writing (in a “writ”) of his intent. surrender possession of his property to a court.

ANSWER: A NAT: AACSB Reflective A8.

548 AICPA Legal

TYPE:

Flip’s debt to George is past due. George brings a legal action against Flip to collect the debt. George asks the court to order Home Bank, in which Flip has an account, to pay a portion of the funds to George. This is a request for a. b. c. d.

a writ of execution. an order of garnishment. an order that would violate most state laws. an artisan’s lien.

ANSWER: B NAT: AACSB Reflective A9.

PAGE:

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TYPE:

Kyla’s debt to Lark is past due. Lark obtains an order of garnishment to require Kyla’s employer My Pi Pizza Restaurant to pay part of Kyla’s paycheck to Lark. The law a. b. c. d.

limits the amount that can be taken from Kyla’s take-home pay. permits My Pi to dismiss Kyla because her wages are garnished. practically does not allow Lark to collect the awarded amount. requires My Pi to retain Kyla as an employee until the debt is paid.

ANSWER: A NAT: AACSB Reflective

PAGE:

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TYPE:

350

TEST BANK A—UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY

A10. Liu and Midge—Nero’s creditors—contract with Nero for the discharge of Nero’s liquidated debts on payment of a lesser sum. This is a. b. c. d.

a composition agreement. a subrogation. a suretyship agreement. in violation of most states’ laws.

ANSWER: A NAT: AACSB Reflective

PAGE:

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TYPE:

A11. Speedy Delivery Company buys a white van from Tom’s Terrific Vehicles, on credit under a guaranty signed by Ulysses, Speedy’s president, making him personally liable if Speedy does not pay. Ulysses is a. b. c. d.

a surety. a lienor. a guarantor. a creditor.

ANSWER: C NAT: AACSB Reflective

PAGE:

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TYPE:

Fact Pattern 28-1A (Questions A12–A15 apply) Dollar Value Motors asks Estimable Bank for a loan to increase its vehicle inventory. Estimable requires Flair, Dollar Value’s president, sign a personal guaranty to pay the debt if Dollar Value defaults. Meanwhile, to buy a pick-up truck from Dollar Value, Gina asks Harper to co-sign a credit application. A12. Refer to Fact Pattern 28-1A. If Harper signs the application but fails to condition her signature on Dollar Value’s agreement to pursue its legal remedies against Gina before looking to her, then Harper is a. b. c. d.

a surety. a lienor. a guarantor. a creditor.

ANSWER:

PAGE:

550

TYPE:

CHAPTER 28: CREDITORS’ RIGHTS AND REMEDIES

NAT: AACSB Reflective

AICPA Legal

351

352

TEST BANK A—UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY

A13. Refer to Fact Pattern 28-1A. If Flair is a guarantor, then the guaranty is required to be in writing because of a. b. c. d.

the debtor’s right of redemption. the co-signer’s right of contribution. the creditor’s transfer of possession. the Statute of Frauds.

ANSWER: D NAT: AACSB Reflective

PAGE:

550 AICPA Legal

TYPE:

A14. Refer to Fact Pattern 28-1A. If Harper signs the application only after language is included that requires Dollar Value to exhaust its legal remedies against Gina before looking to her, then Harper is a. b. c. d.

a surety. a lienor. a guarantor. a creditor.

ANSWER: C NAT: AACSB Reflective

PAGE:

550 AICPA Legal

TYPE:

A15. Refer to Fact Pattern 28-1A. If, after the loan agreement is signed, Gina agrees to a higher rate of interest without telling Harper, then Harper is a. b. c. d.

discharged from the agreement. liable at the higher rate of interest. liable at the lower rate of interest. liable for the principal only.

ANSWER: A NAT: AACSB Reflective

PAGE:

552 AICPA Legal

TYPE:

A16. Rita is a surety for Serena’s loan from Title Lenders, Inc. Rita’s right to “step into the shoes” of Title Lenders, after paying Serena’s debt, and exercise any of the Title Lenders’s rights against Serena is the right of a. b.

contribution. redemption.

353

CHAPTER 28: CREDITORS’ RIGHTS AND REMEDIES

c. d.

reimbursement. subrogation.

ANSWER: D NAT: AACSB Reflective

PAGE:

553 AICPA Legal

TYPE:

354

TEST BANK A—UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY

A17. Doral, Eduard, and Francesca are co-sureties of Glenda’s debt to Hi-Credit Company. Doral pays Glenda’s entire debt. Doral’s right to seek proportionate payments from Eduard and Francesca is the right of a. b. c. d.

contribution. redemption. reimbursement. subrogation.

ANSWER: A NAT: AACSB Reflective

PAGE:

553 AICPA Legal

TYPE:

A18. Rosa and Sally agree to guarantee Timon’s debt. Rosa’s maximum liability is $30,000, and Sally’s is $20,000. Timon owes $20,000 and is in default. Rosa pays the creditor the entire amount. In the absence of an agreement to the contrary, Rosa can recover from Sally a. b. c. d.

$8,000. $10,000. $20,000. 0.

ANSWER: A NAT: AACSB Reflective

PAGE:

553 AICPA Legal

TYPE:

A19. Ronda’s debt to Skye is past due. Skye brings a legal action against Ronda to collect the debt. To ensure that a judgment in Skye’s favor will be collectible, Skye asks the court to order the seizure of Ronda’s property. Exempt from such an order in most states would be a. b. c. d.

all of Ronda’s real property. as much of Ronda’s real property as Ronda opts to exempt. none of Ronda’s real property. Ronda’s family home in its entirety or up to a specified amount.

ANSWER: D NAT: AACSB Reflective

PAGE:

553 AICPA Legal

TYPE:

355

CHAPTER 28: CREDITORS’ RIGHTS AND REMEDIES

A20. Laurel defaults on a loan owed to Maverick Bank. As a creditor, Maverick may attempt to place liens on all of Laurel’s property except a. b. c. d.

motor vehicles used to commute to work. stock in various corporations. items that Laurel selects. vacant commercial property.

ANSWER: A NAT: AACSB Reflective

PAGE:

554 AICPA Legal

TYPE:

ESSAY QUESTIONS A1.

Wanda owes Xtra Credit Company $5,000 but refuses to pay. Xtra Credit obtains a garnishment order and serves it on Wanda’s employer, Young Nursery & Garden, Inc. If Young complies with the order and Wanda stays on the job, is one order enough to garnish all of Wanda’s wages for each pay period until the debt is paid? ANSWER: No. In some states, a creditor such as Xtra Credit must return to the court for a separate order of garnishment for each pay period. Also, federal and state laws limit the amount of money that can be garnished from a debtor’s pay. PAGES: 548–549 NAT: AACSB Reflective

A2.

TYPE: = AICPA Decision Modeling

Smartt Software Company borrows $10,000 from Term ‘N All Loans, Inc., but cannot repay the loan when it comes due. Term ‘N All refuses to extend the time for repayment unless Smartt can provide an acceptable surety. Uno Venture Corporation agrees to act as a surety for the loan after Smartt offers the firm a discount on software and shows Uno financial statements, compiled with Term ‘N All’s assistance, that misrepresent Smartt’s financial situation. Later, after Uno uses the discount to buy software, Smartt again defaults on repayment of the loan, and Term ‘N All files a suit against Uno to collect the amount of the debt. Is Uno liable? Why or why not?

356

TEST BANK A—UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY

ANSWER: Uno is not liable, because Smartt committed fraud in obtaining Commercial Investments’ agreement to serve as surety and Term ‘N All knew about, and assisted in, the fraud. A surety is released from an obligation to pay a debt that he or she agreed to pay if the creditor fraudulently induced the surety to guarantee the debt. The surety can assert the fraud as a defense. In this problem, the debtor defrauded the surety, but the debtor did it with the help of the creditor. Thus, the creditor could not claim to be innocent of the fraud. Even if the creditor had only known about the fraud, and had not actively participated by supplying the financial statements that misrepresented the debtor’s financial condition, the surety could still avoid liability because nondisclosure of a material fact is a form of fraud. PAGES: 552–553 NAT: AACSB Reflective

TYPE: = AICPA Decision Modeling

Chapter 29 Secured Transactions N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

Any creditor who has a security interest in a debtor’s collateral is the secured party. ANSWER: F NAT: AACSB Analytic

A2.

TYPE:

PAGE:

557 AICPA Legal

TYPE:

To create an enforceable security interest, the secured party must give the debtor something of value. ANSWER: T NAT: AACSB Analytic

A4.

557 AICPA Legal

Attachment gives the creditor an enforceable security interest in the collateral. ANSWER: T NAT: AACSB Analytic

A3.

PAGE:

557 AICPA Legal

TYPE:

A security interest is enforceable only if the collateral is in the secured party’s possession. 353

354

TEST BANK A—UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY

ANSWER: F NAT: AACSB Analytic

PAGE:

558 AICPA Legal

TYPE:

CHAPTER 29: SECURED TRANSACTIONS

A5.

A security agreement must contain a description of the collateral that reasonably identifies it. ANSWER: T NAT: AACSB Analytic

A6.

TYPE:

PAGE:

559 AICPA Legal

TYPE:

PAGE:

559 AICPA Legal

TYPE:

The state office in which a financing statement should be filed depends on the debtor’s location. ANSWER: T NAT: AACSB Analytic

A9.

558 AICPA Legal

A financing statement must be filed under the debtor’s trade name. ANSWER: F NAT: AACSB Reflective

A8.

PAGE:

A financing statement cannot be filed electronically. ANSWER: F NAT: AACSB Analytic

A7.

355

PAGE:

561 AICPA Legal

TYPE:

Filing a financing statement with the appropriate public office is the only way to perfect a security interest. ANSWER: F NAT: AACSB Reflective

PAGE:

562 AICPA Legal

TYPE:

A10. A purchase-money security interest in a business’s inventory is perfected automatically at the time of a credit sale. ANSWER: F NAT: AACSB Analytic

PAGE:

564 AICPA Legal

TYPE:

A11. A financing statement is effective for no more than six months from the date of filing. ANSWER: F NAT: AACSB Analytic

PAGE:

564 AICPA Legal

TYPE:

356

TEST BANK A—UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY

A12. A continuation statement will continue the effectiveness of a financing statement for five years. ANSWER: T NAT: AACSB Analytic

PAGE:

564 AICPA Legal

TYPE:

A13. Advances against lines of credit can be subject to a properly perfected security interest in certain collateral. ANSWER: T NAT: AACSB Analytic

PAGE:

565 AICPA Legal

TYPE:

A14. A security interest that provides for a security interest in after-acquired property is a floating lien. ANSWER: T NAT: AACSB Analytic

PAGE:

566 AICPA Legal

TYPE:

A15. When more than one security interest has been perfected in the same collateral, their claims are satisfied proportionately to their value. ANSWER: F NAT: AACSB Analytic

PAGE:

566 AICPA Legal

TYPE:

A16. A buyer in the ordinary course of business has priority unless a previously perfected security interest exists as to the goods. ANSWER: F NAT: AACSB Analytic

PAGE:

569 AICPA Legal

TYPE:

A17. A perfected purchase-money security interest in inventory can have priority over a conflicting security interest in the same inventory. ANSWER: T NAT: AACSB Analytic

PAGE:

569 AICPA Legal

TYPE:

A18. On the debtor’s default, a secured party can take possession of the collateral covered by the security agreement only by court order. ANSWER:

PAGE:

572

TYPE:

CHAPTER 29: SECURED TRANSACTIONS

NAT: AACSB Analytic

357

AICPA Legal

A19. Once default has occurred and the secured party has obtained possession of the collateral, the secured party has no more options. ANSWER: F NAT: AACSB Analytic

PAGE:

574 AICPA Legal

TYPE:

A20. Whatever a secured party obtains on a sale of collateral is all that he or she can collect on the debt. ANSWER: F NAT: AACSB Analytic

PAGE:

576 AICPA Legal

TYPE:

MULTIPLE CHOICE QUESTIONS A1.

The payment of Dagmar’s debt to Evander is guaranteed by Dagmar’s personal property. This is a. b. c. d.

a lien. a secured transaction. a real property mortgage. a violation of most state laws.

ANSWER: B PAGE: NAT: AACSB Reflective A2.

557 AICPA Legal

TYPE:

Bayside Credit Corporation lends funds to Claude, a consumer, to apply to the cost of a boat, which is the collateral for the loan. An enforceable security interest requires a. b. c. d.

a written agreement and Bayside’s possession of the boat. a written agreement or Bayside’s possession of the boat. the boat seller’s acknowledgement of the loan in writing. Claude’s possession of the boat.

ANSWER: B NAT: AACSB Reflective

PAGE:

557 AICPA Legal

TYPE:

TEST BANK A—UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY

358 A3.

The payment of Florida’s debt to Guillermo is guaranteed by Florida’s personal property. Guillermo is a. b. c. d.

a lienor. a secured party. a mortgagee. a usurer.

ANSWER: B PAGE: NAT: AACSB Reflective A4.

TYPE:

The payment of Hu’s debt to Ian is guaranteed by Hu’s personal property. To give public notice of his interest in Hu’s property, Ian is most likely to a. b. c. d.

attach a bright label to Hu’s property. e-mail other potential creditors. file a financing statement with the appropriate authority. publish a collection notice in local newspapers.

ANSWER: C PAGE: NAT: AACSB Reflective A5.

557 AICPA Legal

559 AICPA Legal

TYPE:

Super Chef Appliance Company allows Reba to take a set of kitchen appliances that she bought from Super Chef even though she has not paid the full price. Super Chef’s legally sufficient financing statement in the goods need not include a. b. c. d.

a description of the collateral. a statement of the reason for allowing Reba to take the goods. Super Chef’s name. Reba’s name.

ANSWER: B NAT: AACSB Reflective

PAGE:

559 AICPA Legal

TYPE:

CHAPTER 29: SECURED TRANSACTIONS

A6.

The payment of Laine’s debt to Mingo is guaranteed by Laine’s personal property. The process by which Mingo can protect himself against the claims of third parties to this property is a. b. c. d.

attachment. authentication. perfection. bankruptcy.

ANSWER: C PAGE: NAT: AACSB Reflective A7.

559 AICPA Legal

TYPE:

Olive borrows from Polo and Quennell, using the same collateral for both loans. Only Quennell has a perfected security interest. Olive defaults on both loans. The party with first rights to the collateral is a. b. c. d.

Olive. Polo and Quennell, in proportion to Olive’s debt to each. Polo. Quennell.

ANSWER: D PAGE: NAT: AACSB Reflective A8.

359

559 AICPA Legal

TYPE:

The payment of Yves’s debt to Zane is guaranteed by Yves’s personal property. Their agreement describes Yves’s subject property by serial number. To establish Zane’s interest, this is a. b. c. d.

irrelevant. not sufficient. sufficient if it accurately describes the parties’ agreement. sufficient unless it is too tedious to review.

ANSWER: C PAGE: NAT: AACSB Reflective

561 AICPA Legal

TYPE:

TEST BANK A—UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY

360 A9.

Danica borrows $1,000 from Evermore Bank, using her motorcycle as collateral. To perfect its security interest, the bank must file its financing statement with a. b. c. d.

the secretary of state. the county clerk. the city treasurer. the ward alderman.

ANSWER: A NAT: AACSB Reflective

PAGE:

561 AICPA Legal

TYPE:

A10. Mona lives in New Jersey, but she works in New York. Mona borrows $1,000 from National Bank, using her motorcycle as collateral. To perfect its security interest, the bank must file its financing statement in at least a. b. c. d.

every state. New Jersey. New Jersey and New York. New York.

ANSWER: B NAT: AACSB Reflective

PAGE:

561 AICPA Legal

TYPE:

Fact Pattern 29-1A (Questions A11–A13 apply) Luxuro Vehicles, Inc., makes and sells automobiles to auto dealers, including MotorPros Auto & Truck Sales. MotorPros sells the cars to consumers and businesses. A11. Refer to Fact Pattern 29-1A. A car in MotorPros’s possession is most likely a. b. c. d.

a consumer good. an instrument. equipment. inventory.

ANSWER: D NAT: AACSB Reflective

PAGE:

562 AICPA Legal

TYPE:

A12. Refer to Fact Pattern 29-1A. Nani, a professional driver, buys a customized Luxuro from MotorPros to drive in a Grand Prix race. Nani’s Luxuro is © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

CHAPTER 29: SECURED TRANSACTIONS

a. b. c. d.

361

a consumer good. an instrument. equipment. inventory.

ANSWER: C NAT: AACSB Reflective

PAGE:

562 AICPA Legal

TYPE:

A13. Refer to Fact Pattern 29-1A. Oakes, a police officer, buys a Luxuro from MotorPros to drive in his off-duty hours. Oakes’s Luxuro is a. b. c. d.

a consumer good. an instrument. equipment. inventory.

ANSWER: A NAT: AACSB Reflective

PAGE:

562 AICPA Legal

TYPE:

A14. Saf-T Lenders, Inc., takes possession of Tiara’s stock in Urgent Care Corporation to perfect Saf-T’s security interest in the stock. This is a. b. c. d.

after-acquired property. a pledge. a purchase-money security interest. a violation of most state laws.

ANSWER: B NAT: AACSB Reflective

PAGE:

562 AICPA Legal

TYPE:

TEST BANK A—UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY

362

A15. OK Investments, Inc., files a financing statement to provide notice of its security interest in the property of Pancake House Restaurant. The initial effective term of a financing statement is a period of a. b. c. d.

five days. five months. five weeks. five years.

ANSWER: D NAT: AACSB Reflective

PAGE:

564 AICPA Legal

TYPE:

A16. Clear Sky Credit Corporation asks Dimension Games Company to agree to a security agreement that provides for coverage of the proceeds from the sale of after-acquired property. This is a. b. c. d.

the first-in, first-out rule. a floating lien. a violation of most state laws. a future advance.

ANSWER: B NAT: AACSB Reflective

PAGE:

566 AICPA Legal

TYPE:

A17. Experienced Capital Company and First Street Bank are secured parties with security interests in property owned by Grande Oil Corporation. Between these security interests, the first to be filed or perfected has priority over other filed or perfected security interests in a. b. c. d.

most circumstances. no circumstances. states that have not adopted Article 9 of the UCC. states that require a security agreement to be signed and dated by the creditor.

ANSWER: A NAT: AACSB Reflective

PAGE:

566 AICPA Legal

TYPE:

CHAPTER 29: SECURED TRANSACTIONS

363

A18. Elias repays his debt, incurred to buy consumer goods, to Finance Bank and immediately files a written request for a termination statement. Finance a. b. c. d.

must comply within one month of receipt of the letter. must comply within twenty days of receipt of the letter. must refund $500 to Elias. is not required not comply.

ANSWER: B NAT: AACSB Reflective

PAGE:

571 AICPA Legal

TYPE:

A19. Ron does not make a payment on his car loan for several months. The dealer, Star Auto, repossesses the car by towing it from a public parking lot. Ron sues Star for breach of the peace. Ron will probably a. b. c. d.

prevail, because Ron has not formally defaulted on the car loan. prevail, because the car was in a public lot when it was towed. not prevail, because the repossession was not a breach of the peace. not prevail, because a creditor can repossess property in which it holds an interest if no threats or force are used against a debtor.

ANSWER: C NAT: AACSB Reflective

PAGE:

572 AICPA Legal

TYPE:

A20. Hal’s Hardware store defaults on a debt to Intrastate Bank, which takes possession of the collateral securing the debt. Intrastate sells the collateral. The proceeds from the sale are applied first to a. b. c. d.

Hal’s debt to Intrastate. Hal’s debts to other creditors. Intrastate’s fees for the sale. payments Hal’s made on the debt to Intrastate.

ANSWER: C NAT: AACSB Reflective

PAGE:

576 AICPA Legal

TYPE:

ESSAY QUESTIONS

364 A1.

TEST BANK A—UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY

Efrem owns Fans & Players, a retail sporting goods shop. When Great Hill Lodge, a new ski resort, is built in the area, Efrem decides to expand and borrows a large sum from Hometown Bank. The bank takes a security interest in Efrem’s present inventory and any after-acquired inventory as collateral for the loan. The bank properly perfects the security interest by filing a financing statement. Efrem’s business is profitable, and he begins doubling his inventory. A year later, an avalanche destroys the ski slope and lodge. Efrem’s business takes a turn for the worse, and he defaults on his debt to the bank. The bank seeks possession of his entire inventory, even though the inventory is twice as large as it was when the loan was made. Efrem claims that the bank has rights to only half of his inventory. Is Efrem correct? Explain. ANSWER: No. Hometown Bank will prevail because it held a properly perfected security interest in Efrem’s entire inventory, not just in specific items or in the value of the inventory at the time the loan was made. The entire inventory (the present inventory and any inventory thereafter acquired) was given as collateral for the loan, and, regardless of the fact the inventory is now twice as large, the bank can rightfully take possession of the entire inventory on Efrem’s default in his payments on the loan. PAGES: 565–568 NAT: AACSB Reflective

A2.

TYPE: = AICPA Decision Modeling

Discount Stores, Inc., borrows $5,000 each from EZ Loan Corporation, First National Bank, and Great Products Corporation. Discount uses its “present inventory and any thereafter acquired” to secure the loans from EZ Loan and First National. EZ Loan perfects its interest on April 1, followed by First National on April 5. Discount buys new inventory on April 10 from Great Products and signs a security agreement, giving Great Products a purchasemoney security interest in the new inventory. On the same day, Great Products perfects its interest and notifies EZ Loan and First National. Discount takes possession of the new inventory on April 15. On April 20, Discount defaults on all of the loans. Whose security interest has priority? ANSWER: Great Products’ security interest has priority. Under the general rule that when two or more secured parties have perfected security interests in the same collateral, the first to perfect its interest has priority (unless a state statute provides otherwise), EZ Loan would have priority. Here, EZ Loan has priority with respect to First National. There are

CHAPTER 29: SECURED TRANSACTIONS

365

exceptions, however, that involve purchase-money security interests (PMSIs). A PMSI in non-consumer goods has priority, even if it is later in time of perfection when, as in this problem, the PMSI attaches to inventory, the PMSI is perfected, and proper written or authenticated notice of the PMSI is given to other security-interest holders on or before the time that the debtor takes possession of the inventory. PAGES: 566–570 NAT: AACSB Reflective

TYPE: = AICPA Decision Modeling

Chapter 30 Bankruptcy Law N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

Bankruptcy law has one goal—to provide relief and protection for creditors who have “given too much credit.” ANSWER: F NAT: AACSB Analytic

A2.

TYPE:

PAGE:

581 AICPA Legal

TYPE:

Any “person” may be a debtor in a liquidation proceeding. ANSWER: F NAT: AACSB Analytic

A4.

581 AICPA Legal

Bankruptcy proceedings are held in state courts. ANSWER: F NAT: AACSB Analytic

A3.

PAGE:

582 AICPA Legal

To falsify information on official bankruptcy schedules is a crime. ANSWER:

PAGE: 365

582

TYPE:

366

TEST BANK A—UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY

NAT: AACSB Analytic A5.

If a debtor’s income is below the median income, there is a presumption of bankruptcy abuse. ANSWER: F NAT: AACSB Analytic

A6.

TYPE:

PAGE:

583 AICPA Legal

TYPE:

PAGE:

587 AICPA Legal

TYPE:

The basic duty of a trustee is to collect and reduce to cash the property in the bankruptcy estate that is not exempt. ANSWER: T NAT: AACSB Analytic

A9.

582 AICPA Legal

A bankruptcy estate consists of all the debtor’s interests in property currently held, wherever located. ANSWER: T NAT: AACSB Analytic

A8.

PAGE:

An involuntary bankruptcy occurs when a debtor’s creditors are forced to accept a discharge of the debtor’s debts. ANSWER: F NAT: AACSB Analytic

A7.

AICPA Legal

PAGE:

587 AICPA Legal

TYPE:

In most states, debtors may use only federal exemptions to exempt certain property from the bankruptcy. ANSWER: F NAT: AACSB Analytic

PAGE:

590 AICPA Legal

TYPE:

A10. A trustee must call a meeting of the creditors listed in the schedules filed by the debtor. ANSWER: T NAT: AACSB Analytic

PAGE:

591 AICPA Legal

TYPE:

367

CHAPTER 30: BANKRUPTCY LAW

A11. In the distribution of the debtor’s estate, secured creditors take priority over unsecured creditors. ANSWER: T NAT: AACSB Analytic

PAGE:

591 AICPA Legal

TYPE:

368

TEST BANK A—UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY

A12. Certain debtors may not qualify to have all debts discharged in bankruptcy. ANSWER: T NAT: AACSB Analytic

PAGE:

592 AICPA Legal

TYPE:

A13. Discharge of a debt is never denied because of the nature of a claim. ANSWER: F NAT: AACSB Analytic

PAGE:

592 AICPA Legal

TYPE:

A14. One of the primary effects of a discharge is to relieve the liability of a codebtor. ANSWER: F NAT: AACSB Analytic

PAGE:

593 AICPA Legal

TYPE:

A15. The same principles that govern the filing of a liquidation petition apply to reorganization proceedings. ANSWER: T NAT: AACSB Analytic

PAGE:

595 AICPA Legal

TYPE:

A16. On the entry of an order for relief in a reorganization case, the creditors generally take over the operation of the debtor’s business. ANSWER: F NAT: AACSB Analytic

PAGE:

595 AICPA Legal

TYPE:

A17. For individual debtors, the plan in a reorganization case must be completed before discharge will be granted. ANSWER: T NAT: AACSB Analytic

PAGE:

596 AICPA Legal

TYPE:

A18. Certain liquidation cases may be converted to repayment plan cases with the consent of the debtor. ANSWER: T NAT: AACSB Analytic

PAGE:

596 AICPA Legal

TYPE:

CHAPTER 30: BANKRUPTCY LAW

369

370

TEST BANK A—UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY

A19. In a repayment plan case, the plan must provide for payment of all obligations in full. ANSWER: F NAT: AACSB Analytic

PAGE:

597 AICPA Legal

TYPE:

A20. The procedure for filing a family-farmer bankruptcy plan is very similar to the procedure for filing a repayment plan. ANSWER: T NAT: AACSB Analytic

PAGE:

600 AICPA Legal

TYPE:

MULTIPLE CHOICE QUESTIONS A1.

Mikhail files a petition in bankruptcy. One of the goals of bankruptcy law with respect to a debtor who has “gotten in over his head” is to a. b. c. d.

encourage the continued use of credit to borrow funds. ensure that co-debtors will continue to guarantee loans. provide relief and protection. shield assets from creditors.

ANSWER: C NAT: AACSB Reflective A2.

PAGE:

581 AICPA Legal

TYPE:

Bernice files a petition in bankruptcy. The initial proceeding on this petition will be in a. b. c. d.

a federal bankruptcy court. a state bankruptcy court. the highest court in the state in which Bernice is located. the United States Supreme Court.

ANSWER: A NAT: AACSB Reflective

PAGE:

581 AICPA Legal

TYPE:

371

CHAPTER 30: BANKRUPTCY LAW

A3.

A petition for a discharge in bankruptcy in a liquidation proceeding may be filed by a. b. c. d.

Eminent Employees Credit Union, a corporation. Federal Savings & Loan Association, a corporation. Goodhands Insurance Company, a corporation. Henry, an independent financial adviser.

ANSWER: D NAT: AACSB Reflective A4.

TYPE:

a plan to turn over his future income to the trustee. a certificate proving attendance at a credit-counseling briefing. a provision of adequate means for the petition’s execution. a statement of preference for one creditor over another.

ANSWER: B NAT: AACSB Reflective

PAGE:

582 AICPA Legal

TYPE:

Verna files a petition in bankruptcy in a liquidation proceeding. If the court administers the means test and concludes that Verna is abusing the bankruptcy process by filing for a liquidation, the court will most likely a. b. c. d.

force Verna to file for relief through an individual repayment plan. discharge Verna’s debts. distribute Verna’s property to Verna’s creditors. issue an automatic stay against any actions by Verna’s creditors.

ANSWER: A NAT: AACSB Reflective A6.

582 AICPA Legal

Kenyon files a petition for bankruptcy. Kenyon must include with the petition a. b. c. d

A5.

PAGE:

583 AICPA Legal

TYPE:

Mia’s voluntary petition for bankruptcy is found to be proper. The order for relief is effective as soon as a. b. c.

Mia files the petition. Mia posts a bond to cover the costs of the proceedings. Mia’s creditors agree to the terms.

372

TEST BANK A—UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY

the trustee collects and distributes the property of Mia’s estate.

ANSWER: A NAT: AACSB Reflective

PAGE:

585 AICPA Legal

TYPE:

373

CHAPTER 30: BANKRUPTCY LAW

A7.

Hasty Pastries declares bankruptcy, idling Hasty’s delivery vehicles. The court can compel Hasty to make periodic cash payments to a creditor with a secured interest in the vehicles to offset the depreciation in their value. This is a. b. c. d.

the adequate protection doctrine. the avoidance doctrine. a preferential transfer. the automatic stay.

ANSWER: A NAT: AACSB Reflective

PAGE:

587 AICPA Legal

TYPE:

Fact Pattern 30-1A (Questions A8–A9 apply) Stacy sells her all-terrain vehicle (ATV) to her brother Terrill for $1,000. Twelve days later, Stacy files a petition in bankruptcy for relief through a liquidation. A8.

Refer to Fact Pattern 30-1A. Terrill dies while riding the ATV. Stacy is Terrill’s only heir. With respect to the bankruptcy estate, the inheritance is a. b. c. d.

exempt property. part of the estate if Terrill died more than 180 days after Stacy’s filing. part of the estate if Terrill died within 180 days after Stacy’s filing. part of the estate if the accident was in some way Stacy’s fault.

ANSWER: C NAT: AACSB Reflective A9.

PAGE:

587 AICPA Legal

TYPE:

Refer to Fact Pattern 30-1A. Regarding the sale of the ATV, the trustee may a. b. c. d.

cancel it as a fraudulent transfer. cancel it as a voidable preference. not cancel it because it is a sale, not a gift. not cancel it, but can sue Terrill’s estate for the return of the $1,000.

ANSWER: A NAT: AACSB Reflective

PAGE:

589 AICPA Legal

TYPE:

374

TEST BANK A—UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY

A10. Lorissa files a petition for bankruptcy. Lorissa’s creditors must file with the court their proof of claims against Lorissa’s assets within a. b. c. d.

fifteen days of the order for relief. thirty days of the filing of the petition. sixty days of the automatic stay. ninety days of the creditors’ meeting.

ANSWER: D NAT: AACSB Reflective

PAGE:

591 AICPA Legal

TYPE:

A11. Kipper files a petition in bankruptcy. Kipper’s dischargeable debts include a. b. c. d.

domestic-support obligations. student loans unless the lender would suffer undue hardship. unpaid state and federal taxes. unsecured credit-card debt.

ANSWER: D NAT: AACSB Reflective

PAGE:

592 AICPA Legal

TYPE:

A12. Teona files a voluntary petition in bankruptcy for relief through a liquidation. Debts that will not be discharged include claims for a. b. c. d.

domestic-support obligations. money to be paid for goods not delivered. contributions to employee benefit plans. long overdue credit-card debt.

ANSWER: A NAT: AACSB Reflective

PAGE:

592 AICPA Legal

TYPE:

A13. Ronaldo agrees to pay Simplex Cash Store a debt that is otherwise dischargeable in bankruptcy. This is a. b. c.

a reaffirmation. a liquidation. a reorganization.

375

CHAPTER 30: BANKRUPTCY LAW

a petition.

ANSWER: A NAT: AACSB Reflective

PAGE:

593 AICPA Legal

TYPE:

A14. Reconstruction Building Services receives a discharge in bankruptcy, even though some creditors hold judgments on overdue debts against it and others filed actions to collect on overdue debts before the bankruptcy. Reconstruction’s discharge will a. b. c. d.

absolve the liability of any co-debtors. permit the debtor to enter into reaffirmation agreements. allow the debtor to file a petition for a reorganization. prohibit actions and void judgments regarding overdue debts.

ANSWER: D NAT: AACSB Reflective

PAGE:

593 AICPA Legal

TYPE:

A15. Swim & Trim Fitness Corporation wants to formulate a plan under which it pays a portion of its debts and is discharged of the remainder while continuing in business. To accomplish this goal, Swim & Trim should file a petition in bankruptcy for relief through a. b. c. d.

a liquidation. a reorganization. a repayment plan. a family-farmer bankruptcy plan.

ANSWER: B NAT: AACSB Reflective

PAGE:

594 AICPA Legal

TYPE:

A16. Resources Exploitation, Inc. (REI), files a petition in bankruptcy for relief through a reorganization and assumes the role of a debtor in possession. In this role, REI is similar to a. b. c. d.

a creditor at a creditors’ meeting. a farmer after a discharge through family-farmer bankruptcy plan. a secured creditor in possession of collateral. a trustee in a liquidation.

376

TEST BANK A—UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY

ANSWER: D NAT: AACSB Reflective

PAGE:

595 AICPA Legal

TYPE:

377

CHAPTER 30: BANKRUPTCY LAW

A17. To adjust debt and institute a repayment plan, Charlie—who is not a corporation, a partnership, or a family farmer or fisherman—may file a petition in bankruptcy for relief through a. b. c. d.

a liquidation. a reorganization. a repayment plan. a family-farmer bankruptcy plan.

ANSWER: C NAT: AACSB Reflective

PAGE:

596 AICPA Legal

TYPE:

A18. Tippi believes that she needs to obtain a discharge in bankruptcy through an individual’s repayment plan. This proceeding can be initiated by a filing of a petition by a. b. c. d.

a creditor. a debtor. a corporation. a partnership.

ANSWER: B NAT: AACSB Reflective

PAGE:

596 AICPA Legal

TYPE:

A19. Wilbur files a petition in bankruptcy for relief through an individual’s repayment plan. Wilbur is granted a discharge. Debts that will not be discharged include claims for a. b. c. d.

contributions to employee benefit plans. money to be paid for services not rendered. fraudulently incurred debt. long overdue credit-card debt.

ANSWER: C NAT: AACSB Reflective

PAGE:

597 AICPA Legal

TYPE:

378

TEST BANK A—UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY

A20. To adjust debt and institute a repayment plan, Norman, a family fisherman, may file a petition in bankruptcy for relief under the Bankruptcy Code’s Chapter a. b. c. d.

1. 3. 5. 12.

ANSWER: D NAT: AACSB Reflective

PAGE:

600 AICPA Legal

TYPE:

ESSAY QUESTIONS A1.

Current City (CC) is a retail seller of television sets. CC sells Dhani a $5,000 large-screen, high-definition, plasma set on a retail installment security agreement in which he pays $100 down and agrees to pay the balance in equal installments. CC retains a security interest in the set, and perfects that interest by filing a financing statement centrally. Two months later, Dhani is in default on the payments to CC and is involuntarily petitioned into bankruptcy by other creditors. Discuss CC’s right to repossess the TV set and whether CC has priority over the trustee in bankruptcy to any proceeds from the disposal of the set. ANSWER: CC will not be able to repossess the set. The filing of the involuntary petition in bankruptcy operates as an automatic stay of any creditor’s action against the debtor or the property of the debtor. If CC knowingly violates the automatic stay, CC could be liable to any injured party for actual damages suffered, all costs, reasonable attorneys’ fees, and even possibly punitive damages. Therefore, CC’s right of repossession is cut off by the bankruptcy proceeding. Because Dhani is a consumer-debtor, within thirty days of the filing of the petition or before the first creditor’s meeting (whichever is first) Dhani must file with the clerk his intent as to the disposition of the TV set—is, whether he intends to retain the set, surrender the set to CC, claim the set as exempt, or reaffirm the debt. The trustee must carry out this intent within forty-five days of this filing. As a secured party, however, CC may attempt to get relief from the stay by claiming it needs adequate protection to preserve its security interest in the

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379

set. If, for example, the set is still in Dhani’s possession and is being used by him, the bankruptcy court could require Dhani or the trustee to make periodic cash payments or even a single, one-time payment to protect against depreciation of the value of the set. If adequate protection cannot be provided, the court may vacate the stay and allow CC to repossess the set by pursuing its rights under Article 9 of the UCC. CC does have a right of priority over the trustee. A trustee occupies the same position as a lien creditor, but a lien creditor’s priority is secondary to a previously perfected secured party. CC is a perfected secured party, and on sale of the television set it is entitled to the proceeds up to the amount of balance of the debt and any costs incurred because of Dhani’s default. PAGES: 585–587 NAT: AACSB Reflective A2.

TYPE: = AICPA Decision Modeling

Job Service, Inc., needs funds to meet its payroll, to make other current operating expenses, and to pay its creditors. Kelly, Job Service’s only shareholder, loans the company $10,000 and accepts a promissory note signed on behalf of Job Service by Luna, the firm’s accountant. Job Service’s financial problems continue, however, and the firm’s creditors file an involuntary petition to force it into bankruptcy. Is Kelly entitled to repayment of the loan to Job Service? If so, what is the priority of the claim? ANSWER: Kelly is entitled to be repaid the amount loaned to Job Service. The priority is that of any other general creditor, however, which is at the bottom of the list of the classes of unsecured creditors. Because Luna signed the promissory note, Kelly can prove the claim. The claim is not superior or inferior to other claims because Kelly is the debtor’s only shareholder, nor is it worthless for that same reason. Kelly is a not a secured creditor because she did not ask for, and did not get, collateral to secure the loan. Thus, she is a general unsecured creditor who can share, on a proportionate basis, whatever proceeds are available to other members of the class of general unsecured creditors after those with higher priority are paid in full. PAGES: 591–592 NAT: AACSB Reflective

TYPE: = AICPA Decision Modeling

Chapter 31 Mortgages and Foreclosures after the Recession N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

The loan that a lender provides to enable a borrower to purchase real property is a mortgage. ANSWER: T NAT: AACSB Analytic

A2.

605 AICPA Legal

TYPE:

The initial interest rate is the part of a purchase price that is paid up front in cash. ANSWER: F NAT: AACSB Analytic

A3.

PAGE:

605 AICPA Legal

TYPE:

A fixed-rate mortgage is a standard mortgage with a rate of interest that changes periodically. ANSWER: F NAT: AACSB Analytic

PAGE:

605 AICPA Legal

TYPE:

378

TEST BANK A—UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY

379

CHAPTER 31: MORTGAGES & FORECLOSURES AFTER THE RECESSION

A4.

With an adjustable-rate mortgage, the rate of interest paid by the borrower changes periodically. ANSWER: T NAT: AACSB Analytic

A5.

PAGE:

606 AICPA Legal

TYPE:

PAGE:

607 AICPA Legal

TYPE:

PAGE:

607 AICPA Legal

TYPE:

Steering and targeting occur when a lender manipulates a borrower into accepting a loan product that benefits the lender but is not the best loan for the borrower. ANSWER: T NAT: AACSB Analytic

A9.

Home equity is the portion of a home’s value that is “paid off.” ANSWER: T NAT: AACSB Analytic

A8.

TYPE:

A reverse mortgage starts as a fixed-rate mortgage and then converts into an adjustable-rate mortgage. ANSWER: F NAT: AACSB Analytic

A7.

606 AICPA Legal

Due to a lower default rate, lenders charge a lower interest rate for subprime loans. ANSWER: F NAT: AACSB Reflective

A6.

PAGE:

608 AICPA Legal

TYPE:

Borrowers are required to recite the terms of their loans in clear, readily understandable language so that lenders can make rational choices. ANSWER: F NAT: AACSB Reflective

PAGE:

608 AICPA Legal

TYPE:

A10. A borrower has a right to rescind a mortgage within three business days. ANSWER:

PAGE:

609

TYPE:

380

TEST BANK A—UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY

NAT: AACSB Analytic

AICPA Legal

381

CHAPTER 31: MORTGAGES & FORECLOSURES AFTER THE RECESSION

A11. Federal mortgage disclosure requirements apply to the written materials that a lender provides and to any oral representations. ANSWER: F NAT: AACSB Analytic

PAGE:

609 AICPA Legal

TYPE:

A12. For most purposes, a mortgage assignee of a high-cost or high-fee mortgage product does not acquire the status of a holder in due course. ANSWER: T NAT: AACSB Analytic

PAGE:

609 AICPA Legal

TYPE:

A13. A lender’s failure to comply with federal mortgage disclosure requirements extends the borrower’s right to rescind the loan to no more than seven days. ANSWER: F NAT: AACSB Analytic

PAGE:

610 AICPA Legal

TYPE:

A14. A lender can make a higher-priced mortgage loan based on the value of the consumer’s home without verifying the consumer’s other credit obligations. ANSWER: F NAT: AACSB Analytic

PAGE:

611 AICPA Legal

TYPE:

A15. There are additional disclosure requirements for a higher-priced mortgage loan. ANSWER: T NAT: AACSB Analytic

PAGE:

611 AICPA Legal

TYPE:

A16. If a homeowner defaults, the lender has the right to foreclose on the mortgaged property. ANSWER: T NAT: AACSB Analytic

PAGE:

612 AICPA Legal

TYPE:

A17. Foreclosure is the postponement, for a limited time, of part or all of the payments on a loan in jeopardy of repossession and sale.

382

TEST BANK A—UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY

ANSWER: F NAT: AACSB Analytic

PAGE:

612 AICPA Legal

TYPE:

A18. Federal law encourages private lenders to modify mortgages so as to lower the monthly payments of borrowers who are in default. ANSWER: T NAT: AACSB Analytic

PAGE:

613 AICPA Legal

TYPE:

A19. In a judicial foreclosure, the lender is allowed to foreclose on and sell the property without judicial supervision. ANSWER: F NAT: AACSB Analytic

PAGE:

614 AICPA Legal

TYPE:

A20. A deficiency judgment requires a borrower to pay the amount of debt remaining after the collateral is sold. ANSWER: T NAT: AACSB Analytic

PAGE:

615 AICPA Legal

TYPE:

MULTIPLE CHOICE QUESTIONS A1.

Great Plains Bank provides a loan to enable Helene to buy real property. This loan is a. b. c. d.

a down payment. a mortgage. a short sale. a workout agreement.

ANSWER: B NAT: AACSB Reflective A2.

PAGE:

605 AICPA Legal

TYPE:

Jaime buys a home by paying part of the purchase price up front in cash and borrowing the rest of the funds from Valley Credit Union. The part of the price paid up front in cash is

383

CHAPTER 31: MORTGAGES & FORECLOSURES AFTER THE RECESSION

a. b. c. d.

a down payment. a home equity loan. a reverse mortgage. the average prime offer rate.

ANSWER: A NAT: AACSB Reflective A3.

TYPE:

a fixed-rate mortgage. an adjustable-rate mortgage. an interest-only mortgage. a violation of the law.

ANSWER: B NAT: AACSB Reflective

PAGE:

606 AICPA Legal

TYPE:

Consumer Mortgage Loans provides Demi with a mortgage to buy a home. Under the terms, Demi can choose to pay only the interest portion of the monthly payments and forgo paying of the principal for five years. This is a. b. c. d.

a fixed-rate mortgage. an adjustable-rate mortgage. an interest-only mortgage. a violation of the law.

ANSWER: C NAT: AACSB Reflective A5.

605 AICPA Legal

Ridgeline Bank provides Stanley with a mortgage to buy a home. The rate of interest is fixed for three years and then adjusts annually. This is a. b. c. d.

A4.

PAGE:

606 AICPA Legal

TYPE:

Rita borrows $30,000 from South State Credit Union. South State accepts Rita’s equity in her home as collateral, which can be seized if the loan is not repaid on time. This is a. b. c. d.

a home equity loan. a hybrid mortgage. a reverse mortgage. a violation of the law.

384

TEST BANK A—UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY

ANSWER: A NAT: AACSB Reflective A6.

PAGE:

607 AICPA Legal

TYPE:

Milo borrows $125,000 from North State Bank to buy a home. To comply with the Statute of Frauds, the mortgage must be a. b. c. d.

a highly formal document. a particular form. in the same format as the lender’s other loans. in writing.

ANSWER: D NAT: AACSB Reflective

PAGE:

607 AICPA Legal

TYPE:

385

CHAPTER 31: MORTGAGES & FORECLOSURES AFTER THE RECESSION

A7.

Hubert borrows $100,000 from Integrity Mortgage Mart to buy a home. Soon after obtaining the mortgage, Integrity convinces Hubert to refinance. This is a. b c. d.

a short sale. a subprime mortgage. loan flipping. steering and targeting.

ANSWER: C NAT: AACSB Reflective A8.

608 AICPA Legal

TYPE:

Lorna borrows $175,000 from Mountainside Credit Union to buy a home. Among the terms that must be disclosed under federal law is the annual percentage rate. This is a. b. c. d.

the actual cost of the loan on a yearly basis. the average prime offer rate. the interest rate at which the loan is made. the loan principal.

ANSWER: A NAT: AACSB Reflective A9.

PAGE:

608 AICPA Legal

TYPE:

Kenton borrows $150,000 from Liberty Home Finance Corporation to buy a home. Federal law concerns primarily a. b. c. d.

borrowers’ ability to avoid clear terms in financing documents when the effect may be harsh. how many loans a specific lender can make. the highest prices for which real property can be sold. what must be disclosed with respect to a mortgage.

ANSWER: D NAT: AACSB Reflective

PAGE:

608 AICPA Legal

TYPE:

386

TEST BANK A—UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY

A10. Main Street Lenders, Inc., attempts to coerce Nolan—who specializes in determining the value of real and personal property—into misstating the value of a property on which a loan is to be issued. This is a. b. c. d.

a legal and ethical—but morally arguable—financial ploy. a legal—but unethical—business practice. a necessary tactic to generate a profitable loan in today’s market. a violation of the law.

ANSWER: D NAT: AACSB Reflective

PAGE:

609 AICPA Legal

TYPE:

A11. Ruth owns a home on which she has two mortgages provided by Security Bank. Town Refinance Inc. tells Ruth that it can refinance the loans to reduce her payments. Town Refinance provides all of the required documents, which accurately state the payments under the new loan as higher. Ruth does not read the documents. Town Refinance is most likely liable for a. b. c. d.

fraud. misrepresentation. negative amortization. nothing.

ANSWER: D NAT: AACSB Reflective

PAGE:

609 AICPA Legal

TYPE:

Fact Pattern 31-1A (Questions A12–A14 apply) 24-Hour Credit Corporation issues high-cost and high-fee mortgage products to people, including Benny, who could not easily obtain credit under other loan programs. A12. Refer to Fact Pattern 31-1A. Under federal law, disclosures with respect to one of 24-Hour Credit’s loans must be provided a. b. c. d.

a certain number of days after the loan is finalized. a certain number of days before the loan is finalized. at the same time at which the loan is finalized. at whatever time is most rational and appropriate.

387

CHAPTER 31: MORTGAGES & FORECLOSURES AFTER THE RECESSION

ANSWER: B NAT: AACSB Reflective

PAGE:

609 AICPA Legal

TYPE:

A13. Refer to Fact Pattern 31-1A. 24-Hour Credit assigns Benny’s loan to Consolidated Mortgage Investment Corporation. For most purposes, Consolidated a. b. c. d.

acquires the status of a holder in due course (HDC). has more protection than a mortgage assignee but less than an HDC. is exempt from federal law with respect to mortgages. is subject to claims that Benny could assert against 24-Hour Credit.

ANSWER: D NAT: AACSB Reflective

PAGE:

609 AICPA Legal

TYPE:

A14. Refer to Fact Pattern 31-1A. Under federal law, if 24-Hour Credit fails to provide certain material disclosures with respect to the loan, Benny’s right to rescind the loan a. b. c. d.

expires at midnight on the day the loan is finalized. is immediately revoked. is extended for up to three years. is tolled for the duration of the loan payments.

ANSWER: C NAT: AACSB Reflective

PAGE:

610 AICPA Legal

TYPE:

A15. Property Financial Corporation makes loans that qualify, under a Federal Reserve Board amendment to Regulation Z, as Higher-Priced Mortgage Loans (HPMLs). Quinn applies to Property Financial for an HPML. To make the loan, the lender must a. b. c. d.

convince an appraiser to inflate the value of the property. impose a prepayment penalty for the duration of the loan. structure the loan to specifically evade the HPML protections. verify the borrower’s ability to repay the loan.

ANSWER:

PAGE:

611

TYPE:

388

TEST BANK A—UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY

NAT: AACSB Reflective

AICPA Legal

389

CHAPTER 31: MORTGAGES & FORECLOSURES AFTER THE RECESSION

A16. Velma borrows $110,000 from Watershed Bank to buy a home. If she fails to make payments on the mortgage, the bank has the right to repossess and auction off the property securing the loan. This is a. b. c. d.

a short sale. forbearance. foreclosure. the equitable right of redemption.

ANSWER: C NAT: AACSB Reflective

PAGE:

612 AICPA Legal

TYPE:

A17. Harbor Bay Bank has made mortgage loans to consumers that qualify for the Home Affordable Modification Program (HAMP), which offers incentives to lenders to change the terms of certain loans. The purpose of HAMP is to a. b. c. d.

convey property through lenders to consumers who can afford it. force lenders to forgive all high-risk mortgages. reduce monthly payments to levels that homeowners can pay. transfer affordable property to investors to lease to consumers.

ANSWER: C NAT: AACSB Reflective

PAGE:

613 AICPA Legal

TYPE:

A18. Darwin borrows $200,000 from Evermore Bank to buy a home. Less than six months into the term, Darwin stops making payments on the loan. To initiate the process to repossess and auction off the property securing the loan, Evermore must a. b. c. d.

issue a notice of sale to the borrower. offer the property for sale in an auction on the courthouse steps. record a notice of default with the appropriate county office. resort to litigation to establish clear ownership of the property.

ANSWER: C NAT: AACSB Reflective

PAGE:

614 AICPA Legal

TYPE:

390

TEST BANK A—UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY

A19. Reed borrows $150,000 from Suburban Credit Union to buy a home, which secures the loan. Three years later, Reed stops making payments on the loan. After Suburban Credit repossesses and auctions off the property to Tyler, equity remains. This amount most likely belongs to a. b. c. d.

Reed. Suburban Credit Union. Tyler. the county in which the property is located.

ANSWER: A NAT: AACSB Reflective

PAGE:

615 AICPA Legal

TYPE:

A20. Seymour borrows $350,000 from Reliable Bank to buy a home. Seymour stops making payments on the loan ten months later. After the bank repossesses the property securing the loan but before it is sold, Seymour wants to buy it. This is a. b. c. d.

a deficiency judgment. a reverse mortgage. a violation of the law. the right of redemption.

ANSWER: D NAT: AACSB Reflective

PAGE:

616 AICPA Legal

TYPE:

ESSAY QUESTIONS A1.

Kim’s home is valued at $250,000. Kim has paid the mortgage—she has 100 percent equity in the property. She wants to start a new business with Lloyd. To obtain funds, Kim refinances the loan through Metro Bank, borrowing $200,000 for fifteen years at an interest rate of 4.85 percent. Before the loan is completed, Metro provides Kim with all of the required disclosures. On the day of the loan, a fifteen-year Treasury bond is yielding 2.85 percent. Kim pays $7,500 in fees to the bank. Less than a month later, she sells her interest in the new business to Lloyd and wants to rescind the loan. Which federal law covers this loan—TILA, HOEPA, HPML, or HAMP? Can Kim rescind the deal? Explain.

CHAPTER 31: MORTGAGES & FORECLOSURES AFTER THE RECESSION

391

ANSWER: With respect to real estate transactions, the Truth-in-Lending Act (TILA) applies to residential loans. The Home Ownership and Equity Protection Act (HOEPA) covers mortgage loans that carry a high rate of interest or impose high fees on borrowers. HOEPA applies if the annual percentage rate (APR) exceeds the interest rate on Treasury bonds of comparable maturity by 8 points for a first mortgage, or when the loan fees exceed the loan amount by 8 percent. To qualify as a Higher-Priced Mortgage Loan (HPML), a mortgage must secure a borrower’s principal home and have, if the loan is a first lien, an APR that exceeds the average prime offer rate for a comparable transaction by 1.5 percentage points or more. The U.S. Treasury Department’s Home Affordable Modification Program (HAMP) encourages private lenders to modify mortgages to lower the monthly payments of borrowers in default. In this problem, the mortgage is a residential loan, and thus TILA applies. The loan is a first mortgage but the APR exceeds the interest rate on Treasury bonds of comparable maturity by only 2 points and the fees are not more than 8 percent of the loan. On these facts, HOEPA does not apply. The mortgage is a first lien and is secured by the borrower’s home, but the APR does not most likely exceed the average prime offer rate for a comparable transaction by 1.5 percentage points or more. Thus, the loan is not an HPML. The borrower is not in default, so the loan is not eligible for HAMP. TILA imposes disclosure requirements on lenders. When all required disclosures are provided, a borrower’s right to rescind is limited to three business days (not including Sunday) after a loan is finalized. If a lender fails to provide material required disclosures, the borrower has a right to rescind the transaction for up to three years. In this problem, the loan falls under TILA, and the bank gave the borrower all of the required disclosures. Thus, the right to rescind expired after three days. One month after the loan is too late. PAGES: 608, 609, 611 & 613 NAT: AACSB Reflective A2.

TYPE: N AICPA Decision Modeling

Brendan borrows $150,000 from Countywide Credit Union to buy a home. The loan is a fixed-rate mortgage at 5.5 percent with a thirty-year term secured by Brendan’s home, which is his principal residence. When Brendan has paid off $10,000 of the mortgage—still owing $140,000—he loses his job and defaults on the loan. The market for homes has declined

392

TEST BANK A—UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY

since Brendan took out the loan, and the value of the home at the time of default is $100,000. Despite the default, Brendan assures Countywide that he has accepted a new position, which will begin in six months. What are Brendan’s options to recover the amount still owed on the mortgage? Which option would most benefit these parties? Why? ANSWER: Countrywide’s options include forbearance, a workout agreement, a U.S. Department of Housing and Urban Development (HUD) loan, a short sale, a sale and leaseback arrangement, the U.S. Treasury Department’s Home Affordable Modification Program (HAMP), a deed in lieu of foreclosure, and a prepackaged bankruptcy. Foreclosure is also an option. Forbearance is the postponement of part or all of the payments of a loan in danger of foreclosure. This may be based on a borrower’s securing a new job, selling the property, or some other factor. A workout is a voluntary attempt to cure a default under which, for example, a lender may agree to delay foreclosure in exchange for a borrower’s financial information. An interest-free loan may be obtained from the U.S. Department of Housing and Urban Development (HUD) to bring a mortgage current under certain requirements, including the borrower’s ability to make full payments. A short sale is a sale of property for less than the balance due on a mortgage. A borrower—who typically must show some hardship—sells the property with the lender’s consent, and the lender gets the proceeds. In a sale and leaseback deal, an investor buys the property and leases it back to its former owner for less than the mortgage payments. The seller-owner pays off the mortgage with the sale proceeds. HAMP encourages private lenders to modify mortgages to lower the monthly payments of borrowers in default (to 31 percent of the debtor’s gross monthly income). A deed in lieu of foreclosure conveys property to a lender in satisfaction of a mortgage. This option works best when the property’s value is close to the outstanding loan principal. A prepackaged bankruptcy allows a borrower to negotiate the terms with his or her creditors in advance. In this problem, because the market value of the home has declined, it would be unlikely to bring enough on a short sale or a foreclosure sale to recover the unpaid amount of the loan, plus the lender’s fees and costs, so a deficiency judgment would be needed. The best option among this list would most likely be forbearance or a workout agreement. The lender could ask for proof of the borrower’s pending employment and agree to postpone efforts to collect the unpaid amounts of the mortgage, as well as the next © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

CHAPTER 31: MORTGAGES & FORECLOSURES AFTER THE RECESSION

393

six payments. This action would save both parties expense and the negative effects, particularly to the borrower’s credit rating, of some of the other options. PAGES: 612–614 NAT: AACSB Reflective

TYPE: N AICPA Decision Modeling

Chapter 32 Agency Formation and Duties N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

A principal does not have the right to control an agent’s conduct in matters entrusted to the agent. ANSWER: F NAT: AACSB Analytic

A2.

624 AICPA Legal

TYPE:

An agent is authorized to act on behalf of a principal in doing business with third parties. ANSWER: T NAT: AACSB Analytic

A3.

PAGE:

624 AICPA Legal

TYPE:

An employee may not act in the capacity of an agent. ANSWER: F NAT: AACSB Analytic

PAGE:

624 AICPA Legal

392 A4.

TEST BANK A—UNIT SEVEN: AGENCY AND EMPLOYMENT

Normally, all employees who deal with third parties are deemed to be agents. ANSWER: T NAT: AACSB Reflective

PAGE:

624 AICPA Legal

TYPE:

393

CHAPTER 32: AGENCY FORMATION AND DUTIES

A5.

Employment laws do not apply to independent contractors. ANSWER: T NAT: AACSB Analytic

A6.

PAGE:

624 AICPA Legal

TYPE:

PAGE:

625 AICPA Legal

TYPE:

A person cannot be both an independent contractor and an agent. ANSWER: F NAT: AACSB Analytic

A9.

TYPE:

Independent contractors have no control over the details of their work performance. ANSWER: F NAT: AACSB Analytic

A8.

624 AICPA Legal

Agency relationships exist only within employment relationships. ANSWER: F NAT: AACSB Analytic

A7.

PAGE:

625 AICPA Legal

TYPE:

Agency relationships normally are consensual. ANSWER: T NAT: AACSB Analytic

PAGE:

627 AICPA Legal

A10. A person must have contractual capacity to be an agent. ANSWER: F NAT: AACSB Analytic

PAGE:

627 AICPA Legal

A11. An agreement to form an agency relationship can be oral. ANSWER: T NAT: AACSB Analytic

PAGE:

628 AICPA Legal

A12. Acts of a purported agent in and of themselves can create an agency by estoppel.

394

TEST BANK A—UNIT SEVEN: AGENCY AND EMPLOYMENT

ANSWER: F NAT: AACSB Analytic

PAGE:

629 AICPA Legal

TYPE:

395

CHAPTER 32: AGENCY FORMATION AND DUTIES

A13. A principal owes his or her agent a duty to act in good faith. ANSWER: T NAT: AACSB Analytic

PAGE:

631 AICPA Legal

TYPE:

A14. When an agent fails to perform his or her duties, liability for breach of contract may result. ANSWER: T NAT: AACSB Analytic

PAGE:

631 AICPA Legal

TYPE:

A15. An agent’s deviation from the lawful, clearly stated instructions of the principal is a violation of the duty of obedience. ANSWER: T NAT: AACSB Analytic

PAGE:

633 AICPA Legal

TYPE:

A16. An agent has a duty to keep and make available to the principal an account of all property and funds received and paid out on behalf of the principal. ANSWER: T NAT: AACSB Analytic

PAGE:

633 AICPA Legal

TYPE:

A17. A principal owes an agent a duty of estoppel. ANSWER: F NAT: AACSB Analytic

PAGE:

633 AICPA Legal

A18. When an agency relationship is gratuitous, the agent does not act in exchange for payment. ANSWER: T NAT: AACSB Analytic

PAGE:

633 AICPA Legal

TYPE:

A19. Remedies of the agent for breach of duty by the principal follow normal contract and tort remedies. ANSWER: T NAT: AACSB Analytic

PAGE:

634 AICPA Legal

TYPE:

396

TEST BANK A—UNIT SEVEN: AGENCY AND EMPLOYMENT

397

CHAPTER 32: AGENCY FORMATION AND DUTIES

A20. When the principal-agent relationship is not contractual, the agent has no right to specific performance. ANSWER: T NAT: AACSB Analytic

PAGE:

635 AICPA Legal

TYPE:

MULTIPLE CHOICE QUESTIONS A1.

Ozzy is an officer of Prudent Financial Corporation. Ozzy serves in a representative capacity for Prudent Financial’s owners. With respect to binding Prudent Financial to contracts, Ozzy is a. b. c. d.

an agent and has the authority. an agent but does not have the authority. not an agent and does not have the authority. not an agent but does have the authority.

ANSWER: A NAT: AACSB Reflective A2.

624 AICPA Legal

TYPE:

Genetic Seed Company hires Howie to work on Genetic’s shipping dock, accepting deliveries and dealing with other companies’ drivers. With respect to Genetic, Howie is most likely a. b. c. d.

an agent. an independent contractor. a principal. a work for hire.

ANSWER: A NAT: AACSB Reflective A3.

PAGE:

624 AICPA Legal

TYPE:

Diego is a truck driver for Entertainment Supplies Company (ESC). Diego does exactly what ESC tells him. Diego is a. b. c.

an employee. an employer. an independent contractor.

398

TEST BANK A—UNIT SEVEN: AGENCY AND EMPLOYMENT

a principal.

ANSWER: A NAT: AACSB Reflective

PAGE:

624 AICPA Legal

TYPE:

399

CHAPTER 32: AGENCY FORMATION AND DUTIES

Fact Pattern 32-1A (Questions A4–A5 apply) Janet and Julie work at ABC Interiors. Janet is a designer who works with clients of ABC on interior design projects. ABC closely supervises all of its designers, and dictates their work schedules. Julie works part-time in the evenings cleaning the offices. A4.

Refer to Fact Pattern 32-1A. Janet is ABC’s a. b. c. d.

employee, agent, and independent contractor. employee and agent. employee but not agent. independent contractor.

ANSWER: B NAT: AACSB Reflective A5.

624 AICPA Legal

TYPE:

Refer to Fact Pattern 32-1A. Julie is ABC’s a. b. c. d.

agent but not employee. employee and agent. employee or independent contractor, depending on whether ABC controls the details of her physical performance. independent contractor.

ANSWER: C NAT: AACSB Reflective A6.

PAGE:

625 AICPA Legal

TYPE:

Delicious Coffee Company hires Elton to sell Delicious’s products in a certain area. Delicious agrees to pay Elton a salary, plus commission, for a trial period. They also agree that Elton can sell using any methods and during any hours that seem appropriate. The key factor in whether Elton is Delicious’s employee is a. b. c. d.

the amount of Elton’s salary. the control Delicious has over the details of the work. the length of the trial period. the title that designates Elton’s position.

ANSWER:

PAGE:

625

TYPE:

400

TEST BANK A—UNIT SEVEN: AGENCY AND EMPLOYMENT

NAT: AACSB Reflective

AICPA Legal

401

CHAPTER 32: AGENCY FORMATION AND DUTIES

A7.

Calvin is a minor. In most states, Calvin may be a. b. c. d.

an agent but not a principal. an agent or a principal. a principal but not an agent. neither an agent nor a principal.

ANSWER: A NAT: AACSB Reflective A8.

627 AICPA Legal

TYPE:

Sela agrees to act on Thom’s behalf, subject to Thom’s control, and Thom trusts Sela to so act. They set out the terms in a written document, which they both sign. This is a. b. c. d.

an agency by agreement. an agency by estoppel. an agency by ratification. not the creation of an agency relationship.

ANSWER: A NAT: AACSB Reflective A9.

PAGE:

628 AICPA Legal

TYPE:

Louis, a certified public accountant and an investor, and Maria, an insurance salesperson and a realtor, may create an agency relationship for a. b. c. d.

a business purpose only. a legal purpose only. any purpose. no purpose.

ANSWER: B NAT: AACSB Reflective

PAGE:

628 AICPA Legal

TYPE:

A10. Jill introduces Kelly to her friends as “my associate.” Kelly purports to act as Jill’s agent in several business transactions with those friends. If Jill is liable for Kelly’s actions, it will be under a. b.

the doctrine of estoppel. the equal dignity rule.

402

TEST BANK A—UNIT SEVEN: AGENCY AND EMPLOYMENT

c. d.

the fiduciary principle. the good faith statute.

ANSWER: A NAT: AACSB Reflective

PAGE:

629 AICPA Legal

TYPE:

403

CHAPTER 32: AGENCY FORMATION AND DUTIES

A11. Home Development Company employs llya to buy property for a future residential development. Ilya secretly buys some of the property and sells it to Home Development at a profit. Ilya has breached a. b. c. d.

no duty. the duty of accounting. the duty of loyalty. the duty of notification.

ANSWER: C NAT: AACSB Reflective

PAGE:

631 AICPA Legal

TYPE:

A12. Bob, a salesperson at a Carpets Galore store, tells Dita, a customer, “Buy your carpet here, and I’ll install it for half of what the store would charge.” Dita buys the carpet, which Bob installs for half the store’s price. Bob keeps the money. Bob has breached a. b. c. d.

no duty. the duty of loyalty. the duty of notification. the duty of obedience.

ANSWER: B NAT: AACSB Reflective

PAGE:

631 AICPA Legal

TYPE:

A13. Mackenzie, an agent for Lindsay, signs an agreement with Kirk on Lindsay’s behalf but neglects to tell her that the agreement requires the payment of a certain tax. The government prosecutes Lindsay for failing to pay the tax. She is a. b. c. d.

liable, because notice to Mackenzie is notice to Lindsay. liable, because notice to Kirk is notice to Lindsay. not liable, because Mackenzie did not tell Lindsay about the tax. not liable, because Kirk did not tell Lindsay about the tax.

ANSWER: A NAT: AACSB Reflective

PAGE:

631 AICPA Legal

TYPE:

404

TEST BANK A—UNIT SEVEN: AGENCY AND EMPLOYMENT

A14. Tri-state Financial Corporation hires Uri, a real estate agent, to locate investment properties for Tri-state. Uri learns of a warehouse available for $100,000, informs Tri-state, and makes an offer of $90,000 on Tri-state’s instruction. The offer is rejected. Uri a. b. c. d.

breached the agent’s fiduciary duties to the principal. did nothing wrong. failed to take advantage of a business opportunity. made an unreasonable offer based on current market value.

ANSWER: B NAT: AACSB Reflective

PAGE:

631 AICPA Legal

TYPE:

A15. Glen is an agent for Hi-Flite, Inc. On Hi-Flite’s behalf and at its request, Glen pays Ian for certain plane maintenance and repair services. Glen’s right to obtain the amount of those payments from Hi-Flite arises under the principal’s duty of a. b. c. d.

avoidance. cooperation. indemnification. reimbursement.

ANSWER: D NAT: AACSB Reflective

PAGE:

633 AICPA Legal

TYPE:

A16. Rangle contracts with Siena to buy a certain horse for her. Rangle makes a deal with Timberline Stables, the owner of the horse, and makes a down payment. Siena fails to pay the rest of the price. Timberline sues Rangle for breach of contract. His right to hold Siena liable for any damages that he has to pay is the right of a. b. c. d.

avoidance. cooperation. indemnification. reimbursement.

ANSWER: C NAT: AACSB Reflective

PAGE:

633 AICPA Legal

TYPE:

CHAPTER 32: AGENCY FORMATION AND DUTIES

405

406

TEST BANK A—UNIT SEVEN: AGENCY AND EMPLOYMENT

A17. Clearview 3D HD TV Company grants its agent Blossom an exclusive territory in which to sell Clearview products. Clearview cannot compete with Blossom in that territory under the principal’s duty of a. b. c. d.

avoidance. cooperation. indemnification. reimbursement.

ANSWER: B NAT: AACSB Reflective

PAGE:

634 AICPA Legal

TYPE:

A18. Pam is an agent for Refined Chemicals Corporation. Refined Chemicals owes Pam the duty of a. b. c. d.

accounting. obedience. performance. safe working conditions.

ANSWER: D NAT: AACSB Reflective

PAGE:

634 AICPA Legal

TYPE:

A19. Teresa owns a used-car lot where Salvatore works as a salesperson. Teresa tells Salvatore not to make any warranties for the cars. To make a sale to Rosa, however, Salvatore adds a 50,000-mile warranty. Later, Rosa sues Teresa for breach of warranty. Teresa’s right to hold Salvatore liable for any damages she has to pay is the right of a. b. c. d.

avoidance. cooperation. indemnification. reimbursement.

ANSWER: C NAT: AACSB Reflective

PAGE:

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TYPE:

407

CHAPTER 32: AGENCY FORMATION AND DUTIES

A20. Miracle Motors employs Norris as a sales agent for a trial period. At the end of the period, Miracle Motors and Norris disagree on the amount of the commissions Norris is due for sales that he made. Norris may demand a. b. c. d.

a constructive trust. an accounting. nothing. specific performance.

ANSWER: B NAT: AACSB Reflective

PAGE:

635 AICPA Legal

TYPE:

ESSAY QUESTIONS A1.

Arnold is the chief executive officer of Beta Corporation. Arnold’s responsibilities include decisions on product development, marketing, and other significant business directions. Arnold is subject to the approval and oversight of Beta’s board of directors. Carol is a Beta manager whose duties include the firm’s day-to-day hiring, firing, purchasing, and selling. Dave is a Beta salesperson, whose daily activities are controlled by Carol. Erin writes technical manuals for Beta products according to Arnold’s instructions and subject to Beta’s control, but has no dealings with Beta customers or suppliers. Fred edits the manuals on a contract-per-manual basis and is not otherwise subject to Beta’s control. Who is a principal? Who is an agent? Who is an employee? Who is an independent contractor? ANSWER: Beta is a principal. Arnold, Carol, Dave, and Erin are Beta agents and employees. Fred is an independent contractor. In an agency relationship, an agent agrees to act for or on behalf of a principal. An agent is subject to the control of the principal. An employee is subject to the control of employer. An independent contractor is not subject to an employer’s control. A corporation is a “person” who has contractual capacity but who can act only through its agents. Beta, as a corporation, is acting through its agents. Arnold, Carol, Dave, and Erin act on behalf of Beta, from which they obtain their authority. This authority differs: Arnold, Carol, and Dave can bind Beta in certain ways in their dealings with third parties, but Erin does not have the authority to legally bind Beta. Because Arnold, Carol, Dave, and Erin are subject to the control of

408

TEST BANK A—UNIT SEVEN: AGENCY AND EMPLOYMENT

Beta, through their superiors, they are employees. Because Fred is not subject to Beta’s control with respect to the physical conduct in the performance of his contracts, Fred is an independent contractor. PAGES: 624–627 NAT: AACSB Reflective A2.

TYPE: = AICPA Decision Modeling

Ella agrees to act as Fab’s agent in settlement negotiations with Global Insurance Company. Ella works out a profitable compromise for Fab, but deposits the company’s payment in her own account and refuses to give it to Fab. Fab files a suit against Ella. What remedies might the court impose? ANSWER: Possible remedies include the normal contract and tort remedies—in this problem for breach of contract and conversion. Also, when an agent breaches his or her duty to the principal by retaining benefits that belong to the principal, which is what occurred here, a court can impose a constructive trust and declare that the agent holds the benefits on behalf of the principal. A constructive trust may also be imposed when an agent retains profits that belong to the principal or takes advantage of the agency to obtain property the principal wants to buy. In this question, of course, the benefit was the insurance company’s payment, which was supposed to be paid to Fab, the principal, but which Ella, the agent, withheld. PAGE: 635 NAT: AACSB Reflective

TYPE: = AICPA Decision Modeling

Chapter 33 Agency Liability and Termination N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

Apparent authority is authority declared in clear, direct, definite terms. ANSWER: F NAT: AACSB Analytic

A2.

TYPE:

PAGE:

639 AICPA Legal

TYPE:

640 TYPE: AICPA Critical Thinking

A power of attorney confers express authority. ANSWER: T NAT: AACSB Reflective

A4.

639 AICPA Legal

An agent’s authority must be express for the agent’s act to bind a principal. ANSWER: F NAT: AACSB Analytic

A3.

PAGE:

A power of attorney can be special or general. 403

404

TEST BANK A—UNIT SEVEN: AGENCY AND EMPLOYMENT

ANSWER: T NAT: AACSB Analytic A5.

PAGE:

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TYPE:

PAGE:

641 AICPA Legal

TYPE:

PAGE:

641 AICPA Legal

TYPE:

Apparent authority arises from what the principal makes clear to the agent. ANSWER: F NAT: AACSB Analytic

A9.

An agent’s implied authority can contradict his or her express authority. ANSWER: F NAT: AACSB Analytic

A8.

TYPE:

An agent’s authority to act on behalf of a principal must be actual and apparent. ANSWER: F NAT: AACSB Analytic

A7.

640 AICPA Legal

An agent has the implied authority to do what is reasonably necessary to carry out express authority. ANSWER: T NAT: AACSB Analytic

A6.

PAGE:

641 AICPA Legal

TYPE:

Before a principal can ratify a contract, the third party must withdraw from the deal. ANSWER: F NAT: AACSB Analytic

PAGE:

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TYPE:

A10. Ratification occurs when a principal accepts responsibility for an agent’s unauthorized act. ANSWER: T NAT: AACSB Analytic

PAGE:

644 AICPA Legal

TYPE:

405

CHAPTER 33: AGENCY LIABILITY AND TERMINATION

A11. A principal whose identity is known by a third party with whom an agent contracts on the principal’s behalf is a disclosed principal. ANSWER: T NAT: AACSB Analytic

PAGE:

645 AICPA Legal

TYPE:

406

TEST BANK A—UNIT SEVEN: AGENCY AND EMPLOYMENT

A12. A partially disclosed principal is liable to a third party for a contract made by the agent acting within the scope of his or her authority. ANSWER: T NAT: AACSB Analytic

PAGE:

646 AICPA Legal

TYPE:

A13. If a principal is undisclosed, the agent may be liable to the principal for a third party’s nonperformance of a contract. ANSWER: F NAT: AACSB Analytic

PAGE:

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TYPE:

A14. If a principal is disclosed, the agent may be liable to a third party for the principal’s nonperformance of a contract. ANSWER: F NAT: AACSB Analytic

PAGE:

646 AICPA Legal

TYPE:

A15. A principal who authorizes an agent to commit a tort is not liable to persons or property injured thereby. ANSWER: F PAGE: 647 TYPE: NAT: AACSB Technology AICPA Leveraging Technology

A16. Under the doctrine of respondeat superior, an agent is liable for any harm caused to a principal by a third party. ANSWER: F NAT: AACSB Analytic

PAGE:

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TYPE:

648 AICPA Legal

TYPE:

A17. Vicarious liability is direct liability. ANSWER: F NAT: AACSB Analytic

PAGE:

A18. A principal may be liable for the tort of an agent committed within the scope of the agency or employment. ANSWER:

PAGE:

650

TYPE:

CHAPTER 33: AGENCY LIABILITY AND TERMINATION

NAT: AACSB Analytic

AICPA Legal

407

408

TEST BANK A—UNIT SEVEN: AGENCY AND EMPLOYMENT

A19. An agency relationship may be terminated by an act of the parties or by operation of law. ANSWER: T NAT: AACSB Analytic

PAGE:

651 AICPA Legal

TYPE:

A20. An agency coupled with an interest is an agency created for the agent’s benefit. ANSWER: T NAT: AACSB Analytic

PAGE:

652 AICPA Legal

TYPE:

MULTIPLE CHOICE QUESTIONS A1.

Homer is an officer of Integrity Corporation. With respect to binding Integrity to contracts, Homer’s authority a. b. c. d.

may be actual or apparent. must be actual and apparent. must be actual and not apparent. cannot be actual or apparent.

ANSWER: A NAT: AACSB Reflective A2.

PAGE:

639 AICPA Legal

TYPE:

Jaclyn, an agent for Kilpatrick, enters into a contract on Kilpatrick’s behalf with Leif that must be in writing to be enforceable under the Statute of Frauds. Under the equal dignity rule, Jaclyn’s authority to enter into this contract a. b. c. d.

may be oral or written. must be oral and written. must be written. cannot be oral or written.

ANSWER: C NAT: AACSB Reflective

PAGE:

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TYPE:

409

CHAPTER 33: AGENCY LIABILITY AND TERMINATION

A3.

Cory employs Daily Delivery Agency as an agent under a written agreement that describes the rights and duties of both parties. This is a. b. c. d.

apparent authority. equal authority. express authority. implied authority.

ANSWER: C NAT: AACSB Reflective A4.

TYPE:

any transaction causing a loss to Miklos. Miklos’s death or incapacity. Miklos’s sixty-fifth birthday. Nathalie’s handling of one of each stipulated transaction.

ANSWER: B NAT: AACSB Reflective

PAGE:

640 AICPA Legal

TYPE:

Sonia manages a Tasty Pastry store for United Food Company. To manage the business, Sonia’s authority can be implied by a. b. c. d.

an inference from the position Sonia occupies. any inference a reasonable customer or supplier would make. any inference Sonia chooses to make. no inference.

ANSWER: A NAT: AACSB Reflective A6.

639 AICPA Legal

Miklos grants an ordinary power of attorney to Nathalie to handle a list of financial transactions on Miklos’s behalf. This power will terminate on a. b. c. d.

A5.

PAGE:

641 AICPA Legal

TYPE:

Based on Nan’s conduct, Odel reasonably believes that Poppy has the authority to act on Nan’s behalf even though Poppy does not have the actual authority to do so. In this circumstance, Poppy has a. b. c.

apparent authority. express authority. implied authority.

410

TEST BANK A—UNIT SEVEN: AGENCY AND EMPLOYMENT

no authority.

ANSWER: A NAT: AACSB Reflective

PAGE:

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TYPE:

411

CHAPTER 33: AGENCY LIABILITY AND TERMINATION

A7.

Meals n’ More, Inc., a catering company, requires its customers to pay by check. Lyra, a Meals n’ More driver, tells customers that they can pay her with cash. When Meals n’ More learns of Lyra’s collections, it takes no action to stop it. Lyra steals some of the cash. Meals n’ More may suffer the loss under the doctrine of a. b. c. d.

apparent authority. express authority. implied authority. no authority.

ANSWER: A NAT: AACSB Reflective A8.

641 AICPA Legal

TYPE:

Trey, an agent for Uno Music Corporation, executes an unauthorized contract with Variety Recording, Inc., that is highly advantageous to Uno. Variety withdraws from the deal before Uno ratifies the contract. The contract is a. b. c. d.

valid. variable. void. voidable.

ANSWER: C NAT: AACSB Reflective A9.

PAGE:

644 AICPA Legal

TYPE:

Elin, an agent for First Credit Corporation (FC), enters into an unauthorized contract with Great Expectations, Inc. (GE), purportedly on FC’s behalf. This contract will be enforceable if it is ratified by a. b. c. d.

any third party. Elin. FC. GE.

ANSWER: C NAT: AACSB Reflective

PAGE:

644 AICPA Legal

TYPE:

412

TEST BANK A—UNIT SEVEN: AGENCY AND EMPLOYMENT

Fact Pattern 33-1A (Questions A10–A11 apply) Ulani indicates that she is acting as an agent on behalf of an unidentified client— Thoroughbred Stallions, LLC—when she enters into a contract with Shana. A10. Refer to Fact Pattern 33-1A. Thoroughbred Stallions is a. b. c. d.

a disclosed principal. a non-existent principal. an undisclosed principal. a partially disclosed principal.

ANSWER: D NAT: AACSB Reflective

PAGE:

645 AICPA Legal

TYPE:

A11. Refer to Fact Pattern 33-1A. Liability to Shana for nonperformance of the contract may be imposed on a. b. c. d.

neither Ulani nor Thoroughbred Stallions. Ulani and Thoroughbred Stallions. Ulani only. Thoroughbred Stallions only.

ANSWER: B NAT: AACSB Reflective

PAGE:

646 AICPA Legal

TYPE:

A12. BizOnline.com uses an electronic agent, or e-agent, to perform certain tasks in e-commerce. With respect to the e-agent’s actions, BizOnline.com is bound by a. b. c. d.

all of the actions. only those actions of which BizOnline.com is aware. only those actions that BizOnline.com does not refute. only those actions that BizOnine.com ratifies.

ANSWER: A PAGE: NAT: AACSB Technology

647 AICPA Legal

TYPE:

413

CHAPTER 33: AGENCY LIABILITY AND TERMINATION

A13. Rupert, an agent for Star Productions, Inc., enters into an unauthorized contract with Theatrical Transport Corporation purportedly on behalf of Star, which refuses to perform. Rupert is liable a. b. c. d.

for breach of contract to Star and Theatrical Transport. for misrepresentation to Star only. for misrepresentation to Theatrical Transport only. to no one.

ANSWER: C NAT: AACSB Reflective

PAGE:

647 AICPA Legal

TYPE:

A14. Emery is an agent for Downtown Market Corporation. Emery makes an innocent misrepresentation when entering into a contract on behalf of Downtown Market with Cool Fruits, Inc. Cool Fruits a. b. c. d.

is directly responsible for performing the contract. is estopped from performing the contract. may rescind the contract. must ratify the contract.

ANSWER: C NAT: AACSB Reflective

PAGE:

648 AICPA Legal

TYPE:

A15. Fabulous Auto Sales, Inc., employs GR8 Collection Company as a collection agent. While repossessing a car from Hadji, one of Fabulous’s customers, GR8 causes an accident in which Hadji is injured. Hadji can recover from a. b. c. d.

Fabulous only. Fabulous or GR8. GR8 only. Hadji’s insurance company only.

ANSWER: B NAT: AACSB Reflective

PAGE:

648 AICPA Legal

TYPE:

414

TEST BANK A—UNIT SEVEN: AGENCY AND EMPLOYMENT

A16. Commercial Development Corporation (CDC) hires Delta Construction Company to work at a site as an independent contractor. Whether CDC will be liable for torts committed at the site by Delta depends on a. b. c. d.

what Delta bid for the job. whether unusually hazardous activities are involved. which party obtained insurance to cover tort liability. who is paying Delta.

ANSWER: B NAT: AACSB Reflective

PAGE:

651 AICPA Legal

TYPE:

A17. Security Armored Car Corporation employs Theo as an agent. Without Security’s knowledge but otherwise acting within the scope of employment, Theo commits a crime. The state can successfully prosecute a. b. c. d.

neither Security nor Theo. Security only. Security or Theo. Theo only.

ANSWER: D NAT: AACSB Reflective

PAGE:

651 AICPA Legal

TYPE:

A18. Clive is a purchasing agent for Double D Ranch with the authority to buy cattle at a certain auction. After the cattle are bought, the agency relationship terminates a. b. c. d.

automatically. following notice to all actual cattle sellers. following notice to all potential cattle sellers. following published notice in a local newspaper.

ANSWER: A NAT: AACSB Reflective

PAGE:

651 AICPA Legal

TYPE:

415

CHAPTER 33: AGENCY LIABILITY AND TERMINATION

A19. Frida hires Gert, a real estate broker, to act as her agent to sell her house. The house burns down before being sold. The agency agreement is likely a. b. c. d.

still in force if Frida gives Gert additional consideration. still in force if Gert does not tell prospective customers. terminated by mutual consent of the parties. terminated by operation of law.

ANSWER: D NAT: AACSB Reflective

PAGE:

653 AICPA Legal

TYPE:

A20. Omar hires Petra, a real estate broker, to act as his agent to sell his land for $150,000. Oil is discovered beneath the land, causing its market value to increase considerably. The agency agreement is likely a. b. c. d.

still in force if Omar gives Petra additional consideration. still in force if Petra does not tell prospective customers. terminated by mutual consent of the parties. terminated by operation of law.

ANSWER: D NAT: AACSB Reflective

PAGE:

653 AICPA Legal

TYPE:

ESSAY QUESTIONS A1.

Brenda is a purchasing agent for Commodities Exchange Corporation. Dennis, a Commodities corporate officer, gives Brenda written authority to buy for the firm as many computers and peripheral devices as necessary. The next day, Dennis calls Brenda and tells her to buy only fifty notebook computers and nothing else. Brenda shows the written authority to EProducts, Inc., and enters into a contract with E-Products to buy sixty notebook computers and a selection of printers, scanners, and extra storage media. E-Products ships the order to Commodities. Is Commodities liable to E-Products under the contract? Is Brenda liable? In each case, if so, why? If not, why not? ANSWER: Commodities is liable to E-Products. Brenda is not liable to EProducts. A principal is liable for the contracts of its agents entered into

416

TEST BANK A—UNIT SEVEN: AGENCY AND EMPLOYMENT

with actual or apparent authority. Actual authority may be express or implied. Apparent authority arises from what the principal causes a third party reasonably to believe regarding the agent’s authority to act, even if the agent does not have actual authority to act. If the third party changes its position in reliance on the principal’s representations, the principal is estopped from denying that the agent had authority. In this problem, Brenda had the actual authority to order fifty notebook computers and apparent authority to order the rest of the equipment, according to the written authorization that Dennis gave to Brenda and Brenda showed to EProducts. E-Products’s contract rights are not limited by the limits placed on that authority by Dennis’s call to Brenda. Brenda is not liable to EProducts because she acted with apparent authority. Brenda is liable to Commodities, however, for exceeding her authority. PAGES: 639–642 NAT: AACSB Reflective A2.

TYPE: = AICPA Decision Modeling

Tropical Vittles, LLC, hires Sophie to act as its agent to buy a ten-acre tract of land from Rico for $1,000 per acre. Tropical Vittles does not want Rico to know that it is the principal or that Sophie is its agent. Tropical Vittles wants the land for a new fast-food restaurant, and believes that Rico may not sell the land for that purpose or may demand a premium price. Sophie makes the purchase, signing only her name to the contract as the buyer and not disclosing to Rico the agency relationship. The transfer of the deed is to occur on May 1. Rico learns of Tropical Vittles’s identity on April 15. Can Rico legally refuse to deed the property on May 1? Explain. ANSWER: Generally, no. Although the identity of the principal in this problem was not disclosed, the principal still retains the usual contractual rights of a principal. Therefore, if the agent contracted with the third-party seller within the scope of the agent’s authority, the principal and the thirdparty seller are bound in contract. There are three possible exceptions to the general rule. If a thirdparty seller expressly excludes undisclosed principals from a contract with an agent, if a principal’s identity is undisclosed for the purpose of defrauding the third-party seller, or if the agent’s performance is personal to the contract, the third-party seller can legally refuse to perform. Because none of these exceptions appears to apply here, however, the third-

CHAPTER 33: AGENCY LIABILITY AND TERMINATION

417

party seller’s refusal to deed the property on the contract date would constitute a breach. PAGES: 645–646 NAT: AACSB Reflective

TYPE: N AICPA Decision Modeling

Chapter 34 Employment, Immigration, and Labor Law N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

Generally, under employment-at-will doctrine, an employer may fire an employee at any time for any reason. ANSWER: T NAT: AACSB Analytic

A2.

658 AICPA Legal

TYPE:

Courts in a few states have held that all employment contracts an implied covenant of good faith. ANSWER: T NAT: AACSB Analytic

A3.

PAGE:

658 AICPA Legal

TYPE:

Whistleblowing occurs when an employer signals the end of a work day by sounding a buzzer, ringing a bell, or otherwise “blowing the whistle “ ANSWER:

PAGE:

660

TYPE:

416

TEST BANK A—UNIT SEVEN: AGENCY AND EMPLOYMENT

NAT: AACSB Analytic A4.

Any employee who works more than eight hours per day must be paid overtime . ANSWER: F NAT: AACSB Analytic

A5.

PAGE:

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TYPE:

PAGE:

663 AICPA Legal

TYPE:

PAGE:

664 AICPA Legal

TYPE:

A violation of federal family and medical leave requirements may result in liability for an employer but not personal liability for a supervisor. ANSWER: F NAT: AACSB Analytic

A9.

TYPE:

Certain employers must provide their employees with up to twelve weeks of paid family or medical leave during any twelve-month period. ANSWER: F NAT: AACSB Analytic

A8.

661 AICPA Legal

A large business must provide notice before implementing a mass layoff. ANSWER: T NAT: AACSB Analytic

A7.

PAGE:

Children under fourteen years of age are not allowed to work. ANSWER: F NAT: AACSB Analytic

A6.

AICPA Legal

PAGE:

666 AICPA Legal

TYPE:

There is no general duty on employers to keep workplaces safe. ANSWER: T NAT: AACSB Analytic

PAGE:

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TYPE:

A10. Only employees contribute under federal law to help pay for benefits that will partially make up for their loss of income on retirement. ANSWER: F NAT: AACSB Analytic

PAGE:

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TYPE:

417

CHAPTER 34: EMPLOYMENT, IMMIGRATION, AND LABOR LAW

A11. To be eligible for unemployment compensation, a worker must be willing and able to work. ANSWER: T NAT: AACSB Analytic

PAGE:

668 AICPA Legal

TYPE:

418

TEST BANK A—UNIT SEVEN: AGENCY AND EMPLOYMENT

A12. For works whose jobs have been terminated, federal law provides no right to continued health-care coverage. ANSWER: F NAT: AACSB Analytic

PAGE:

669 AICPA Legal

TYPE:

A13. Normally, if employees are informed that their communications are being monitored, they cannot expect those communications to be private. ANSWER: T NAT: AACSB Analytic

PAGE:

670 AICPA Legal

TYPE:

A14. Employers can require or cause employees, but not job applicants, to take lie-detector tests. ANSWER: F NAT: AACSB Analytic

PAGE:

671 AICPA Legal

TYPE:

A15. An employer must verify a prospective worker’s identity and eligibility for employment in the United States and abroad. ANSWER: F NAT: AACSB Analytic

PAGE:

672 AICPA Legal

TYPE:

A16. An employer who violates the law by hiring an unauthorized alien is subject only to the penalty of a forced discharge of the employee. ANSWER: F NAT: AACSB Analytic

PAGE:

673 AICPA Legal

TYPE:

A17. Employers and unions have a duty to bargain in good faith. ANSWER: T NAT: AACSB Analytic

PAGE:

674 AICPA Legal

TYPE:

A18. During a union election campaign, employers can undertake certain types of surveillance to identify union supporters. ANSWER:

PAGE:

675

TYPE:

CHAPTER 34: EMPLOYMENT, IMMIGRATION, AND LABOR LAW

NAT: AACSB Analytic

AICPA Legal

419

420

TEST BANK A—UNIT SEVEN: AGENCY AND EMPLOYMENT

A19. Requiring union membership as a condition of continued employment is illegal in many states. ANSWER: T NAT: AACSB Analytic

PAGE:

675 AICPA Legal

TYPE:

A20. Workers have a right to refuse to cross a picket line of fellow workers who are engaged in a lawful strike. ANSWER: T NAT: AACSB Analytic

PAGE:

677 AICPA Legal

TYPE:

MULTIPLE CHOICE QUESTIONS A1.

Myron is an employee of Nero. Either party can terminate the employment relationship at any time for any reason without liability. With respect to the employment-at-will doctrine, this is a. b. c. d.

an example of the doctrine. an exception based on contract theory. an exception based on public policy. an exception based on tort theory.

ANSWER: A NAT: AACSB Reflective A2.

PAGE:

658 AICPA Legal

TYPE:

Richard is an employee of Stealth Security Company. Stealth discharges Richard for refusing to infiltrate a competitor’s organization to learn its trade secrets. With respect to the employment-at-will doctrine, this is a. b. c. d.

an example of the doctrine. an exception based on contract theory. an exception based on public policy. an exception based on tort theory.

ANSWER: C NAT: AACSB Reflective

PAGE:

660 AICPA Legal

TYPE:

421

CHAPTER 34: EMPLOYMENT, IMMIGRATION, AND LABOR LAW

A3.

Emma, Frick, Glenda, and Huey are employees of different-sized employers in different industries. Under the Fair Labor Standards Act, a minimum wage must be paid to employees in a. b. c. d.

all industries. covered industries only. no industries. small-business industries only.

ANSWER: B NAT: AACSB Reflective A4.

661 AICPA Legal

TYPE:

Jenna is fifteen years old. Under the Fair Labor Standards Act, Jenna cannot work a. b. c. d.

in the entertainment industry. in a hazardous occupation. for her parents. in the delivery of newspapers.

ANSWER: B NAT: AACSB Reflective A5.

PAGE:

661 AICPA Legal

TYPE:

Delicious Fruit-of-the-Month Company currently employs five hundred fulltime workers and two hundred part-time seasonal workers. Because business has declined, Delicious plans to close a plant that employs more than fifty full-time workers. Advance notice of the layoff must be sent to a. b. c. d.

affected workers or their union representative. all workers, even those who are not being laid off. potential customers and suppliers. no one.

ANSWER: A NAT: AACSB Reflective

PAGE:

663 AICPA Legal

TYPE:

422 A6.

TEST BANK A—UNIT SEVEN: AGENCY AND EMPLOYMENT

Kato takes temporary family leave from his job at Lube & Oil Company to care for a new baby. During the leave, under the Family and Medical Leave Act, Lube & Oil must a. b. c. d.

continue the employee’s health-care coverage. suspend the employee’s health-care coverage. terminate the employee’s health-care coverage. do nothing.

ANSWER: A NAT: AACSB Reflective A7.

664 AICPA Legal

TYPE:

Miley takes temporary medical leave from her job at Lumber Mill Inc. to care for a parent with a serious health condition. When she attempts to return to work, Lumber Mill refuses to reinstate her. Under the Family and Medical Leave Act, Miley may obtain a. b. c. d.

an award of key employee status but no injunctive or economic relief. a cease-and-desist order or other injunction but no economic award. double damages, job reinstatement, a promotion, and more. nothing.

ANSWER: C NAT: AACSB Reflective A8.

PAGE:

666 AICPA Legal

TYPE:

Chuck works for Deepwater Drilling Corporation. While operating a Deepwater drill, Chuck suffers an injury. Under state workers’ compensation laws, Chuck will be compensated only if a. b. c. d.

he does not have health insurance. he is completely disabled. his injury was accidental. his injury was intentional.

ANSWER: C NAT: AACSB Reflective

PAGE:

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TYPE:

423

CHAPTER 34: EMPLOYMENT, IMMIGRATION, AND LABOR LAW

A9.

Ewa is a current employee of Financial Accounting, Inc. Gomer, a former Financial employee who is currently unemployed, collects unemployment compensation. This is provided by a tax on a. b. c. d.

Ewa and Gomer only. Ewa, Financial, and Gomer. Financial only. none of these parties.

ANSWER: C NAT: AACSB Reflective

PAGE:

668 AICPA Legal

TYPE:

A10. Machine Operations, Inc. (MO), employs four hundred workers at three locations in three states. Workers who lose their jobs with MO have a right to continued health-care coverage under MO’s group plan unless they a. b. c. d.

are fired for gross misconduct. are laid off for budgetary reasons. have their hours decreased from full-time to part-time. quit their jobs voluntarily.

ANSWER: A NAT: AACSB Reflective

PAGE:

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TYPE:

A11. Interstate Distribution, Inc. (IDI), provides its employees with an e-mail system. IDI notifies them that it will monitor their communications over the system. Some employees file a suit against IDI, claiming a violation of privacy. The court is most likely to hold that, with respect to communications over the e-mail system, a. b. c. d.

the employees did not have a reasonable expectation of privacy. the employer violated the employees’ privacy rights. federal law prohibits the employer’s “intentional interception.” federal law prohibits the employees’ privacy claim.

ANSWER: A NAT: AACSB Reflective

PAGE:

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TYPE:

424

TEST BANK A—UNIT SEVEN: AGENCY AND EMPLOYMENT

A12. First National Bank may subject its employees to lie-detector tests when investigating a. b. c. d.

health and medical conditions. losses attributable to theft. prior work history. suspected drug use.

ANSWER: B NAT: AACSB Reflective

PAGE:

671 AICPA Legal

TYPE:

A13. Hu, Ivan, and Juana apply to work for King Meatpacking Company. These individuals’ identities and eligibility to work must be verified by a. b. c. d.

the employer. the individuals. the individuals’ countries of origin. the U.S. Citizenship and Immigration Services.

ANSWER: A NAT: AACSB Reflective

PAGE:

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TYPE:

A14. Southwestern Foods Corporation operates a packaging plant near the border between the United States and Mexico. Due to the location, it would be easier for Southwestern to employ noncitizens. It is legal for a U.S. employer to a. b. c. d.

hire persons not authorized to work in the United States. recruit persons not authorized to work in the United States. refer for a fee persons not authorized to work in the United States. none of the choices.

ANSWER: D NAT: AACSB Reflective

PAGE:

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TYPE:

425

CHAPTER 34: EMPLOYMENT, IMMIGRATION, AND LABOR LAW

A15. Detailed Designs Company, an architectural firm, wants to hire Eduardo, a noncitizen. A temporary work visa is most likely to be set aside for a noncitizen who is a. b. c. d.

a “person of ethnic similarity to the employer’s workforce.” a “person of extraordinary ability.” a “person of ordinary ability and ambition.” a “person with an extraordinary work ethic.”

ANSWER: B NAT: AACSB Reflective

PAGE:

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TYPE:

A16. Fedro is an employee of Earth & Sea Mining Company. Under federal law, Fedro and other employees have the right to a. b. c. d.

bargain collectively with Earth & Sea through their representative. insist that Earth & Sea require union membership to work. require Earth & Sea to contribute financially to their union. refuse to bargain with Earth & Sea through their representative.

ANSWER: A NAT: AACSB Reflective

PAGE:

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TYPE:

A17. Residential Construction Company agrees with its employees’ union not to buy any nonunion-produced goods from other firms for use on Residential Construction job sites. This is a. b. c. d.

a permissible secondary boycott. a prohibited secondary boycott. a technically legal secondary boycott. a unilateral one-party boycott.

ANSWER: B NAT: AACSB Reflective

PAGE:

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TYPE:

426

TEST BANK A—UNIT SEVEN: AGENCY AND EMPLOYMENT

A18. During a union election campaign, Autowerks Repair, Inc., prohibits onsite, work-hour solicitations by any party, including Mechanics Union, which is seeking the workers’ unionization. This violates a. b. c. d.

federal labor law. federal election law. federal solicitation law. no federal law.

ANSWER: D NAT: AACSB Reflective

PAGE:

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TYPE:

A19. Clerical Workers Union represents the employees of Miracle Medical Research Company. The management of the firm refuses to bargain with the union over the hiring of unnecessary workers. This most likely violates a. b. c. d.

federal labor law. state right-to-work laws. federal wage-and-hour laws. no federal or state law.

ANSWER: D NAT: AACSB Reflective

PAGE:

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TYPE:

A20. Boz, a clerk for a Cheezy Burger, Inc., restaurant goes out on strike with the other employees. After the strike, Boz must be given his job back if there is still work at the restaurant and the strike was a. b. c. d.

a lawful economic strike. an “excuse” for a few days off. an unjustified strike. an unlawful “practice” strike.

ANSWER: A NAT: AACSB Reflective

PAGE:

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TYPE:

ESSAY QUESTIONS

CHAPTER 34: EMPLOYMENT, IMMIGRATION, AND LABOR LAW

A1.

427

Borealis Power Company is subject to mandatory workers’ compensation laws in the states in which it does business. Chad and Dex work for Borealis as part of a crew that travels to remote locations to repair downed power lines and other damaged equipment. At a distant site, Chad is injured in an accident that is entirely Dex’s fault. Chad files a claim for workers’ compensation. Should the claim be granted? What would be Borealis’s best defense against it? ANSWER: Chad’s claim should probably be granted. Borealis’s best defense in this situation, as in all workers’ compensation cases, is that Chad’s injury did not arise out of and in the course of employment. That defense would not likely be successful here, however. Under workers’ compensation laws, employers are strictly liable without regard to whether or not they are at fault. Even if the employer is not negligent, he or she is liable if an employee’s injury arose out of and in the course of employment. “Liability” in this context means that an injured employee is entitled to workers’ compensation benefits for his or her injury. An injury must be workrelated, arising out of activity that is normal for the kind of job involved. “In the course of employment” means that the employee was either at work or performing work at a different location. That a co-worker caused an injury to an employee does not block the employee’s recovery of workers’ compensation benefits. Also, although an employee is not covered while driving to work from home, the employee is covered while performing a work-related service at an off-site location. PAGE: 667 NAT: AACSB Reflective

A2.

TYPE: = AICPA Decision Modeling

Healthy Harvest Company runs a candy and fruit processing and packaging plant. Most of Healthy Harvest’s business is done during holiday seasons, especially between Halloween and New Year’s Day, and in the spring. The company hires a large temporary workforce during its busiest times. Occasionally, a position opens for an individual with highly specialized skills, particularly to operate and maintain the company’s inventory and sales control systems. Can Healthy Harvest hire noncitizens for its temporary, seasonal work? Can the company hire a noncitizen with special skills for certain jobs? If so, what procedures must the employer follow in both situations to do this hiring? If not, how can Healthy Harvest be assured that it is hiring only citizens?

428

TEST BANK A—UNIT SEVEN: AGENCY AND EMPLOYMENT

ANSWER: It is illegal to hire for work in the United States a person who is not authorized to work here. Thus, under no circumstances can an employer legally hire a noncitizen who is in the United States unlawfully. But an employer may hire a noncitizen who is a lawful permanent resident. The principal responsibility to verify an individual’s identity and eligibility to work rests with the employer. The U.S. Citizenship and Immigration Services (CIS) supplies a form—Form I-9, Employment Eligibility Verification—that an employer must complete within three days of hiring an employee (and retain for three years). An employer has some defenses against alleged violations but is otherwise subject to penalties for illegally employing noncitizens. Lawful permanent residency can be proved by an I551 Alien Registration Receipt, or “green card.” Subject to certain strict requirements, an employer may apply for a “green card” for a noncitizen. Persons who immigrate to the United States to work include those with special skills, such as an individual who might qualify to fill the job with Healthy Harvest in this question. To hire such an individual who is not otherwise authorized to work here, an employer must petition the CIS. The employer can obtain a visa for a person to work in the United States in a highly qualified, specialty occupation as part of the H-1B visa program. PAGES: 672–674 NAT: AACSB Reflective

TYPE: N AICPA Decision Modeling

Chapter 35 Employment Discrimination N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

An employer’s discrimination against job applicants or employees on certain grounds may violate federal law. ANSWER: T NAT: AACSB Analytic

A2.

681 AICPA Legal

TYPE:

The Civil Rights Act of 1964 does not prohibit job discrimination in the hiring process. ANSWER: F NAT: AACSB Analytic

A3.

PAGE:

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TYPE:

Disparate-impact discrimination occurs when a protected group of people is adversely affected by an employer’s practices, even though they do not appear to be discriminatory. ANSWER: T NAT: AACSB Analytic

PAGE:

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TYPE:

428

TEST BANK A—UNIT SEVEN: AGENCY AND EMPLOYMENT

429

CHAPTER 35: EMPLOYMENT DISCRIMINATION

A4.

A5.

A6.

Making out a prima facie case of discrimination means that a plaintiff has met his or her initial burden of proof. ANSWER: T NAT: AACSB Analytic

PAGE:

The Civil Rights Act of discrimination.

1964

ANSWER: F NAT: AACSB Analytic

PAGE:

protect against reverse

683 AICPA Legal

TYPE:

PAGE:

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TYPE:

PAGE:

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TYPE:

A plaintiff alleging wage discrimination must file a complaint within a certain period of time of the decision that set the discriminatory pay. ANSWER: F NAT: AACSB Analytic

A9.

not

Federal law does not prohibit discrimination on the basis of gender in assessing an employee’s education, training, or experience. ANSWER: F NAT: AACSB Analytic

A8.

does

TYPE:

Employers can treat their employees more or less favorably based on their religious beliefs or practices. ANSWER: F NAT: AACSB Analytic

A7.

682 AICPA Legal

PAGE:

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TYPE:

An employee’s resignation must be the foreseeable result of an employer’s discriminatory action to support a showing of constructive discharge. ANSWER: T NAT: AACSB Analytic

PAGE:

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TYPE:

A10. A tangible employment action is a significant change in employment status or benefits.

430

TEST BANK A—UNIT SEVEN: AGENCY AND EMPLOYMENT

ANSWER: T PAGE: NAT: AACSB Technology

685 AICPA Legal

TYPE:

A11. Protection against retaliation under the Civil Rights Act of 1964 does not extend to an employee who speaks out about discrimination on his or her own initiative. ANSWER: F NAT: AACSB Analytic

PAGE:

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TYPE:

A12. When the harassment of co-workers creates a hostile working environment, an employee may have a cause of action against the employer. ANSWER: T NAT: AACSB Analytic

PAGE:

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TYPE:

A13. Protection against discrimination under the Civil Rights Act of 1964 does not extend to situations in which individuals are harassed by members of the same gender. ANSWER: F NAT: AACSB Analytic

PAGE:

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TYPE:

A14. Under the Age Discrimination in Employment Act of 1967, the plaintiff needs to show only that the employer was motivated in part by unlawful discrimination. ANSWER: F NAT: AACSB Analytic

PAGE:

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TYPE:

A15. Under the Age Discrimination in Employment Act of 1967, a plaintiff must prove that he or she was replaced by a person “outside the protected class.” ANSWER: F NAT: AACSB Analytic

PAGE:

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TYPE:

A16. State employers are not immune from private suits brought by employees under the Age Discrimination in Employment Act of 1967.

431

CHAPTER 35: EMPLOYMENT DISCRIMINATION

ANSWER: F NAT: AACSB Analytic

PAGE:

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TYPE:

432

TEST BANK A—UNIT SEVEN: AGENCY AND EMPLOYMENT

A17. Employers can consider mitigating measures or medications when determining if an individual has a disability that fits the definition in the Americans with Disabilities Act of 1990. ANSWER: F NAT: AACSB Analytic

PAGE:

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TYPE:

A18. The Americans with Disabilities Act of 1990 requires that employers accommodate the needs of applicants or employees with disabilities who are not otherwise qualified for the work ANSWER: F NAT: AACSB Analytic

PAGE:

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TYPE:

A19. Employers who do not accommodate the needs of persons with disabilities must demonstrate that the accommodations would cause undue hardship. ANSWER: T NAT: AACSB Analytic

PAGE:

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TYPE:

A20. An employer may defend against a claim of unintentional discrimination by asserting that a practice that has a discriminatory effect is a business necessity. ANSWER: T NAT: AACSB Analytic

PAGE:

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TYPE:

MULTIPLE CHOICE QUESTIONS A1.

Origami Paper Products Corporation meets all of the requirements to be subject to the federal employment discrimination laws. These laws restrict the ability of employers to discriminate against workers on the basis of a. b. c. d.

experience. gender. intelligence. skill.

433

CHAPTER 35: EMPLOYMENT DISCRIMINATION

ANSWER: B NAT: AACSB Reflective

PAGE:

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TYPE:

434 A2.

TEST BANK A—UNIT SEVEN: AGENCY AND EMPLOYMENT

Nina is a Jew and Odell is a college student. Based on this information, members of protected classes include a. b. c. d.

neither Nina nor Odell. Nina and Odell. Nina only. Odell only.

ANSWER: C NAT: AACSB Reflective A3.

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TYPE:

Dakota believes that Credit Services Corporation (CSC) has discriminated against her on the basis of gender. She files a suit against CSC under the Civil Rights Act of 1964. To establish a prima facie case of employment discrimination, Dakota must show that a. b. c. d.

she is a member of a protected class. CSC has no legal defenses against the claim. discriminatory intent motivated CSC’s act. no other firm in CSC’s industry has committed a discriminatory act.

ANSWER: A NAT: AACSB Reflective A4.

PAGE:

682 AICPA Legal

TYPE:

Olivia applies for a job with Petro Company. Petro does not hire Olivia because of her ethnicity, or national origin. This is a. b. c. d.

reverse discrimination. disparate-impact discrimination. disparate-treatment discrimination. not discrimination.

ANSWER: C NAT: AACSB Reflective

PAGE:

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TYPE:

435

CHAPTER 35: EMPLOYMENT DISCRIMINATION

Fact Pattern 35-1A (Questions A5-A6 apply) Erasmus applies for a job at Drain-Pro Plumbing & Repair LLC for which he is well qualified. He passes a test to determine which applicants are eligible for hiring, but the employer discards the results, and Erasmus is rejected. Drain-Pro continues to seek applicants. A5.

Refer to Fact Pattern 35-1A. Erasmus files a suit against Drain-Pro under the Civil Rights Act of 1964, claiming reverse discrimination. To support this claim, Erasmus must show that he is a member of a. b. c. d.

a protected class. a majority group. an employers’ association. a union.

ANSWER: B NAT: AACSB Reflective A6.

683 AICPA Legal

TYPE:

Refer to Fact Pattern 35-1A. To successfully defend itself against Erasmus’s suit, Drain-Pro must articulate a. b. c. d.

a legitimate, nondiscriminatory reason for its action. a mere fear that it would be sued if it used the test results. a pretext for its action. a discriminatory basis for its action.

ANSWER: A NAT: AACSB Reflective A7.

PAGE:

683 AICPA Legal

TYPE:

Conrad and Delilah are employees of AgriBio Feed & Seed Corporation. Under the Equal Pay Act of 1963, AgriBio can legitimately pay different wages on the basis of a. b. c. d.

seniority. job descriptions. substantial equality of skill, effort, and responsibility. gender.

ANSWER:

PAGE:

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TYPE:

436

TEST BANK A—UNIT SEVEN: AGENCY AND EMPLOYMENT

NAT: AACSB Reflective A8.

Greta is the only female employee in the maintenance department of Hydro Hydraulics Inc. Greta’s supervisor and co-workers tease and play tricks on her so relentlessly that she feels compelled to quit. This is a. b. c. d.

a constructive discharge on the basis of gender discrimination. a harassing discharge on the basis of treatment discrimination. a voluntary discharge on the basis of impact discrimination. not a discharge or discrimination.

ANSWER: A NAT: AACSB Reflective A9.

AICPA Legal

PAGE:

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TYPE:

Ruth is a supervisor for Subs & Suds, a restaurant. Tim is a Subs employee. The owner announces that some employees will be discharged. Ruth tells Tim that if he has sex with her, he can keep his job. This is a. b. c. d.

harassment on the basis of sexual orientation. not harassment. quid pro quo harassment. same-gender harassment.

ANSWER: C NAT: AACSB Reflective

PAGE:

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TYPE:

A10. Fix-It Repair Shop does not take any action to prevent sexual harassment of its employees. Fix-It Repair may be liable for such harassment by a. b. c. d.

an employee’s previous employer. a customer or a co-worker. an employee’s spouse. none of the choices.

ANSWER: B NAT: AACSB Reflective

PAGE:

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TYPE:

437

CHAPTER 35: EMPLOYMENT DISCRIMINATION

A11. Cora, a female, and Dom, a male, are employees of Equipment Leasing Corporation. Cora regularly e-mails sexually explicit images to Dom via Equipment Leasing’s computer network. Dom finds this offensive. This is a. b. c. d.

hostile-environment harassment. not harassment or any form of discrimination. quid pro quo harassment. reverse discrimination.

ANSWER: A NAT: AACSB Reflective

PAGE:

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TYPE:

A12. Mona files an employment discrimination suit against Nationwide Distribution Corporation (NDC) under the Civil Rights Act of 1964. If Mona shows that NDC acted with malice or reckless indifference, she may recover a. b. c. d.

an unlimited amount of compensatory and punitive damages. a limited amount of compensatory and punitive damages. neither compensatory nor punitive damages. compensatory or punitive damages, but not both.

ANSWER: B NAT: AACSB Reflective

PAGE:

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TYPE:

A13. Pikabo files an employment discrimination suit against Quantitative Analysis, Inc., under the Civil Rights Act of 1964, based on its discharge of Pikabo. Possible relief includes a. b. c. d.

imprisonment. reinstatement. fines. an order to shutdown the employer’s business.

ANSWER: B NAT: AACSB Reflective

PAGE:

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TYPE:

438

TEST BANK A—UNIT SEVEN: AGENCY AND EMPLOYMENT

A14. United Company replaces Vera, a forty-five-year-old employee, with Wendy. Vera files a suit against United under the Age Discrimination in Employment Act of 1967. To establish a prima facie case, Vera must show, among other things, that she is a. b. c. d.

deserving of higher pay than Wendy. generally more dependable than Wendy. older than Wendy. qualified for the position.

ANSWER: D NAT: AACSB Reflective

PAGE:

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TYPE:

A15. Eton files a suit in a federal district court against Florida, alleging employment discrimination under the Age Discrimination in Employment Act of 1967. The state asks the court to dismiss the suit. The court is most likely to rule that a. b. c. d.

the state is immune from the suit. the suit can proceed. Eton is immune from any defense the state might offer. the court is immune from such request.

ANSWER: A NAT: AACSB Analytic

PAGE:

691 AICPA Legal

TYPE:

A16. Paolo has cerebral palsy, Quincy has kleptomania, and both work for Reality Insurance Company. Considered disabled under the Americans with Disabilities Act a. b. c. d.

are Paolo and Quincy. is Paolo only. is Quincy only. is neither Paolo nor Quincy.

ANSWER: B NAT: AACSB Reflective

PAGE:

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TYPE:

439

CHAPTER 35: EMPLOYMENT DISCRIMINATION

Fact Pattern 35-2A (Questions A17–A18 apply) Beth, who has a disability, is an employee of Corporate Office Company (COC). After the installation of new doors on COC’s building, Beth finds it nearly impossible to get in and out. For repeatedly failing to be on time, COC replaces Beth with Dian, who does not have a disability. A17. Refer to Fact Pattern 35-2A. To succeed with a claim against COC under the Americans with Disabilities Act, Beth will have to show that a. b. c. d.

Beth consistently met the essential requirements of her job. COC refused to make reasonable accommodation for Beth. Dian is unqualified for Beth’s position. the doors were installed as an act of intentional discrimination.

ANSWER: B NAT: AACSB Reflective

PAGE:

693 AICPA Legal

TYPE:

A18. Refer to Fact Pattern 35-2A. To successfully defend against Beth’s claim, COC will have to show that a. b. c. d.

Beth consistently failed to meet the essential requirements of her job. COC cannot make changes to the doors without undue hardship. Dian is qualified for Beth’s position. the doors were not installed as an act of intentional discrimination.

ANSWER: B NAT: AACSB Reflective

PAGE:

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TYPE:

A19. Vincenzo is a pilot for Wayfarer Airlines. Wayfarer’s policy is to restrict Vincenzo and its other pilots from flight responsibilities after a certain age. This is most likely a. b. c. d.

a legitimate bona fide occupational qualification. discrimination on the basis of age. association discrimination. discrimination on the basis of disability.

ANSWER:

PAGE:

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TYPE:

440

TEST BANK A—UNIT SEVEN: AGENCY AND EMPLOYMENT

NAT: AACSB Reflective

AICPA Legal

A20. Jason and Katrina work on the loading dock for Longhaul Transport Company. Jason has a disability. Katrina has seniority. Jason asks for a transfer, which would represent an accommodation for his disability. Longhaul gives the transfer to Katrina on the basis of her seniority. Jason files a suit against Longhaul for discrimination on the basis of his disability. The court is most likely to rule that a. b. c. d.

Katrina’s seniority is a good defense. Jason’s disability is a sufficient basis for relief. Longhaul’s action was a business necessity. Longhaul’s action was a reasonable accommodation.

ANSWER: A NAT: AACSB Reflective

PAGE:

695 AICPA Legal

TYPE:

ESSAY QUESTIONS A1.

With a couple of new ideas regarding software design, Carol and Ray start a partnership that, with business success, becomes Pacific Applications Company. The company grows to include a staff of twenty-one employees. Over time, Pacific develops a new computer operating system. The firm signs licensing contracts with several computer manufacturers, but needs to double the number of its employees to fulfill those contracts. Is Pacific subject to federal antidiscrimination laws? If so, what should it consider in hiring new employees? ANSWER: Pacific is subject to Title VII of the Civil Rights Act of 1964 and the Americans with Disabilities Act of 1990, each of which applies to employers affecting interstate commerce and having fifteen or more employees. Pacific is also subject to the Age Discrimination in Employment Act of 1967, which applies to employers with twenty or more employees. Under these laws, in hiring new employees, Pacific cannot discriminate against any applicant on the basis of race, religion, national origin, gender, age, or disability. A class of persons defined by one or more of these criteria is a protected class. Generally, Pacific's work force should reflect the diversity of the community in which Pacific is located. Pacific may exclude members of protected classes who are qualified applicants only if it has a

CHAPTER 35: EMPLOYMENT DISCRIMINATION

441

reason that is genuinely related to an important job interest and only if no reasonable accommodation is possible. For most positions, such a claim would be hard to substantiate. PAGES: 681–682, 688–690 & 691–694 TYPE: = NAT: AACSB Reflective AICPA Decision Modeling

442 A2.

TEST BANK A—UNIT SEVEN: AGENCY AND EMPLOYMENT

Gelato Cheese Company, a major processor of cheese sold throughout the United States, employs one hundred workers at its principal processing plant. The plant is located in Heartland Corners, which has a population that is 50 percent white and 25 percent African American, with the balance Hispanic American, Asian American, and others. Gelato requires a high school diploma as a condition of employment for its cleaning crew. Threefourths of the white population completed high school, compared with only one-fourth of those in the minority groups. Gelato has an all-white cleaning crew. Has Gelato violated the Civil Rights Act of 1964? Explain. ANSWER: An employer can legally impose an educational requirement if the requirement is directly related to, and necessary for, performance of the job. In this situation, the employer is requiring a high school diploma as a condition of employment for its cleaning crew. A high school diploma is not related to, or necessary for, the competent performance of a job on a cleaning crew. Gelato as an employer falls under the Civil Rights Act of 1964. Therefore, if someone were to challenge Gelato’s practices, a court would be likely to consider the disparate impact that the educational requirement had on Gelato’s hiring of minorities. Gelato’s educational requirement resulted in its hiring an all-white cleaning crew in an area in which 75 percent of the pool of qualified applicants were minorities. Therefore, Gelato’s educational requirement would likely be considered unintentional (disparate-impact) discrimination against minorities. PAGE: 682 NAT: AACSB Reflective

TYPE: N AICPA Decision Modeling

Chapter 36 Sole Proprietorships and Franchises N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

The simplest form of business is a sole proprietorship. ANSWER: T NAT: AACSB Analytic

A2.

TYPE:

PAGE:

706 TYPE: AICPA Critical Thinking

A franchise is a contractual arrangement. ANSWER: T NAT: AACSB Analytic

A4.

706 AICPA Legal

A franchise contract may use only one type of business organization—the sole proprietorship. ANSWER: F NAT: AACSB Reflective

A3.

PAGE:

706 AICPA Legal

TYPE:

In a sole proprietorship, the proprietor shares the burden of any losses or liabilities incurred by the business enterprise with the government. 441

442

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

ANSWER: F NAT: AACSB Analytic

PAGE:

707 AICPA Legal

TYPE:

443

CHAPTER 36: SOLE PROPRIETORSHIPS AND FRANCHISES

A5.

A sole proprietorship lacks continuity on the death of the proprietor. ANSWER: T NAT: AACSB Analytic

A6.

PAGE:

708 AICPA Legal

TYPE:

PAGE:

708 AICPA Legal

TYPE:

A manufacturer’s license to a dealer to sell a product is a chain-style business operation. ANSWER: F NAT: AACSB Reflective

A9.

TYPE:

A franchisee can operate as an independent businessperson but cannot then obtain the advantages of a national organization. ANSWER: F NAT: AACSB Analytic

A8.

707 AICPA Legal

A franchisor is the purchaser of a franchise. ANSWER: F NAT: AACSB Analytic

A7.

PAGE:

709 TYPE: AICPA Critical Thinking

A franchise relationship may be governed by the law covering sales contracts as expressed in Article 2 of the Uniform Commercial Code. ANSWER: T NAT: AACSB Reflective

PAGE:

709 TYPE: AICPA Critical Thinking

A10. Laws governing franchising are designed in part to prevent franchisors from terminating franchises without good cause. ANSWER: T NAT: AACSB Analytic

PAGE:

709 AICPA Legal

TYPE:

A11. Some states require franchisors to provide presale disclosures to prospective franchisees. ANSWER: T NAT: AACSB Analytic

PAGE:

710 AICPA Legal

TYPE:

444

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

445

CHAPTER 36: SOLE PROPRIETORSHIPS AND FRANCHISES

A12. If a party to a franchise contract fails to perform its contractual duties, the other party may be subject to a lawsuit for breach of contract. ANSWER: F NAT: AACSB Analytic

PAGE:

711 AICPA Legal

TYPE:

A13. A franchisee ordinarily pays an initial fee or lump sum price for a franchise license. ANSWER: T NAT: AACSB Analytic

PAGE:

711 AICPA Legal

TYPE:

A14. Typically, the franchisee determines the territory to be served by the franchise. ANSWER: F NAT: AACSB Analytic

PAGE:

711 AICPA Legal

TYPE:

A15. The day-t-day operation of franchise business normally is left up to the franchisee. ANSWER: T NAT: AACSB Analytic

PAGE:

711 AICPA Legal

TYPE:

A16. A franchisor can require a franchisee to purchase certain supplies from the franchisor at an established price. ANSWER: T NAT: AACSB Analytic

PAGE:

712 AICPA Legal

TYPE:

A17. The duration of a franchise is a matter to be determined between the parties. ANSWER: T NAT: AACSB Analytic

PAGE:

712 AICPA Legal

TYPE:

A18. Normally, a franchisee receives a windfall on the termination of a franchise.

446

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

ANSWER: F NAT: AACSB Reflective

PAGE:

713 TYPE: AICPA Critical Thinking

A19. Good faith and fair dealing are not important in terminating a franchise relationship. ANSWER: F NAT: AACSB Analytic

PAGE:

713 AICPA Legal

TYPE:

A20. A franchisor’s decision to terminate a franchise may be made in the normal course of business operations. ANSWER: T NAT: AACSB Analytic

PAGE:

715 AICPA Legal

TYPE:

MULTIPLE CHOICE QUESTIONS A1.

Hermione starts up, and assumes the financial risk of, Graphic Ads, a new enterprise. Hermione is a. b. c. d.

a franchisee. a franchisor. an agent. a sole proprietor.

ANSWER: D NAT: AACSB Reflective A2.

PAGE:

706 AICPA Legal

TYPE:

Carl sells Direct Marketing Enterprises, a sole proprietorship, to Eve. This is a transfer of a. b. c. d.

a license. a trade name. the formula to make a product. the ownership of the business.

ANSWER: D NAT: AACSB Reflective

PAGE:

706 AICPA Legal

TYPE:

CHAPTER 36: SOLE PROPRIETORSHIPS AND FRANCHISES

447

448 A3.

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

Jim organized, and owns and operates, Jim’s Landscaping Service in the simplest form of business organization. This is a. b. c. d.

a corporation. a limited liability company. a partnership. a sole proprietorship.

ANSWER: D NAT: AACSB Reflective A4.

TYPE:

limited by state statute and varies from state to state. limited to the extent of capital expenditures. limited to the extent of his or her original investment. unlimited.

ANSWER: D NAT: AACSB Reflective

PAGE:

707 AICPA Legal

TYPE:

Real Events Promotion Corporation licenses trademarks to Stadium Souvenirs, Inc., to use in selling caps, sweatshirts, and similar goods. This is a. b. c. d.

a franchise. an entrepreneur. a principal-agent relationship. a sole proprietorship.

ANSWER: A NAT: AACSB Reflective A6.

706 AICPA Legal

Jody owns KuppaJava Kiosks, a sole proprietorship. Jody’s liability is a. b. c. d.

A5.

PAGE:

708 AICPA Legal

TYPE:

Otis is interested in buying a franchise from Plentiful Markets Inc. This transaction, like other franchise deals, is regulated to protect a. b. c.

certain types of anticompetitive agreements. franchisors from dishonest prospective franchisees. prospective franchisees from dishonest franchisors.

449

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the government’s power to restrict freedom of contract.

ANSWER: C NAT: AACSB Reflective

PAGE:

709 AICPA Legal

TYPE:

450 A7.

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

Pilar is interested in buying a franchise from Quixotic Bike Corporation. Quixotic must disclose material facts that Pilar needs to make an informed decision concerning this purchase, according to a. b. c. d.

no law. the Petroleum Marketing Practices Act of 1979. the Federal Trade Commission’s Franchise Rule. the Uniform Commercial Code.

ANSWER: C NAT: AACSB Reflective A8.

709 AICPA Legal

TYPE:

Burger Heaven, Inc., conducts a chain-style franchise. This involves the transfer to Chester, one of its franchisees, of a. b. c. d.

a license. a trade name. the formula to make a product. the ownership of the business.

ANSWER: B NAT: AACSB Reflective A9.

PAGE:

709 AICPA Legal

TYPE:

709 TYPE: AICPA Critical Thinking

Effervescent Soda Bottling Company is a. b. c. d.

a chain-style franchise. a distributorship franchise. a manufacturing franchise. no franchise.

ANSWER: C NAT: AACSB Reflective

PAGE:

A10. In-Home Maid Service Company uses a Web site to provide downloadable information to prospective franchises. This online information is the equivalent of an offer that must comply with a. b. c.

the Automobile Dealers’ Franchise Act of 1965. the Petroleum Marketing Practices Act of 1979. the Federal Trade Commission’s Franchise Rule.

451

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the state Franchise Disclosure Document, or FDD.

ANSWER: C NAT: AACSB Reflective

PAGE:

709 AICPA Legal

TYPE:

452

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

A11. Leo buys an exclusive territory in which he is authorized to set up a plant to make Midwest Dairy, Inc., products. After receiving the formula, Leo begins making Nice Ice-brand ice cream and other Midwest products. This is a. b. c. d.

a chain-style franchise. a distributorship franchise. a manufacturing franchise. no franchise.

ANSWER: C NAT: AACSB Reflective

PAGE:

709 TYPE: AICPA Critical Thinking

A12. Echo enters into an agreement with Deep Pan Pies, Inc., to operate a franchise in Centre City. Later, Deep grants franchises to others within the city. Echo files a suit to close them. If the court rules in Echo’s favor it will most likely be on the ground that a. b. c. d.

Deep violated the antitrust laws. Deep violated the implied covenant of good faith and fair dealing. Echo paid a franchise fee. Echo was the first Deep franchisee in Centre City.

ANSWER: B NAT: AACSB Reflective

PAGE:

711 AICPA Legal

TYPE:

A13. Flip Gymnastics & Karate, Inc., grants a franchise to Gibby to operate a Flip gym. Flip may require Gibby to pay the franchisor a percentage of his a. b. c. d.

annual sales or volume of business. weekly payroll expense. monthly overhead savings. none of the choices.

ANSWER: A NAT: AACSB Reflective

PAGE:

711 AICPA Legal

TYPE:

453

CHAPTER 36: SOLE PROPRIETORSHIPS AND FRANCHISES

A14. Stacy contracts to buy a franchise from Tender Steak House Company. In this contract, as in most franchise contracts, the determination of the territory to be served is made by a. b. c. d.

a court. Stacy. Tender Steak House. the Federal Trade Commission.

ANSWER: C NAT: AACSB Reflective

PAGE:

711 AICPA Legal

TYPE:

A15. Dominique buys a franchise from Cheyenne Artisans, Inc. This provides Cheyenne with an outlet for the firm’s goods, some of which Dominique is required to buy at an established price. In their agreement, Cheyenne may also specify a. b. c. d.

the franchisor’s non-culpability for any breach of the agreement. the franchise’s business organizational form. the retail prices at which Dominique must resell the goods she buys. none of the choices.

ANSWER: B NAT: AACSB Reflective

PAGE:

711 AICPA Legal

TYPE:

A16. Inger is a franchisee of Honey Bear Restaurants, LLC Their contract gives Honey Bear the right to control virtually all aspects of Inger’s operation, including the hiring of employees. One of the employees, Joris commits a tort against Kiley, one of Inger’s customers. Kiley files a suit against Honey Bear. Honey Bear is most likely a. b. c. d.

liable because Honey Bear exercises control over Inger’s operation. liable because Kiley was Honey Bear’s customer. not liable because Inger is responsible for the employees. not liable because Kiley was Inger’s customer.

ANSWER: A NAT: AACSB Reflective

PAGE:

711 AICPA Legal

TYPE:

454

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

A17. Sweet Styles, Inc., a franchisor of clothing stores, wishes to standardize the pricing practices of its franchisees that have engaged in price-cutting to increase their respective shares of the market. The most prudent action might be for Sweet to a. b. c. d.

mandate the prices at which its franchisees sell their products. suggest the prices at which its franchisees sell their products. require its franchisees to buy inventory exclusively from Sweet. threaten its franchisees with a material breach of contract.

ANSWER: B NAT: AACSB Reflective

PAGE:

712 AICPA Legal

TYPE:

A18. Star Resorts Corporation wants to terminate its franchise arrangement with Tony. Their contract does not provide for notice of termination or set a time for winding up the business. This means that to wind up, Tony a. b. c. d.

has a reasonable time, with notice. has whatever time A determines, with or without notice. is entitled to notice, but nothing more. must close immediately.

ANSWER: A NAT: AACSB Reflective

PAGE:

712 AICPA Legal

TYPE:

A19. Bret buys a franchise from Comida Mexicano Ltd. If their agreement is like most franchise agreements, it will specify that Comida can terminate the franchise a. b. c. d.

at will. for any reason. for cause only. for no reason.

ANSWER: C NAT: AACSB Reflective

PAGE:

712 AICPA Legal

TYPE:

455

CHAPTER 36: SOLE PROPRIETORSHIPS AND FRANCHISES

A20. Mika buys a Nuance Cabinets, Inc., franchise, which the franchisor later terminates. In determining whether the termination was proper, a court will generally a. b. c. d.

balance the rights of both parties. emphasize the right of Nuance to its business operation. focus on the right of Mika to be dealt with fairly. underscore the interest of consumers in affordability.

ANSWER: A NAT: AACSB Reflective

PAGE:

715 AICPA Legal

TYPE:

ESSAY QUESTIONS A1.

Owen plans to open Owen’s Pets Store, a pet supplies outlet, and to hire Quinn and Ruth. Owen will invest only his own money. He does not expect to make any profit for at least two years and to make almost no profit for the first three years, but he hopes to expand eventually. Which form of business organization would be most appropriate? ANSWER: When a business is relatively small and is not diversified, employs relatively few people, has modest profits, and is not likely to expand significantly or require extensive financing in the immediate future, the most appropriate form for doing business may be a sole proprietorship. A sole proprietorship is easier and less costly to start than other forms of business, because few legal forms are involved. This form is also more flexible than other forms because the owner is free to make business decisions without consulting others. Taxes are paid on the business’s income as the owner’s personal income. PAGES: 706–708 NAT: AACSB Reflective

A2.

TYPE: = AICPA Decision Modeling

Doc’s Sports Club and Elite Fitness Corporation enter into a franchise agreement that provides for its termination at any time for “cause.” Doc’s fails to meet Elite’s membership sales quota. Is this “cause” for termination? Explain.

456

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

ANSWER: Yes, a franchisee’s failure to meet a franchisor’s specified sales quota can be sufficient cause for the franchisor’s termination of the franchise relationship. The parties to a franchise agreement determine what will constitute the grounds for a termination of their relationship, and set these bases out in their agreement. Here, the parties’ agreement specified a sales quota for the franchisee to meet. The agreement also provided that it could be terminated for “cause.” When the franchisee failed to satisfy the quota, it breached the franchise agreement. In other cases, if a franchisor is acting in good faith, “cause” may include any other breach of the franchise agreement, as well as the death or the disability of the franchisee, or the insolvency of the franchisee. Typically, in all cases, notice must be provided, and a franchisee must be given reasonable time to wind up the business. PAGES: 712–713 NAT: AACSB Reflective

TYPE: = AICPA Decision Modeling

Chapter 37 Partnerships and Limited Liability Partnerships N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

An association cannot be a partnership without an express agreement. ANSWER: F NAT: AACSB Analytic

A2.

TYPE:

PAGE:

719 AICPA Legal

TYPE:

A sharing of profits from the ownership of property creates a presumption that a partnership exists. ANSWER: F NAT: AACSB Analytic

A4.

719 AICPA Legal

The Uniform Partnership Act governs the operation of partnerships. ANSWER: T NAT: AACSB Analytic

A3.

PAGE:

720 AICPA Legal

TYPE:

Federal law permits a partnership to be treated as an entity in suits in federal courts. 453

454

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

ANSWER: T NAT: AACSB Analytic

PAGE:

720 AICPA Legal

TYPE:

455

CHAPTER 37: PARTNERSHIPS AND LIMITED LIABILITY PARTNERSHIPS

A5.

A partner’s profit from a partnership is taxed as income to the firm. ANSWER: F NAT: AACSB Analytic

A6.

PAGE:

721 AICPA Legal

TYPE:

PAGE:

722 AICPA Legal

TYPE:

Under no circumstances can a non-partner be regarded as an agent whose acts are binding on the partnership. ANSWER: F NAT: AACSB Analytic

A9.

TYPE:

In a general partnership, all partners have equal rights in managing the partnership. ANSWER: T NAT: AACSB Analytic

A8.

720 AICPA Legal

Withdrawal from a partnership for a term prematurely does not constitute a breach of the partnership agreement. ANSWER: F NAT: AACSB Analytic

A7.

PAGE:

722 AICPA Legal

TYPE:

A partner owes to the partnership and the other partners a duty of loyalty. ANSWER: T NAT: AACSB Analytic

PAGE:

723 AICPA Legal

TYPE:

A10. A partner who pursues his or her own interests automatically violates the partner’s fiduciary duties to the partnership. ANSWER: F NAT: AACSB Analytic

PAGE:

725 AICPA Legal

TYPE:

A11. In a general partnership, the partners are personally liable for the debts of the partnership. ANSWER: T NAT: AACSB Analytic

PAGE:

726 AICPA Legal

TYPE:

456

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

457

CHAPTER 37: PARTNERSHIPS AND LIMITED LIABILITY PARTNERSHIPS

A12. A partner always has the power and the right to dissociate from the partnership. ANSWER: F NAT: AACSB Analytic

PAGE:

727 AICPA Legal

TYPE:

A13. On a partner’s dissociation, his or her duty of loyalty to the partnership ends. ANSWER: T NAT: AACSB Analytic

PAGE:

728 AICPA Legal

TYPE:

A14. Any event that makes its unlawful for a partnership to continue its business will result in dissolution. ANSWER: T NAT: AACSB Analytic

PAGE:

729 AICPA Legal

TYPE:

A15. A limited liability partnership allows its partners to avoid personal liability for the malpractice of other partners. ANSWER: T NAT: AACSB Analytic

PAGE:

730 AICPA Legal

TYPE:

A16. In a limited partnership, a limited partner has full responsibility for the partnership and for all its debts. ANSWER: F NAT: AACSB Analytic

PAGE:

731 AICPA Legal

TYPE:

A17. In a limited partnership, with the exception of the right to participate in management, limited partners have essentially the same rights as general partners. ANSWER: T NAT: AACSB Analytic

PAGE:

732 AICPA Legal

TYPE:

A18. Some states have passed laws prohibiting the withdrawal of limited partners from a limited partnership. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

458

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

ANSWER: T NAT: AACSB Analytic

PAGE:

734 AICPA Legal

TYPE:

A19. An assignment of the interest of a limited partner dissolves a limited partnership. ANSWER: F NAT: AACSB Analytic

PAGE:

734 AICPA Legal

TYPE:

A20. In a limited liability limited partnership, the liability of a general partner is limited to the amount of capital he or she has invested in the partnership. ANSWER: T NAT: AACSB Analytic

PAGE:

735 AICPA Legal

TYPE:

MULTIPLE CHOICE QUESTIONS A1.

Guy and Hanna do business as G-H Associates. If G-H is a partnership, it is governed by the Uniform Partnership Act a. b. c. d.

in the absence of an express agreement. in the absence of an implied agreement. only in the presence of an express agreement. under all circumstances.

ANSWER: A NAT: AACSB Reflective A2.

PAGE:

719 AICPA Legal

TYPE:

Noah and Orin do business as Pest Control Partners. In most states, for the purposes of suing and being sued, Pest Control Partners would be treated as a. b. c. d.

an aggregate of the individual partners. a natural person. an entity. a non-existent party.

459

CHAPTER 37: PARTNERSHIPS AND LIMITED LIABILITY PARTNERSHIPS

ANSWER: C NAT: AACSB Reflective

PAGE:

720 AICPA Legal

TYPE:

460

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

Fact Pattern 37-1A (Questions A3–A4 apply) Desi starts up eSites, an Internet service, and leases office space in a building owned by Fred. The lease requires Desi to pay Fred a base rental of $1,250, plus 10 percent of eSites’ profits, each month. The term is two years. Desi hires Gwen to work at eSites’ tech support desk at an hourly wage of $12.50, plus a commission of 10 percent of the profits. The term is also two years. A3.

Refer to Fact Pattern 37-1A. Desi and Fred are a. b. c. d.

not partners, because Fred does not have an ownership interest or management rights in eSites. not partners, because the lease includes a “base rental.” not partners, because the rent includes only 10 percent of the profits. partners in a partnership for two years.

ANSWER: A NAT: AACSB Reflective A4.

720 AICPA Legal

TYPE:

Refer to Fact Pattern 37-1A. Desi and Gwen are a. b. c. d.

not partners, because Gwen does not have an ownership interest or management rights in eSites. not partners, because the pay includes an hourly wage. not partners, because the pay includes only 10 percent of the profits. partners in a partnership for two years.

ANSWER: A NAT: AACSB Reflective A5.

PAGE:

720 AICPA Legal

TYPE:

Sable and Rex agree while talking on the phone to form a partnership to deal in transfers of real property. Their partnership agreement is legally binding a. b. c. d.

only if a copy of the agreement is filed in the appropriate state office. only if the agreement is reduced to writing. only if the parties exchange valid consideration. without more.

ANSWER:

PAGE:

721

TYPE:

CHAPTER 37: PARTNERSHIPS AND LIMITED LIABILITY PARTNERSHIPS

NAT: AACSB Reflective

AICPA Legal

461

462 A6.

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

Rona and Savannah do business as Treasure Island Traders. In acting on the firm’s behalf in a deal with Unlimited Potential, Inc., Rona makes an honest error in overestimating the profit. To her firm, Rona is a. b. c. d.

liable for breach of the duty of care. liable for breach of the duty of economic sense. liable for breach of the duty of loyalty. not liable.

ANSWER: D NAT: AACSB Reflective A7.

723 AICPA Legal

TYPE:

Megan and Nicole do business as One World Realty. In acting on the firm’s behalf in a deal with Property Acquisition Company, Megan fails to account for the profit. To her firm, Megan is a. b. c. d.

liable for breach of the duty of care. liable for breach of the duty of economic sense. liable for breach of the duty of loyalty. not liable.

ANSWER: C NAT: AACSB Reflective A8.

PAGE:

723 AICPA Legal

TYPE:

Corbin, a partner in Doctors Medical Clinic, applies for a loan with Evermore Bank allegedly on Doctors’ behalf but without the authorization of the other partners. Evermore knows that Corbin is not authorized to take out the loan. Corbin defaults on the loan. Liability for its unpaid amount is imposed on a. b. c. d.

Corbin and Doctors, jointly. Corbin only. Doctors only. Evermore only.

ANSWER: B NAT: AACSB Reflective

PAGE:

725 AICPA Legal

TYPE:

463

CHAPTER 37: PARTNERSHIPS AND LIMITED LIABILITY PARTNERSHIPS

Fact Pattern 37-2A (Questions A9–A10 apply) Luann and Mace are partners in Networx, a computer peripherals firm. A9.

Refer to Fact Pattern 37-2A. Luann signs a contract with Oleo Chips, a retail component supplier, apparently on Networx’s behalf. The contract is binding on a. b. c. d.

Luann, Mace, and Networx. Luann only. Networx only. Oleo only.

ANSWER: A NAT: AACSB Reflective

PAGE:

725 AICPA Legal

TYPE:

A10. Refer to Fact Pattern 37-2A. Mace dissociates from Networx. Luann signs a contract with Physik Drives, a wholesale component supplier, apparently on Networx’s behalf. Physik does not know of Mace’s dissociation. The contract is binding on a. b. c. d.

Luann, Mace, and Networx. Luann only. Networx only. Physik only.

ANSWER: A NAT: AACSB Reflective

PAGE:

725 AICPA Legal

TYPE:

A11. Fay is admitted to Global Associates, an existing partnership. A partnership debt incurred before the date of her admission comes due. Fay is a. b. c. d.

not liable for the debt. only liable for the debt up to the amount of her capital contribution. personally liable only to the extent the other partners do not pay. personally liable to the full extent of the debt.

ANSWER: B NAT: AACSB Reflective

PAGE:

727 AICPA Legal

TYPE:

464

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

A12. Clu, Dolf, and Elton do business as Fertile Valley Farm. Clu’s relationship to the firm ends, but it continues to do business. This is a. b. c. d.

dissociation. dissolution. winding up. wrongful.

ANSWER: A NAT: AACSB Reflective

PAGE:

727 AICPA Legal

TYPE:

A13. Hud and Iggy form Jerry-Bilt Construction to enter into a contract to build one bridge. Under their partnership agreement, Jerry-Bilt is to dissolve when the bridge is built. Iggy signs a contract for the firm to build a second bridge. JerryBilt a. b. c. d.

dissolves as soon as the first bridge is built. dissolves as soon as the second bridge is built. dissolves immediately on Iggy’s signing of the second contract. does not dissolve.

ANSWER: A NAT: AACSB Reflective

PAGE:

728 AICPA Legal

TYPE:

A14. Kelly, Lars, and Mona agree to be partners in Neighborhood Delivery Service (NDS), splitting the profits equally. Kelly contributes 67 percent of the capital. When NDS is dissolved, its liabilities are greater than its assets. The losses are paid by a. b. c. d.

all of the partners in proportion to their capital contributions. all of the partners in proportion to their shares of the profits. Kelly because she contributed most of the capital. Lars and Mona because they contributed the least of the capital.

ANSWER: B NAT: AACSB Reflective

PAGE:

729 AICPA Legal

TYPE:

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A15. Vasili is considering forms of business organization for Vasili’s Designs, an architectural firm. An advantage of a limited liability partnership is that partners may be able to avoid personal liability for a. b. c. d.

any partnership obligation. only other partners’ wrongdoing. only partnership obligations that exceed capital contributions. only partnership obligations that fall within capital contributions.

ANSWER: A NAT: AACSB Reflective

PAGE:

730 AICPA Legal

TYPE:

A16. Jack and Kyra are partners in Law Firm, LLP, a limited liability partnership. Jack supervises Kyra, who negligently fails to appear in court on behalf of Milo, a client. Liability to Milo rests with a. b. c. d.

Jack and Kyra. Jack only. Kyra only. neither Jack nor Kyra.

ANSWER: A NAT: AACSB Reflective

PAGE:

730 AICPA Legal

TYPE:

A17. Fern and Gray want to form a limited partnership to manage two restaurants: Café Latte and Deli Delite. In most states, a limited partnership will be created when a. b. c. d.

a certificate of limited partnership is filed. a partnership agreement is executed. the business for which the firm is formed actually opens its doors. the partners make their capital contributions.

ANSWER: A NAT: AACSB Reflective

PAGE:

731 AICPA Legal

TYPE:

466

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

A18. Lucy is a limited partner in Metro Contractors, a limited partnership, which cannot pay its debts. Lucy is personally liable for the debts a. b. c. d.

in proportion to the number of partners in the firm. to no extent. to the extent of her capital contribution. to the full extent.

ANSWER: C NAT: AACSB Reflective

PAGE:

731 AICPA Legal

TYPE:

A19. Venture Capital, LP, is a limited partnership. Its limited partners include more than 150 sophisticated investors and investment professionals. A Venture limited partner loses his or her limited liability if he or she a. b. c. d.

acts as the firm’s manager. does not participate in the firm’s management. invests in Unified Fund, one of Venture’s competitors. votes on the firm’s sale or dissolution.

ANSWER: A NAT: AACSB Reflective

PAGE:

731 AICPA Legal

TYPE:

A20. Energy Unlimited, LP, is a limited partnership to which its partners, including Fink, have contributed capital. Energy’s creditors include Graves Engineering, Inc. On Energy’s dissolution, its assets will be distributed to pay a. b. c. d.

Fink and Graves proportionately. Fink first. Graves first. neither Fink nor Graves.

ANSWER: C NAT: AACSB Reflective

PAGE:

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TYPE:

ESSAY QUESTIONS

CHAPTER 37: PARTNERSHIPS AND LIMITED LIABILITY PARTNERSHIPS

A1.

467

Sally and Tom decide to go into business, selling discounted merchandise through their Web site “e-Buy.” They sign a partnership agreement that requires Sally to contribute $12,000 and Tom to contribute $8,000 in capital to start the firm. The agreement also states that only Sally will have the authority to bind the partnership in deals with third parties, but the agreement says nothing about the management of the firm or a division of profits. Without Sally’s knowledge, Tom tells United Computer Products, Inc., that he represents the firm and signs a contract with United to buy hard drives for resale on e-Buy. In the first year, e-Buy makes a profit of $50,000. What are the partners’ rights with respect to the management of the firm? Is the partnership bound to the contract with United? Do the partners split the first year’s profits? If so, how much is each entitled to? ANSWER: The partners’ rights with respect to the management of the partnership business and the profits of the firm is a split of each equally. The partnership is bound to the contract with United. Because the agreement is silent on the subject of the firm’s management, each partner has an equal right to manage the business. For the same reason, each partner has a right to an equal share of the profits, even though their capital contributions were not equal. The apparent authority of a partner to bind a partnership in dealing with third parties cannot be limited by an agreement between the partners of which third parties are unaware. Every partner is an agent of the partnership and may bind the firm to contracts with third parties. Only if the third party is aware that a partner’s authority is limited will the liability of the firm also be limited to the same extent. PAGES: 721, 722–723 & 725–726 NAT: AACSB Reflective

A2.

TYPE: = AICPA Decision Modeling

International Exports, L.P., is a limited partnership, with $100,000 in declared but unpaid profits. International’s creditors include Friendly Credit Corporation for $5,000 and Gwen, one of International’s limited partners, also for $5,000. When Harry, one of International’s general partners, decides to retire, the other general partners vote to liquidate and dissolve the firm. The limited partners, who are not asked their opinions, want International to continue in business and file a suit against the general partners to compel this result. Can the court order International to continue? If not,

468

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

what is the priority of the distribution of International’s assets on its dissolution? ANSWER: A court cannot order a partnership to continue in business if all of its general partners do not consent. Thus, the court in this problem could not order International to continue even if all of its limited partners outnumbered its general partners and wanted the firm to continue. The priority of the distribution of a limited partnership’s assets on its dissolution is: first, creditors, including partner-creditors, for outstanding debts; second, partners and former partners for unpaid distributions of declared profit; third, partners for their capital contributions; and fourth, partners for the remaining assets, which would be undeclared profit, in proportion to their shares of distributions. Here, this would mean that on International’s dissolution, Friendly and Gwen would be paid first. All of the partners would then receive their shares of the remaining $100,000 in declared but unpaid profit and next the amounts of their capital contributions. Any remaining assets would be divided among the partners according to their shares of the profit. PAGES: 734–735 NAT: AACSB Reflective

TYPE: = AICPA Decision Modeling

Chapter 38 Limited Liability Companies and Special Business Forms N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

A limited liability company can be taxed as a partnership. ANSWER: T NAT: AACSB Analytic

A2.

739 AICPA Legal

TYPE:

Limited liability companies (LLCs) are governed by state LLC statutes. ANSWER: T NAT: AACSB Analytic

A3.

PAGE:

739 AICPA Legal

TYPE:

Foreign investors are not allowed to become limited liability company members. ANSWER: F NAT: AACSB Analytic

PAGE:

740 AICPA Legal

TYPE:

466 A4.

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

A limited liability company (LLC) formed in one state but doing business in another state is referred to in the second state as a foreign LLC. ANSWER: T NAT: AACSB Analytic

PAGE:

740 AICPA Legal

TYPE:

467

CHAPTER 38: LIMITED LIABILITY COMPANIES & SPECIAL BUSINESS FORMS

A5.

A limited liability company is not a citizen of any state. ANSWER: F NAT: AACSB Analytic

A6.

PAGE:

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TYPE:

PAGE:

742 AICPA Legal

TYPE:

A limited liability company, as an entity, pays no taxes. ANSWER: T NAT: AACSB Analytic

A9.

TYPE:

The liability of the members of a limited liability company is limited to the amount of their investments. ANSWER: T NAT: AACSB Analytic

A8.

741 AICPA Legal

A limited liability company as an entity is not liable for the wrongful acts or omissions of its members. ANSWER: F NAT: AACSB Analytic

A7.

PAGE:

743 AICPA Legal

A limited liability company that has only one member cannot be taxed. ANSWER: F NAT: AACSB Analytic

PAGE:

743 AICPA Legal

TYPE:

A10. State limited liability company statutes are uniform. ANSWER: F NAT: AACSB Analytic

PAGE:

744 AICPA Legal

A11. In many states, an operating agreement is not required for a limited liability company to exist. ANSWER: T NAT: AACSB Reflective

PAGE:

744 TYPE: AICPA Critical Thinking

A12. A limited liability company must be managed by non-member managers. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

468

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

ANSWER: F NAT: AACSB Analytic

PAGE:

744 AICPA Legal

TYPE:

A13. Most limited liability company statutes have no provisions regarding members’ meetings. ANSWER: T NAT: AACSB Analytic

PAGE:

745 AICPA Legal

TYPE:

A14. Some states provide that in the absence of an agreement to the contrary each member of a limited liability company has one vote. ANSWER: T NAT: AACSB Analytic

PAGE:

745 AICPA Legal

TYPE:

A15. When a member dissociates form a limited liability company, the member’s duty of loyalty continues. ANSWER: F NAT: AACSB Analytic

PAGE:

746 AICPA Legal

TYPE:

A16. Normally, a dissociated member of an limited liability company (LLC) has the right to force the LLC to dissolve. ANSWER: F NAT: AACSB Analytic

PAGE:

746 AICPA Legal

TYPE:

A17. A joint venture resembles a partnership but is taxed like a corporation. ANSWER: F NAT: AACSB Analytic

PAGE:

747 AICPA Legal

TYPE:

A18. A joint venturer can be held personally liable for the venture’s debts. ANSWER: T NAT: AACSB Analytic

PAGE:

747 AICPA Legal

TYPE:

469

CHAPTER 38: LIMITED LIABILITY COMPANIES & SPECIAL BUSINESS FORMS

A19. The members of a joint venture have more implied and apparent authority than the partners in a partnership. ANSWER: F NAT: AACSB Analytic

PAGE:

748 AICPA Legal

TYPE:

A20. A business trust resembles a corporation. ANSWER: T NAT: AACSB Analytic

PAGE:

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470

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

MULTIPLE CHOICE QUESTIONS A1.

Sustainable Café LLC is a limited liability company. Like any other LLC, unless Sustainable Café chooses otherwise, the firm will be taxed as a. b. c. d.

a corporation. a joint venture. a partnership. a cooperative.

ANSWER: C NAT: AACSB Reflective A2.

TYPE:

all states. no states. less than one-fifth of the states. only Wyoming and Florida.

ANSWER: A NAT: AACSB Analytic

PAGE:

739 AICPA Legal

TYPE:

Bee Hive Honey, LLC’s members include Chad. For purposes of suing and being sued, Bee Hive Honey is a. b. c. d.

an aggregate of Chad and the other members. a natural person in the members’ “family.” a legal entity apart from the owners. a non-participating third party.

ANSWER: C NAT: AACSB Reflective A4.

739 AICPA Legal

Esteban and Florian want to form a limited liability company (LLC) to manage their business, Gordian Nuts. LLC statutes have been adopted in a. b. c. d.

A3.

PAGE:

740 AICPA Legal

TYPE:

Greta is a member of Hovercraft LLC. As a member, Greta is a. b.

a manager or officer, but not an owner. an investor, but not a manager, officer, or owner.

471

CHAPTER 38: LIMITED LIABILITY COMPANIES & SPECIAL BUSINESS FORMS

c. d.

an owner. a participant, but not an investor, manager, officer, or owner.

ANSWER: C NAT: AACSB Reflective

PAGE:

740 AICPA Legal

TYPE:

472 A5.

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

Coco is considering forms of business organization for her concessions business—Coco’s Cupcakes. Most states require that a limited liability company have at least a. b. c. d.

no minimum number of members. at least one member. at least two members. at least three members, including at least one general partner.

ANSWER: B NAT: AACSB Analytic A6.

740 AICPA Legal

TYPE:

Location! Realty LLC is a limited liability company (LLC). Like other LLCs, for federal jurisdictional purposes, Location! Realty is most likely a citizen of a. b. c. d.

all states. every state in which its members are citizens. no state. only the state in which it was formed.

ANSWER: B NAT: AACSB Reflective A7.

PAGE:

741 AICPA Legal

TYPE:

Jay is a member of Kappa, LLC, a limited liability company. Jay is liable for Kappa’s debts a. b. c. d.

in proportion to the total number of members. to the extent of his investment in the firm. to the extent that the other members do not pay the debts. to the full extent.

ANSWER: B NAT: AACSB Reflective

PAGE:

742 AICPA Legal

TYPE:

473

CHAPTER 38: LIMITED LIABILITY COMPANIES & SPECIAL BUSINESS FORMS

A8.

B2B, LLC, is a limited liability company. Among its members, a dispute arises that the operating agreement does not cover. The dispute is governed by a. b. c. d.

the applicable state LLC statute. the federal Uniform LLC Law. the principles of partnership law. the state corporation statute.

ANSWER: A NAT: AACSB Reflective A9.

PAGE:

744 AICPA Legal

TYPE:

CPA Accounting, LLC, is a limited liability company. If the law in CPA’s state is like the law in most states, unless the members have agreed otherwise, participants in the firm’s management will be considered to include a. b. c. d.

all members. no member. one member. two members, including at least one general partner.

ANSWER: A NAT: AACSB Reflective

PAGE:

744 AICPA Legal

TYPE:

A10. Cecilia’s Day Spa, LLC, is a member-managed limited liability company. If the law in Cecilia’s state is like the law in most states, unless the members have agreed otherwise, voting rights are apportioned according to a. b. c. d.

capital contributions. participation in management. the number of members. transactions with the firm.

ANSWER: A NAT: AACSB Reflective

PAGE:

745 AICPA Legal

TYPE:

474

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

A11. Flip is a member of Great States Trucking LLC. Flip’s relationship to Great States ends, but the firm continues to do business. This is a. b. c. d.

dissociation. dissolution. winding up. wrongful.

ANSWER: A NAT: AACSB Reflective

PAGE:

745 AICPA Legal

TYPE:

A12. Build-Rite Construction Corporation and Deals-R-Us, Inc., combine their efforts to build an entertainment complex. Their form of business organization is a. b. c. d.

a business trust. a joint stock company. a joint venture. a syndicate.

ANSWER: C NAT: AACSB Reflective

PAGE:

746 AICPA Legal

TYPE:

A13. Binary Corporation and Coda, Inc., two software firms, wish to combine their research and development capabilities to make a special, limited edition computer game. The appropriate legal entity for this project is most likely a. b. c. d.

a business trust. a joint stock company. a joint venture. a syndicate.

ANSWER: C NAT: AACSB Reflective

PAGE:

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TYPE:

475

CHAPTER 38: LIMITED LIABILITY COMPANIES & SPECIAL BUSINESS FORMS

A14. Rafaela Art Gallery and Sequoia Exhibitions form a joint venture. When a dispute arises, Rafaela files a suit against Sequoia. The court is most likely to apply the same principles to this joint venture as it applies to a. b. c. d.

business trusts. cooperatives. corporations. partnerships.

ANSWER: D NAT: AACSB Reflective

PAGE:

747 AICPA Legal

TYPE:

A15. Delta Music Company and eDistribution & Marketing Corporation form a joint stock company. A joint stock company can be formed for, at the most, a. b. c. d.

an implied duration of not more than six months. a perpetual existence. a single activity or transaction. a stated duration of not more than one year.

ANSWER: B NAT: AACSB Analytic

PAGE:

748 AICPA Legal

TYPE:

A16. Owen, Petunia, Quentin, and Rita combine to finance the building of Surfside Stores, a waterfront shopping mall. Their selected form of business organization is an investment group, or a. b. c. d.

a business trust. a joint stock company. a joint venture. a syndicate.

ANSWER: D NAT: AACSB Reflective

PAGE:

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TYPE:

476

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

A17. Accumulated Capital Corporation and Business Funds, Inc., form a joint stock company. The ownership of a joint stock company is represented by a. b. c. d.

partnership certificates. shares of stock. title documents. trust certificates.

ANSWER: B NAT: AACSB Analytic

PAGE:

748 AICPA Legal

TYPE:

A18. Downwind Land Corporation and Leeward Investments Company transfer their property to Financial Managers, Inc., which manages the property and distributes the profits to Downwind and Leeward. This form of a business organization is a. b. c. d.

a business trust. a joint stock company. a joint venture. a syndicate.

ANSWER: A NAT: AACSB Reflective

PAGE:

749 AICPA Legal

TYPE:

A19. Vela and other farmers in Washington County form a business organization to provide, without profit, an economic service to its members. This is a. b. c. d.

a business trust. a cooperative. a corporation. a joint stock company.

ANSWER: B NAT: AACSB Reflective

PAGE:

749 AICPA Legal

TYPE:

477

CHAPTER 38: LIMITED LIABILITY COMPANIES & SPECIAL BUSINESS FORMS

A20. Buyers Club is an incorporated cooperative. Like other incorporated cooperatives, Buyers Club distributes profits to its owners on the basis of a. b. c. d.

the amount of capital they contribute. the degree to which they participate in management. their transactions with the cooperative. the requirements of the state in which it was incorporated.

ANSWER: C NAT: AACSB Reflective

PAGE:

749 AICPA Legal

TYPE:

ESSAY QUESTIONS A1.

Petra. Queenie, and Randall want to form Sales-to-Infinity, LLC (limited liability company). What should they provide in their operating agreement? If they fail to include some important operating details, what determines these details? ANSWER: The provisions of a limited liability company operating agreement typically set out the firm’s management, the division of profits, how membership may be transferred, what events cause dissolution, and so on. If there is no agreement, the applicable state statutes determine these issues. In the absence of a statute, the courts often apply the principles of partnership law. PAGE: 744 NAT: AACSB Reflective

A2.

TYPE: = AICPA Decision Modeling

Alpha Communications, a partnership, publishes consumer periodicals, including Science Today. Beta Publications, also a partnership, publishes professional periodicals, including Technology Review. Alpha and Beta agree to pool their resources in a one-time deal to print and market a book, Unlimited Future. In contracting with Gamma Printing Supplies, Inc., for paper to print the book, Alpha commits fraud. In contracting with Delta Literary Agency for articles to use in Technology Review, Beta commits fraud. Gamma and Delta file suits against Alpha and Beta. What type of business organization has Alpha and Beta formed? To whom, if anyone, is Alpha liable? To whom, if anyone, is Beta liable?

478

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

ANSWER: Alpha and Beta formed a joint venture. Alpha is liable to Gamma, but not to Delta. Beta is liable to Gamma and Delta. A joint venture is an association of two or more business entities that combine their efforts or property for a single transaction or a series of related transactions or projects. This is what Alpha and Beta did: they combined efforts to undertake a single project, the publishing of the book Unlimited Future. Each joint venturer is liable to a third party for the actions of the other members of the joint venture in pursuit of the enterprise’s common goal. Each member is not liable to a third party for the actions of other members pursuing their own separate interests. In this question, Alpha and Beta are each liable for Alpha’s fraud to Gamma, because it was committed in pursuit of their common enterprise. Only Beta is liable for Beta’s fraud to Delta, however, because the fraud was committed in pursuit of Beta’s interest only. PAGES: 746–748 NAT: AACSB Reflective

TYPE: = AICPA Decision Modeling

Chapter 39 Corporate Formation and Financing N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

A corporation is a legal entity created and recognized by federal law. ANSWER: F NAT: AACSB Analytic

A2.

753 AICPA Legal

TYPE:

Corporate profits can be subject to double taxation. ANSWER: T NAT: AACSB Analytic

A3.

PAGE:

754 AICPA Legal

A holding company is a company whose business activity consists of holding shares in another company. ANSWER: T NAT: AACSB Analytic

PAGE:

754 AICPA Legal

TYPE:

478 A4.

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

A corporation cannot be held liable for the criminal acts of its employees. ANSWER: F NAT: AACSB Analytic

PAGE:

754 AICPA Legal

TYPE:

479

CHAPTER 39: CORPORATE FORMATION AND FINANCING

A5.

A corporation whose shares are not publicly traded is a partnership. ANSWER: F NAT: AACSB Analytic

A6.

PAGE:

756 AICPA Legal

TYPE:

PAGE:

756 AICPA Legal

TYPE:

For liability purposes, some courts treat professional corporations somewhat like a partnership. ANSWER: T NAT: AACSB Analytic

A9.

TYPE:

An agreement between shareholders to restrict the transfer of a closely held corporation’s stock is illegal. ANSWER: F NAT: AACSB Reflective

A8.

756 AICPA Legal

A corporation formed in another country but doing business in the United States is referred to in the United States as an alien corporation. ANSWER: T NAT: AACSB Analytic

A7.

PAGE:

759 AICPA Legal

TYPE:

A promoter is personally liable for a preincorporation contract until the corporation assumes liability. ANSWER: T NAT: AACSB Analytic

PAGE:

759 AICPA Legal

TYPE:

A10. The articles of incorporation serve as a primary source of authority for a corporation. ANSWER: T NAT: AACSB Analytic

PAGE:

761 AICPA Legal

TYPE:

A11. Each incorporator must have an interest in the corporation. ANSWER: F NAT: AACSB Analytic

PAGE:

762 AICPA Legal

TYPE:

480

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

481

CHAPTER 39: CORPORATE FORMATION AND FINANCING

A12. Bylaws can conflict with the incorporation statute or the articles of incorporation. ANSWER: F NAT: AACSB Analytic

PAGE:

763 AICPA Legal

TYPE:

A13. Courts in some states will treat an alleged corporation as if it were an actual corporation for the purpose of determining the rights and liabilities in particular circumstances. ANSWER: T NAT: AACSB Analytic

PAGE:

764 AICPA Legal

TYPE:

A14. A corporation generally can engage in any act and enter into any contract available to a natural person. ANSWER: T NAT: AACSB Analytic

PAGE:

765 AICPA Legal

TYPE:

A15. To pierce the corporate veil means to ignore the corporate structure, exposing the shareholders to personal liability. ANSWER: T NAT: AACSB Analytic

PAGE:

766 AICPA Legal

TYPE:

A16. A court will not pierce the corporate veil of a corporation that is merely too “thinly” capitalized. ANSWER: F NAT: AACSB Analytic

PAGE:

766 AICPA Legal

TYPE:

A17. Stocks represent the borrowing of funds by firms. ANSWER: F NAT: AACSB Analytic

PAGE:

769 AICPA Legal

A18. Common stock provides a proportionate interest in the corporation with regard to control.

482

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

ANSWER: T NAT: AACSB Analytic

PAGE:

769 AICPA Legal

TYPE:

A19. Firms are obligated to return a principal amount per share to each holder of common stock. ANSWER: F NAT: AACSB Reflective

PAGE:

769 TYPE: AICPA Critical Thinking

A20. Venture capital is capital provided to new business ventures by professional, outside investors. ANSWER: T NAT: AACSB Reflective

PAGE:

771 AICPA Legal

TYPE:

MULTIPLE CHOICE QUESTIONS A1.

Ivy and Justin want to form and do business as Kayak Adventures Corporation. A corporation can be owned by a. b. c. d.

natural persons only. artificial persons only. artificial or natural persons. neither “artificial” nor “natural” persons.

ANSWER: C NAT: AACSB Reflective A2.

PAGE:

753 AICPA Legal

TYPE:

Skyla and Terry want to form and do business as Unique Boutique Corporation. Most statutes governing the formation and use of corporations are guided by a. b. c. d.

city or county corporate codes. the Entrepreneur’s Corporate Handbook. the federal Administrative Procedure Act. the Revised Model Business Corporation Act.

ANSWER:

PAGE:

753

TYPE:

CHAPTER 39: CORPORATE FORMATION AND FINANCING

NAT: AACSB Reflective

483

AICPA Legal

484

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

Fact Pattern 39-1A (Questions A3–A4 apply) Mountaintop Clearview Corporation authorizes Niles, its employee, to oversee its timber operation. In the course of his employment, Niles disposes of the operation’s waste illegally. Orson is a Mountaintop shareholder. A3.

Refer to Fact Pattern 39-1A. With respect to Mountaintop and Niles, liability for this crime most likely rests with a. b. c. d.

neither Mountaintop nor Niles. Mountaintop and Niles. Mountaintop only. Niles only.

ANSWER: B NAT: AACSB Reflective A4.

754 AICPA Legal

TYPE:

Refer to Fact Pattern 39-1A. Liability for Niles’s act most likely rests with Orson to a. b. c. d.

no extent. the proportionate extent of the number of shares Orson owns. the amount of Orson’s investment in the firm. the full extent.

ANSWER: C NAT: AACSB Reflective A5.

PAGE:

754 AICPA Legal

TYPE:

Digitech is a foreign corporation, which means that Digitech a. b. c. d.

is an alien corporation. is chartered in a foreign country. may be required to obtain a certificate of authority to do business. may do business only in foreign countries.

ANSWER: C NAT: AACSB Reflective

PAGE:

756 AICPA Legal

TYPE:

485

CHAPTER 39: CORPORATE FORMATION AND FINANCING

A6.

Convenience Mart, Inc., is a closely held corporation. Convenience Mart is a. b. c. d.

eligible to make public offerings of securities. exempt from filing a certificate of incorporation. generally allowed to restrict the transfer of its stock. taxed in the same manner as a partnership.

ANSWER: C NAT: AACSB Reflective A7.

TYPE:

corporations. estates. individuals. partnerships.

ANSWER: D NAT: AACSB Reflective

PAGE:

759 AICPA Legal

TYPE:

Jim and Kiley are architects and members of J&K, P.C., a professional corporation. Jim supervises Luc, an employee of the firm. As a member, Jim a. b. c. d.

is personally liable for any tort committed by Kiley. has limited liability for any of Kiley’s acts of malpractice. has no liability for any torts committed by Kiley or Luc. may be personally liable for malpractice committed by Luc.

ANSWER: D NAT: AACSB Reflective A9.

757 AICPA Legal

Boutique Corporation would like to change its corporate status to avoid income taxes at the corporate level. To qualify, the shareholders must not be a. b. c. d.

A8.

PAGE:

759 AICPA Legal

TYPE:

To qualify as a professional corporation, Medical Clinic, P.C., a. b. c. d.

must be a corporation formed by professionals. must grant all shareholders voting rights. must have at least thirty-five shareholders. all of the choices.

486

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

ANSWER: A NAT: AACSB Reflective

PAGE:

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TYPE:

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CHAPTER 39: CORPORATE FORMATION AND FINANCING

A10. Sullivan and Taylor want to form a corporation to provide catering services. The first step in the incorporation procedure is to a. b. c. d.

file the articles of incorporation. hold the first organizational meeting. secure a corporate name. select a state in which to incorporate.

ANSWER: D NAT: AACSB Reflective

PAGE:

760 TYPE: AICPA Critical Thinking

A11. Suki is a registered agent for Trans-state Trucking, Inc. (TTI), which incorporated in Utah. As a registered agent, Suki a. b. c. d.

agreed to buy stock in TTI before it existed. applied to Utah on behalf of TTI to obtain its corporate charter. does business for TTI in Utah. receives legal documents on behalf of TTI.

ANSWER: D NAT: AACSB Reflective

PAGE:

761 AICPA Legal

TYPE:

A12. Stan incorporates his scientific products business as Tech Precision Supply, Inc. This firm could have perpetual existence in a. b. c. d.

a few states. all states. most states. no states.

ANSWER: C NAT: AACSB Reflective

PAGE:

762 AICPA Legal

TYPE:

A13. Hailey and Ike hold the first organizational meeting of Java Kiosk Corporation. Probably the most important function of this meeting is a. b. c.

adopting Java’s bylaws. agreeing on Java’s purpose. drafting Java’s articles.

488

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

obtaining a charter for Java.

ANSWER: A NAT: AACSB Reflective

PAGE:

763 TYPE: AICPA Critical Thinking

489

CHAPTER 39: CORPORATE FORMATION AND FINANCING

A14. Start-Up Corporation substantially complies with all conditions precedent to incorporation. Start-Up has a. b. c. d.

corporate existence by estoppel. de facto existence. de jure existence. ultra vires existence.

ANSWER: C NAT: AACSB Reflective

PAGE:

763 AICPA Legal

TYPE:

A15. Eager Beaver Corporation fails to hold a meeting to adopt bylaws. Under this circumstance, Eager Beaver will still be treated as a legal corporation in those states that recognize the common law doctrine of a. b. c. d.

corporation by estoppel. de facto corporation. de jure corporation. ultra vires.

ANSWER: B NAT: AACSB Reflective

PAGE:

763 AICPA Legal

TYPE:

A16. Quixotic Company claims to be a corporation but it is not. Rachel signs a contract with Quixotic that is not performed. In Rachel’s suit against Quixotic, a court will likely recognize the firm as a. b. c. d.

a corporation by estoppel. a de facto corporation. a de jure corporation. an ultra vires corporation.

ANSWER: A NAT: AACSB Reflective

PAGE:

764 AICPA Legal

TYPE:

490

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

A17. Wild & Scenic River Tours, Inc., is a corporation. Wild & Scenic has the implied power to a. b. c. d.

issue stocks and bonds. execute contracts and negotiable instruments. buy and sell (or lease) property. perform all acts reasonably appropriate and necessary to accomplish its corporate purposes.

ANSWER: D NAT: AACSB Reflective

PAGE:

765 TYPE: AICPA Critical Thinking

A18. Omega Corporation makes and markets digital timers, clocks, and related products. Like other business corporations, Omega issues securities to a. b. c. d.

increase its market share. obtain financing. reduce its production costs. safeguard its facilities.

ANSWER: B NAT: AACSB Reflective

PAGE:

769 TYPE: AICPA Risk Analysis

A19. Mari buys 500 shares of common stock in National Livestock Traders, Inc. As a shareholder of record, Mari owns a proportionate interest in terms of a. b. c. d.

control, earnings, and net assets. control only. earnings and net assets only. neither control nor earnings and net assets.

ANSWER: A NAT: AACSB Reflective

PAGE:

769 TYPE: AICPA Critical Thinking

491

CHAPTER 39: CORPORATE FORMATION AND FINANCING

A20. Discount Factory Outlets, Inc., issues bonds. Bonds a. b. c. d.

are issued by businesses only. are sometimes referred to as “stock with preferences.” have maturity dates. require periodic interest payments from their owners.

ANSWER: C NAT: AACSB Reflective

PAGE:

769 TYPE: AICPA Critical Thinking

ESSAY QUESTIONS A1.

Agents and employees of Apples Corporation and Oranges Corporation are convicted of conspiring to violate a federal law that is punishable by a term of imprisonment and a fine. Can the corporations be held liable for these crimes? If so, how can they be punished? ANSWER: Yes, the corporations can be held liable for the crimes of their agents and employees. As for punishment, the corporations cannot be imprisoned, but they can be fined. Under certain circumstances, corporate directors and officers may also be imprisoned for the criminal acts of agents and employees under their direct supervision. PAGES: 754–755 NAT: AACSB Reflective

A2.

TYPE: = AICPA Decision Modeling

Incredible eSales Corporation is a new Internet business. How can Incredible eSales obtain capital to finance its operations? ANSWER: Generally, to obtain capital, a corporation issues securities, principally stocks and bonds. A security usually represents either an ownership interest in a firm (stock) or a debt owed by the firm (bond). Some debt is also in the form of accounts payable and notes payable, which can, like bonds, be marketed to obtain capital. The two major types of stock are common stock and preferred stock. Other possibilities include venture capital financing and private equity capital. Venture capital is provided by professional, outside investors, who often also offer managerial and technical expertise. In

492

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

return for their capital and advice, these investors expect to be given some control over the financed firm’s decisions. Private equity capital can come from a pool of investors who combine their funds. These investors often expect to buy an entire corporation, however, and reorganize it, selling off parts of the firm to pay debts. Incredible E-Sales, or any business firm, can also obtain capital by borrowing against or selling some of its assets. PAGES: 769–771 NAT: AACSB Reflective

TYPE: = AICPA Decision Modeling

Chapter 40 Corporate Directors, Officers, and Shareholders N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

Shareholders are the ultimate authority in every corporation. ANSWER: F NAT: AACSB Reflective

A2.

775 TYPE: AICPA Critical Thinking

Many qualifications are required for directors. ANSWER: F NAT: AACSB Analytic

A3.

PAGE:

775 AICPA Legal

TYPE:

An amendment to the articles of incorporation can create a new position on the board of directors. ANSWER: T NAT: AACSB Analytic

PAGE:

776 AICPA Legal

TYPE:

490 A4.

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

An inside director is a director who does not hold a management position in the corporation. ANSWER: F NAT: AACSB Analytic

A5.

PAGE:

777 AICPA Legal

TYPE:

PAGE:

777 AICPA Legal

TYPE:

PAGE:

778 AICPA Legal

TYPE:

The ordinary rules of agency normally do not apply to the employment of corporate officers. ANSWER: F NAT: AACSB Analytic

A9.

Officers hire the directors and other executive employees. ANSWER: F NAT: AACSB Analytic

A8.

TYPE:

Committees of the board of directors focus on individual subjects. ANSWER: T NAT: AACSB Analytic

A7.

776 AICPA Legal

Directors have a right to participate in all board of directors’ meetings. ANSWER: T NAT: AACSB Analytic

A6.

PAGE:

778 AICPA Legal

TYPE:

A director or officer is required to exercise the care that an ordinarily prudent person would exercise in similar circumstances. ANSWER: T NAT: AACSB Analytic

PAGE:

779 AICPA Legal

TYPE:

A10. Directors are entitled to use corporate funds for their personal advantage. ANSWER: F NAT: AACSB Analytic

PAGE:

780 AICPA Legal

TYPE:

A11. Directors are not obligated to refrain from self-dealing. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

491

CHAPTER 40: CORPORATE DIRECTORS, OFFICERS, & SHAREHOLDERS

ANSWER: F NAT: AACSB Analytic

PAGE:

780 AICPA Legal

TYPE:

492

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

A12. A director must make a full disclosure of any potential conflict of interest that might arise in any corporate transaction. ANSWER: T NAT: AACSB Analytic

PAGE:

782 AICPA Legal

TYPE:

A13. Shareholders are co-owners of the corporation. ANSWER: T NAT: AACSB Analytic

PAGE:

783 AICPA Legal

A14. Shareholders’ meetings need not occur at any certain interval. ANSWER: F NAT: AACSB Analytic

PAGE:

784 AICPA Legal

TYPE:

A15. In some states, obtaining the unanimous written consent of shareholders is a permissible alternative to holding a shareholders’ meeting. ANSWER: T NAT: AACSB Analytic

PAGE:

785 AICPA Legal

TYPE:

A16. Dividends are distributed on the basis of possession of a stock certificate. ANSWER: F NAT: AACSB Analytic

PAGE:

786 AICPA Legal

TYPE:

A17. Dividends can be paid in the stock of the corporation that is paying the dividends. ANSWER: T NAT: AACSB Analytic

PAGE:

787 AICPA Legal

TYPE:

A18. Every shareholder is entitled to examine specified corporate records. ANSWER: T NAT: AACSB Analytic

PAGE:

788 AICPA Legal

TYPE:

A19. When a third party harms a corporation, only the shareholders can bring a suit in the corporation’s name against that party. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

493

CHAPTER 40: CORPORATE DIRECTORS, OFFICERS, & SHAREHOLDERS

ANSWER: F NAT: AACSB Analytic

PAGE:

788 AICPA Legal

TYPE:

494

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

A20. Shareholders are personally liable for the debts of a corporation. ANSWER: F NAT: AACSB Analytic

PAGE:

790 AICPA Legal

TYPE:

MULTIPLE CHOICE QUESTIONS A1.

Gillian is a director of Fizzy Soda Company. As a director, Gillian can act as an agent to bind Fizzy a. b. c. d.

in all circumstances. in no circumstances. to any contract in which Fizzy does not have a conflict of interest. to any contract that represents a corporate opportunity for Gillian.

ANSWER: B NAT: AACSB Reflective A2.

775 AICPA Legal

TYPE:

Rhea is a director of Spex Corporation, which makes and sells sunglasses and other eyewear. As a Spex director, Rhea sits on the board, which a. b. c. d.

governs Spex. is governed by the Spex incorporators. is governed by the Spex officers. is governed by the Spex shareholders.

ANSWER: A NAT: AACSB Reflective A3.

PAGE:

775 AICPA Legal

TYPE:

Lon and Merry act as the incorporators for NuGame Corporation. After the first board of directors is chosen, subsequent directors are elected by a majority vote of NuGame’s a. b. c. d.

board of directors. incorporators. officers. shareholders.

495

CHAPTER 40: CORPORATE DIRECTORS, OFFICERS, & SHAREHOLDERS

ANSWER: D NAT: AACSB Reflective A4.

PAGE:

775 AICPA Legal

TYPE:

Frida, Gayla, and Hart occupy the positions of director on the board of Integral Components Corporation. With respect to these directors, a quorum is the minimum number a. b. c. d.

who must be at odds in a dispute to call for its resolution. who must be present to validly transact business. whom the shareholders may remove from office at any one time. whose positions must be vacant to warrant an election.

ANSWER: B NAT: AACSB Reflective

PAGE:

776 AICPA Legal

TYPE:

Reba is a director of Quantum Mechanix Corporation. Reba’s rights, as a director, do not include a right to a. b. c. d.

indemnification. inspection. participation. self-dealing.

ANSWER: D NAT: AACSB Reflective A7.

TYPE:

board of directors. incorporators. officers. shareholders.

ANSWER: A NAT: AACSB Reflective

A6.

775 AICPA Legal

Bret and Courtney form Delite Day Care, Inc. Ultimate responsibility for policy decisions necessary to the management of corporate affairs rests with Delite’s a. b. c. d.

A5.

PAGE:

777 AICPA Legal

TYPE:

Melba and Leon are directors of Fresh Foods, Inc. The right of Melba and Leon to be notified of special meetings of the board is the right to

496

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

a. b. c. d.

compensation. indemnification. participation. self-dealing.

ANSWER: C NAT: AACSB Reflective

PAGE:

777 AICPA Legal

TYPE:

497

CHAPTER 40: CORPORATE DIRECTORS, OFFICERS, & SHAREHOLDERS

A8.

Frawsty Corporation distributes beverages in the greater Northwest. Frawsty’s board of directors can delegate some of its functions to a. b. c. d.

Frawsty’s incorporators. Frawsty’s officers. Frawsty’s shareholders. no one.

ANSWER: B NAT: AACSB Reflective A9.

PAGE:

777 AICPA Legal

TYPE:

VeriVisual Company makes HD 3D film and video equipment. VeriVisual is like most corporations in that its officers are hired by the firm’s a. b. c. d.

board of directors. incorporators. other officers. shareholders.

ANSWER: A NAT: AACSB Reflective

PAGE:

778 AICPA Legal

TYPE:

A10. Odell is a director of Price Rite, Inc. As a director, with respect to the corporation, Odell is a. b. c. d.

a fiduciary. a forum. a proxy. a quorum.

ANSWER: A NAT: AACSB Reflective

PAGE:

778 AICPA Legal

TYPE:

498

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

A11. Luke is a director of Motor Parts Corporation. Luke makes decisions with respect to Motor Parts in good faith, in what Luke believes is the firm’s best interest, and without violating any duties owed to it. If, despite these circumstances, Luke exercises poor business judgment, under the business judgment rule Luke is a. b. c. d.

immune from liability. liable only to the extent that Luke gains as a result. liable only to the extent that Motor Parts suffers as a result. wholly liable.

ANSWER: A NAT: AACSB Reflective

PAGE:

779 AICPA Legal

TYPE:

A12. Gladys is a shareholder of Frozen Yogurt, Inc. As a shareholder, Gladys must approve a. b. c. d.

amending the bylaws. declaring a corporate dividend. hiring a chief executive officer. issuing additional shares.

ANSWER: A NAT: AACSB Reflective

PAGE:

783 AICPA Legal

TYPE:

A13. Heidi and Ian are directors and shareholders of Globe Software, Inc. Heidi’s written authorization to Ian to vote Heidi’s shares at a Globe shareholders’ meeting is a. b. c. d.

a violation of the duty of loyalty. a preemptive right. a proxy. a quorum.

ANSWER: C NAT: AACSB Reflective

PAGE:

784 AICPA Legal

TYPE:

499

CHAPTER 40: CORPORATE DIRECTORS, OFFICERS, & SHAREHOLDERS

A14. Thor Power Products Corporation permits the election of its directors by cumulative voting. This a. b. c. d.

allows minority shareholders to be represented on the board. assures directors that they will be selected by their peers. guarantees Thor’s executive officers of the final choice. insures against persons who may “cloud” the corporate direction.

ANSWER: A NAT: AACSB Reflective

PAGE:

785 AICPA Legal

TYPE:

A15. Fiona owns one share of stock in GR8 Boards Corporation, as evidenced by a stock certificate. Fiona loses the certificate. Her ownership of the stock is a. b. c. d.

forfeited immediately. forfeited within ten days of a third party’s claim to ownership. forfeited within thirty days if she cannot find the certificate. not affected.

ANSWER: D NAT: AACSB Reflective

PAGE:

786 AICPA Legal

TYPE:

A16. In all states, Exercise & Fitness Club Company and other corporations can pay dividends from a. b. c. d.

gross profits. net profits. retained earnings. surplus.

ANSWER: C NAT: AACSB Reflective

PAGE:

787 AICPA Legal

TYPE:

A17. Bev is a shareholder of All-Terrain Vehicle Company. As a shareholder, Bev does not have a. b. c. d.

a right to compensation. dividend rights. inspection rights. preemptive rights.

500

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

ANSWER: A NAT: AACSB Reflective

PAGE:

788 AICPA Legal

TYPE:

501

CHAPTER 40: CORPORATE DIRECTORS, OFFICERS, & SHAREHOLDERS

Fact Pattern 40-1A (Questions A18–A19 apply) Ruben is a shareholder of Speed Bikes Company (SBC). When the directors fail to undertake an action to redress a wrong suffered by SBC, Ruben files a suit on the firm’s behalf. A18. Refer to Fact Pattern 40-1A. Ruben’s suit is a shareholder’s a. b. c. d.

indemnification suit. derivative suit. proxy suit. preemptive suit.

ANSWER: B NAT: AACSB Reflective

PAGE:

788 AICPA Legal

TYPE:

A19. Refer to Fact Pattern 40-1A. Any damages recovered by Ruben’s suit will normally go to a. b. c. d.

Ruben. SBC. SBC’s directors. the state in which SBC is incorporated.

ANSWER: B NAT: AACSB Reflective

PAGE:

788 AICPA Legal

TYPE:

A20. Clark is a shareholder of Bedrest Mattress Company. Clark will be deemed to have a fiduciary duty to Bedrest and its minority shareholders if he has a. b. c. d.

preferred stock. a right of first refusal. a sufficient number of shares to exercise de facto control. watered stock.

ANSWER: C NAT: AACSB Reflective

PAGE:

791 AICPA Legal

TYPE:

502

A1.

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

Tank is a director and the majority shareholder of Unique New Investment Corporation (UNIC). Tank buys, for $1,500, an option to purchase a tract of real estate for $50,000. Tank forms Vista Property, Inc., to hold the option. As the majority shareholder, and thus controlling director, of UNIC, Tank orders the firm to authorize the purchase of the land from Vista Property for $500,000. Tank then has Vista Property buy the land, sell it to UNIC, and loan the money to UNIC for the purchase at a 10 percent interest rate. Wim, a minority shareholder in UNIC, complains to UNIC’s board, which takes no action. Wim files a suit against Tank on UNIC’s behalf. Will Wim prevail? Explain. ANSWER: Yes. Wim will succeed in the suit against Tank, on UNIC’s behalf. This is a shareholder’s derivative suit, which may be brought by a shareholder on behalf of a corporation. Some wrong must have been done to the firm, and before the suit can be brought, the board of directors must be told of the wrong and refuse to act on it. Here, the wrong has been committed by Tank, the controlling director of the firm. A director is a fiduciary with respect to his or her firm, with a duty to act in good faith, a duty of loyalty, and a duty to make a full disclosure in any transaction in which the director has a conflict of interest. In this problem, the director made an undisclosed profit in a transaction with the corporation, a transaction that the director ordered the corporation to make. As a majority shareholder, Tank owed similar duties to Wim and any other minority shareholders. Tank also breached these duties. PAGES: 780–782 & 791–793 NAT: AACSB Reflective

A2.

TYPE: = AICPA Decision Modeling

Dimitri is a director and shareholder of Equitable Corporation and of Four Square Products, Inc. A resolution comes before the Equitable board to compete with Four Square. What is Dimitri’s responsibility? ANSWER: A director cannot support a business that competes directly with a corporation on the board of which the director sits. The director’s fiduciary duty requires him to fully disclose the conflict of interest. Most likely, the director in these circumstances will have to resign from one of the boards.

CHAPTER 40: CORPORATE DIRECTORS, OFFICERS, & SHAREHOLDERS

PAGES: 782 NAT: AACSB Reflective

TYPE: = AICPA Decision Modeling

503

Chapter 41 Corporate Merger, Consolidation, and Termination N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

Federal law establishes the specific procedures for mergers. ANSWER: F NAT: AACSB Analytic

A2.

796 AICPA Legal

TYPE:

The power to consolidate is conferred by statute. ANSWER: T NAT: AACSB Analytic

A3.

PAGE:

796 AICPA Legal

When a merger takes place, the surviving corporation issues shares or pays fair consideration to the shareholders of the corporation that ceases to exist. ANSWER:

PAGE: 499

797

TYPE:

500

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

NAT: AACSB Analytic A4.

In a consolidation, two or more corporations combine so that each corporation continues to exist. ANSWER: F NAT: AACSB Analytic

A5.

PAGE:

797 AICPA Legal

TYPE:

PAGE:

797 AICPA Legal

TYPE:

PAGE:

797 AICPA Legal

TYPE:

A short-form merger is the legal combination of two or more corporations online. ANSWER: F NAT: AACSB Analytic

A9.

TYPE:

How the value of the shares of each merging corporation will be determined is stated after the plan of merger has been approved. ANSWER: F NAT: AACSB Analytic

A8.

797 AICPA Legal

The board of directors of each corporation involved must approve a merger. ANSWER: T NAT: AACSB Analytic

A7.

PAGE:

In a share exchange, some or all of the shares of one corporation are exchanged for some or all of the shares of another corporation. ANSWER: T NAT: AACSB Analytic

A6.

AICPA Legal

PAGE:

798 AICPA Legal

TYPE:

Once a dissenting shareholder elects appraisal rights, the shareholder loses his or her shareholder status. ANSWER: T NAT: AACSB Analytic

PAGE:

798 AICPA Legal

TYPE:

A10. A corporation that is selling all of its assets must obtain approval only from its board of directors. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

501

CHAPTER 41: CORPORATE MERGER, CONSOLIDATION, & TERMINATION

ANSWER: F NAT: AACSB Analytic

PAGE:

799 AICPA Legal

TYPE:

A11. Generally, a corporation that purchases the assets of another corporation is automatically responsible for the liabilities of the selling corporation. ANSWER: F NAT: AACSB Analytic

PAGE:

799 AICPA Legal

TYPE:

A12. A corporate takeover is the process of acquiring control over a corporation by the purchase of a substantial number of the voting shares of its stock. ANSWER: T NAT: AACSB Analytic

PAGE:

801 AICPA Legal

TYPE:

A13. Federal securities laws strictly control the terms, duration, and circumstances under which most tender offers are made. ANSWER: T NAT: AACSB Analytic

PAGE:

801 AICPA Legal

TYPE:

A14. Courts do not apply the business judgment rule to analyze whether the directors acted reasonably in resisting a takeover attempt. ANSWER: F NAT: AACSB Analytic

PAGE:

801 AICPA Legal

TYPE:

A15. A takeover cannot be challenged on the ground that it would result in a substantial increase in the acquiring corporation’s marker power. ANSWER: F NAT: AACSB Analytic

PAGE:

802 AICPA Legal

TYPE:

A16. Dissolution is the legal death of the artificial “person” of a corporation. ANSWER: T NAT: AACSB Analytic

PAGE:

802 AICPA Legal

TYPE:

502

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

A17. When a corporation is dissolved voluntarily, the corporation must file articles of dissolution with the state. ANSWER: T NAT: AACSB Analytic

PAGE:

802 AICPA Legal

TYPE:

A18. If a corporation is dissolved, its asset can be liquidated without further notice to a party who has a claim against the firm. ANSWER: F NAT: AACSB Analytic

PAGE:

802 AICPA Legal

TYPE:

A19. The state can bring an action to dissolve a corporation that has failed to pay its annual taxes. ANSWER: T NAT: AACSB Analytic

PAGE:

805 AICPA Legal

TYPE:

A20. On dissolution, corporate assets are distributed to shareholders according to their stock rights and any remaining assets are used to pay creditors. ANSWER: F NAT: AACSB Analytic

PAGE:

806 AICPA Legal

TYPE:

MULTIPLE CHOICE QUESTIONS A1.

Like other corporations, Biopesticide Corporation can extend its operations through a. b. c. d.

a share exchange. a dissolution. a termination. a winding up.

ANSWER: A NAT: AACSB Reflective

PAGE:

796 AICPA Legal

TYPE:

503

CHAPTER 41: CORPORATE MERGER, CONSOLIDATION, & TERMINATION

A2.

Ridgeway Sand & Gravel Corporation and Quick-Set Paving Company combine so that all that remains after the papers have been signed is Ridgeway. This is a. b. c. d.

a consolidation. a merger. a purchase of assets. a share exchange.

ANSWER: B NAT: AACSB Reflective

PAGE:

796 AICPA Legal

TYPE:

504

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

Fact Pattern 41-1A (Questions A3-A5 apply) Cherry Grove Apartments, Inc., merges with Dutch Elm Realty, Inc. Only Dutch Elm remains. A3.

Refer to Fact Pattern 41-1A. Cherry Grove owed money to Eager Beaver Repair Service and other creditors. After the merger, Dutch Elm must pay a. b. c. d.

all of Cherry Grove’s debts. half of Cherry Grove’s debts. none of Cherry Grove’s debts. only debts that Cherry Grove incurred after a merger was proposed.

ANSWER: A NAT: AACSB Reflective A4.

796 AICPA Legal

TYPE:

Refer to Fact Pattern 41-1A. Cherry Grove held rights in certain real property. After the merger, Dutch Elm acquires the rights a. b. c. d.

automatically. only after completing certain additional statutory procedures. only Cherry Grove’s former shareholders expressly approve. only if the acquisition is a specified result of the merger.

ANSWER: A NAT: AACSB Reflective A5.

PAGE:

796 AICPA Legal

TYPE:

Refer to Fact Pattern 41-1A. The articles of the merger agreement differ from Dutch Elm’s articles of incorporation. The articles a. b. c. d.

are deemed amended to include the differences. are replaced by the merger agreement. effectively prevent the merger. prevail.

ANSWER: A NAT: AACSB Reflective

PAGE:

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TYPE:

505

CHAPTER 41: CORPORATE MERGER, CONSOLIDATION, & TERMINATION

Fact Patter 41-2A (Questions A6–A8 apply) Petro Drilling Corporation combines its assets and debts with those of Oil Refining Company to form New Energy, Inc. A6.

Refer to Fact Pattern 41-2A. The formation of New Energy is a. b. c. d.

a consolidation. a share exchange. a liquidation. a merger.

ANSWER: A NAT: AACSB Reflective A7.

797 AICPA Legal

TYPE:

Refer to Fact Pattern 41-2A. New Energy acquires a. b. c. d.

all of Petro’s and Oil’s assets. half of Petro’s and Oil’s assets. none of Petro’s and Oil’s assets. only assets that Petro and Oil acquired after a combination was proposed.

ANSWER: A NAT: AACSB Reflective A8.

PAGE:

797 AICPA Legal

TYPE:

Refer to Fact Pattern 41-2A. New Energy assumes a. b. c. d.

all of Petro’s and Oil’s assets. half of Petro’s and Oil’s assets. none of Petro’s and Oil’s assets. only debts that Petro and Oil incurred after a combination was proposed.

ANSWER: A NAT: AACSB Reflective

PAGE:

797 AICPA Legal

TYPE:

506 A9.

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

Penn files a suit against Roadway Sign Company While the suit is pending, Roadway consolidates with Synchronized Signal Corporation to form Traffic Management, Inc. Now, liability in the suit, if any, rests with a. b. c. d.

Traffic. Roadway and Synchronized. Penn. no one.

ANSWER: C NAT: AACSB Reflective

PAGE:

797 AICPA Legal

TYPE

A10. Through a certain transaction, Corporate Properties, Inc., acquires all of the shares of Downtown Realty Corporation for some of Corporate Properties’s shares. Both Corporate Properties and Downtown Realty continue to exist. This is a. b. c. d.

a consolidation. a share exchange. a short-form merger. a hold-up.

ANSWER: B NAT: AACSB Reflective

PAGE:

797 AICPA Legal

TYPE:

A11. Precise Device Corporation and Quality Instruments, Inc., decide to merge. This corporate combination does not require the approval of a. b. c. d.

Precise and Quality’s directors. Precise and Quality’s officers. Precise’s shareholders. Quality’s shareholders.

ANSWER: B NAT: AACSB Reflective

PAGE:

797 AICPA Legal

TYPE:

507

CHAPTER 41: CORPORATE MERGER, CONSOLIDATION, & TERMINATION

A12. Vacation Adventures, Inc., and Wild River Tour Company plan to merge. Most likely, the articles of merger will be filed with a. b. c. d.

the county recording office. the local chamber of commerce. the state’s secretary of state. the national travel agents’ association.

ANSWER: C NAT: AACSB Reflective

PAGE:

798 AICPA Legal

TYPE:

A13. Vision Optical Company and Wide Eyes Open, Inc. decide to combine. Xavier, a Wide Eyes shareholder, is dissatisfied with the price that he will receive for his stock. In the absence of fraud or other illegal conduct, Xavier’s exclusive remedy is to a. b. c. d.

exercise an appraisal right. file a suit to delay the process. refuse to agree to the deal, which cannot then proceed. urge other shareholders to insist on a higher price.

ANSWER: A NAT: AACSB Reflective

PAGE:

798 AICPA Legal

TYPE:

A14. Ewa is a shareholder of Farm Fresh Foods, Inc., whose management is considering a tender offer by Growers Market Corporation. Ewa elects appraisal rights. This affects a. b. c. d.

Farm Fresh’s consideration of the offer. Ewa’s shareholder status. Growers Market’s offer. nothing.

ANSWER: B NAT: AACSB Reflective

PAGE:

798 AICPA Legal

TYPE:

508

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

A15. Firelite Corporation wants to purchase all of the assets of Glo Power Products, Inc. Helen is a Glo Power shareholder. The approval of Helen and other Glo Power shareholders is necessary a. b. c. d.

in all circumstances. in no circumstances. only if Firelite plans to pay with unauthorized, unissued stock. only if the purchase extends Firelite’s control over more assets.

ANSWER: A NAT: AACSB Reflective

PAGE:

799 AICPA Legal

TYPE:

A16. Stratified Industries, Inc., increases its holdings, making tender offers in many states. These offers are subject to a. b. c. d.

federal securities laws only. state antitakeover statutes only. neither state statutes nor federal laws. state antitakeover statutes and federal securities laws.

ANSWER: D NAT: AACSB Reflective

PAGE:

801 AICPA Legal

TYPE:

A17. The term for the legal death of the artificial “person” of Skytop Services, Inc., or any other corporation, is a. b. c. d.

surviving corporation. dissolution. takeover. winding up.

ANSWER: B NAT: AACSB Reflective

PAGE:

802 AICPA Legal

TYPE:

A18. Titan Business Corporation can be compelled to dissolve by a. b. c.

its creditors only. itself, through its shareholders and directors, only. itself, through its shareholders and directors, or the state.

509

CHAPTER 41: CORPORATE MERGER, CONSOLIDATION, & TERMINATION

the state only.

ANSWER: C NAT: AACSB Reflective

PAGE:

802 AICPA Legal

TYPE:

510

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

Fact Pattern 41-3A (Questions A19-A20 apply) Atlantic Corporation’s articles of incorporation prohibit a sale of its assets without a vote of the board of directors. Atlantic’s officers sell some assets to Pacific Company without notice to the board. The officers also fail to pay Atlantic’s taxes on time, and some Atlantic funds are not accounted for. A19. Refer to Fact Pattern 41-3A. The appropriate remedy is most likely a. b. c. d.

a sale of the rest of Atlantic’s assets to its directors and shareholders. Atlantic’s consolidation or merger with Pacific. Atlantic’s dissolution. payment of damages to Atlantic’s officers.

ANSWER: C NAT: AACSB Reflective

PAGE:

805 AICPA Legal

TYPE:

A20. Refer to Fact Pattern 41-3A. With respect to Atlantic’s shareholders, this conduct is most likely a. b. c. d.

not oppressive because it is undertaken by Atlantic’s officers. oppressive because Atlantic’s directors may be personally liable. oppressive because Atlantic’s shareholders may be personally liable. oppressive because it departs from the standards of fair dealing.

ANSWER: D NAT: AACSB Reflective

PAGE:

805 AICPA Legal

TYPE:

ESSAY QUESTIONS A1.

Spice Corp. wants to acquire all the assets of Sugar Corp. Spice plans to pay for the assets by issuing its own corporate stock. Spice’s board of directors has already approved the merger. In what circumstances would the approval of Spice’s shareholders be required for this merger? Is the approval of Sugar’s shareholders necessary? Explain. ANSWER: When a corporation acquires all the assets of another corporation by a direct purchase, shareholder approval of the acquiring corporation (Spice) is not required except in two situations: (1) if the acquiring

CHAPTER 41: CORPORATE MERGER, CONSOLIDATION, & TERMINATION

511

Spice Corp. plans to pay for Sugar’s assets with its own stock, and it does not have enough authorized unissued shares to make the purchase, and more shares need to be authorized, shareholder approval is necessary to amend the corporate articles; and (2) if Spice’s stock is sold on a national stock exchange, shareholder approval may be required if Spice plans on issuing a significant number of shares at one time, such as 20 percent or more of its outstanding shares. Sugar—the corporation being acquired (selling all its assets)—is obviously changing its business position substantially. Because of this, approval from both Sugar’s board of directors and shareholders is required. In this case, a dissenting shareholder of Sugar can have appraisal rights. Because no shareholder approval is required for the acquiring corporation, appraisal rights are not available to Spice’s shareholders. PAGES: 799–801 NAT: AACSB Reflective A2.

TYPE: = AICPA Decision Modeling

Florence and Grady pool their money and talents to form Happy Home Builders, Inc. They are the firm’s only shareholders, directors, and officers. After five years of declining home prices, they decide to cease business. Can they simply dissolve their corporation at will? If so, what are the steps in the process? ANSWER: In the problem, Florence and Grady can dissolve their corporation at will acting as directors or, in some states, as shareholders. The process will include notifying the state and the firm’s creditors, liquidating the firm’s assets, and making distributions. Procedures for voluntary dissolution vary in different states. Generally, the directors can vote to submit a proposal of dissolution to the shareholders for a vote at a shareholders’ meeting, or in some states shareholders acting unanimously can vote to initiate dissolution proceedings for a corporation. The corporation must file articles of dissolution with the state and notify its creditors of the dissolution. Under the Revised Model Business Corporation Act, the firm must also set a date at least 120 days after the date of dissolution by which all creditors’ claims must be received. The directors act as trustees of the corporate assets in winding up the firm’s affairs for the benefit of the creditors and shareholders. In this problem, the directors and shareholders are the same persons, but they may be held accountable for any breach of a trustee’s fiduciary duty to the creditors. The corporation’s assets will be liquidated (converted into cash) and distributed

512

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

among its creditors and shareholders according to the applicable rules of preference. Generally, the creditors are paid before the shareholders. PAGES: 802–804 & 806 NAT: AACSB Reflective

TYPE: = AICPA Decision Modeling

Chapter 42 Securities Law and Corporate Governance N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

The Securities and Exchange Commission interprets federal securities laws, but does not investigate violations. ANSWER: F NAT: AACSB Analytic

A2.

812 AICPA Legal

TYPE:

The Securities and Exchange Commission administrative law judges hear cases involving alleged securities law violations. ANSWER: T NAT: AACSB Analytic

A3.

PAGE:

812 AICPA Legal

TYPE:

The definition of security in the Securities Act of 1933 does not include instruments and interests commonly known as securities. ANSWER:

PAGE: 511

814

TYPE:

512

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

NAT: AACSB Analytic A4.

Before filing the registration statement, an issuer cannot sell or offer to sell the securities. ANSWER: T NAT: AACSB Analytic

A5.

PAGE:

816 AICPA Legal

TYPE:

PAGE:

818 AICPA Legal

TYPE:

PAGE:

818 AICPA Legal

TYPE:

Selling securities after the effective date of the registration statement results in liability. ANSWER: F NAT: AACSB Analytic

A9.

TYPE:

Accredited investors include banks, but not investment companies. ANSWER: F NAT: AACSB Analytic

A8.

815 AICPA Legal

Securities that are exempt from the registration requirement can not generally be resold without being registered. ANSWER: F NAT: AACSB Analytic

A7.

PAGE:

Most private, small-business, noninvestment company offers of securities are not exempt from the registration requirements. ANSWER: F NAT: AACSB Analytic

A6.

AICPA Legal

PAGE:

819 AICPA Legal

TYPE:

Insider trading occurs when persons buy or sell securities on the basis of information that is not available to the pubic. ANSWER: T NAT: AACSB Analytic

PAGE:

820 AICPA Legal

TYPE:

A10. The Securities Exchange Act of 1934 is a one-time disclosure law.

CHAPTER 42: SECURITIES LAW & CORPORATE GOVERNANCE 513

ANSWER: F NAT: AACSB Analytic

PAGE:

820 AICPA Legal

TYPE:

514

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

A11. “Forward-looking” financial forecasts are protected against liability for securities fraud. ANSWER: T NAT: AACSB Analytic

PAGE:

822 AICPA Legal

TYPE:

A12. Anyone who wrongfully obtains inside information and trades on it for his or her personal gain can be liable under SEC Rule 10b-5. ANSWER: T NAT: AACSB Analytic

PAGE:

823 AICPA Legal

TYPE:

A13. The Securities and Exchange Commission does not regulate the content of proxy statements. ANSWER: F NAT: AACSB Analytic

PAGE:

824 AICPA Legal

TYPE:

A14. For criminal sanctions to be imposed under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, scienter must not exist. ANSWER: F NAT: AACSB Analytic

PAGE:

824 AICPA Legal

TYPE:

A15. For a defendant to be convicted in a criminal prosecution under the securities laws, there can be no reasonable doubt that the defendant knew he or she was acting wrongfully. ANSWER: T NAT: AACSB Analytic

PAGE:

826 AICPA Legal

TYPE:

A16. The Securities and Exchange Commission can bring a civil action against anyone who aids in a violation of the Securities Exchange Act of 1934. ANSWER: T NAT: AACSB Analytic

PAGE:

827 AICPA Legal

TYPE:

A17. State securities laws apply mainly to intrastate transactions.

CHAPTER 42: SECURITIES LAW & CORPORATE GOVERNANCE 515

ANSWER: T NAT: AACSB Analytic

PAGE:

829 AICPA Legal

TYPE:

516

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

A18. Exemptions from federal securities laws are exemptions from state laws. ANSWER: F NAT: AACSB Reflective

PAGE:

829 TYPE: AICPA Critical Thinking

A19. State corporation statues set up the legal framework for corporate governance. ANSWER: T NAT: AACSB Analytic

PAGE:

830 AICPA Legal

TYPE:

A20. Under the Sarbanes-Oxley Act of 2002, chief executive officers no longer need to certify the accuracy of information in corporate financial statements. ANSWER: F NAT: AACSB Reflective

PAGE:

831 TYPE: AICPA Critical Thinking

MULTIPLE CHOICE QUESTIONS A1.

Frothy Beverage Corporation is a public company whose shares are traded in the public securities markets. Under the Securities Act of 1933, Frothy is required to a. b. c. d.

contribute to the operations of national stock exchanges. disclose financial and other information about its securities. engage in market surveillance to deter undesirable practices. solicit proxies for voting.

ANSWER: B NAT: AACSB Reflective A2.

PAGE:

814 AICPA Legal

TYPE:

RingTone Corporation is a public company whose securities are traded among investors. Under the Securities Act of 1933, a security is a. b. c.

almost any stake in the ownership or debt of a company. an investment that is guaranteed to make a profit. only such common forms of debt and equity as bonds and stocks.

CHAPTER 42: SECURITIES LAW & CORPORATE GOVERNANCE 517

whatever a company represents to the public as a security.

ANSWER: A NAT: AACSB Reflective

PAGE:

814 AICPA Legal

TYPE:

518 A3.

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

Start-Up Enterprises, Inc., completes its registration process and begins advertising the availability of its new issue of securities. Start-Up places a tombstone ad in the financial papers. This ad tells prospective investors a. b. c. d.

about investing. about the company. where to buy the securities. where to obtain a prospectus.

ANSWER: D NAT: AACSB Reflective A4.

815 AICPA Legal

TYPE:

Celfone Corporation is required to file a registration statement with the Securities and Exchange Commission. This statement must contain a. b. c. d.

a copy of prospectuses to be provided to investors. a description of securities being offered for sale. a record of pre-registration sales in securities. a sample of advertising to be used to attract investments in Celfone.

ANSWER: B NAT: AACSB Reflective A5.

PAGE:

815 AICPA Legal

TYPE:

Flo-Thru Plumbing Corporation is poised to issue securities that, under the Securities Act of 1933, are “exempt.” This means that the securities can be sold a. b. c. d.

on the basis of a material omission or misrepresentation. on the basis of nonpublic information. within any six-month period by certain insiders. without being registered.

ANSWER: D NAT: AACSB Reflective

PAGE:

816 AICPA Legal

TYPE:

CHAPTER 42: SECURITIES LAW & CORPORATE GOVERNANCE 519

Fact Pattern 42-1A (Questions A6–A7 apply) Fresh Fruits & Veggies, Inc., wants to make an initial public offering of securities. Fresh believes that it qualifies for an exemption under Regulation A from the full registration requirement of the federal Securities Act of 1933. A6.

Refer to Fact Pattern 42-1A. Fresh decides to sell its new securities via the Internet. This offering a. b. c. d.

will avoid the payment of commissions to brokers or underwriters. is an investment scam. is a Ponzi scheme. constitutes insider trading.

ANSWER: A NAT: AACSB Reflective A7.

816 AICPA Legal

TYPE:

Refer to Fact Pattern 42-1A. If Fresh is exempt from the federal registration requirement, Fresh is a. b. c. d.

automatically exempt from any state registration requirement. not subject to any state securities laws. not necessarily exempt under a state registration requirement. automatically subject to all state registration requirements.

ANSWER: C NAT: AACSB Reflective A8.

PAGE:

829 AICPA Legal

TYPE:

To raise $12 million to expand operations, Star Corporation makes a stock offering directly to sixty accredited investors and twenty sophisticated, but unaccredited investors. Star plans to notify the SEC of sales. Under the Securities Act of 1933, this issue may qualify as an “exempt” transaction a. b. c. d.

as is. if all of the investors are also given certain material information. if the offering is also made available to the general public. under no circumstances.

ANSWER: B NAT: AACSB Reflective

PAGE:

818 AICPA Legal

TYPE:

520

A9.

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

Players Video Game Centers, Inc., wants to issue stock of $1 million in a single offering. Players must provide all investors with material information about itself, its business, and its securities if a. b. c. d.

all investors are accredited. under any circumstances. any investors are accredited. any investors are unaccredited.

ANSWER: D NAT: AACSB Reflective

PAGE:

818 AICPA Legal

TYPE:

A10. Hobie, the chief executive officer of Ideal Gamers, Inc. (IGI), intentionally understates the amount of IGI’s debts in information provided to investors as part of an issue of IGI stock. Jack buys the stock and suffers a loss. Hobie may be subject to a. b. c. d.

government prosecution and Jack’s suit. neither government prosecution nor Jack’s suit. only government prosecution. only Jack’s suit.

ANSWER: A NAT: AACSB Reflective

PAGE:

819 AICPA Legal

TYPE:

A11. New Discoveries Corporation, and its officers, directors, and shareholders, buy and sell securities. Section 10(b) of the Securities Exchange Act of 1934 applies to a. b. c. d.

only the purchase or sale of a security by an investment company. only the purchase or sale of a security involving short-swing profits. only the purchase or sale of a security involving a tipper and tippee. the purchase or sale of any security.

ANSWER: D NAT: AACSB Analytic

PAGE:

820 AICPA Legal

TYPE:

CHAPTER 42: SECURITIES LAW & CORPORATE GOVERNANCE 521

A12. Lex, a salesperson for Macro Corporation, learns that Macro will increase the dividend it pays to shareholders. Lex buys 1,000 shares of Macro stock. When the price increases, Lex sells his shares for a profit. Lex would not be liable for insider trading if the information about the dividend was a. b. c. d.

material when he sold the stock. public after he bought the stock. public before he bought the stock. too speculative when he bought the stock.

ANSWER: C NAT: AACSB Reflective

PAGE:

820 AICPA Legal

TYPE:

Fact Pattern 42-2A (Questions A13–A14 apply) Dhani, an accountant for Eureka, Inc., learns of undisclosed company plans to market a new laptop. Dhani buys 1,000 shares of Eureka stock. He reveals the company plans to Fay, who buys 500 shares. Fay tells Geoff, who tells Hu, each of whom buy 100 shares. They knows that Fay got her information from Dhani. When Eureka publicly announces its new laptop, Dhani, Fay, Geoff, and Hu sell their stock for a profit. A13. Refer to Fact Pattern 42-2A. If Dhani is liable under the Securities Exchange Act of 1934, it will be because the information on which he based his purchase of Eureka stock was a. b. c. d.

a forward-looking forecast. not material. not yet public. not yet true.

ANSWER: C NAT: AACSB Reflective

PAGE:

820 AICPA Legal

TYPE:

A14. Refer to Fact Pattern 42-2A. Under the Securities Exchange Act of 1934, Fay is most likely a. b. c.

liable for insider trading. not liable because Fay did not prevent others from profiting. not liable because Fay did not solicit information from Dhani.

522

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

not liable because Fay does not work for Eureka.

ANSWER: A NAT: AACSB Reflective

PAGE:

823 AICPA Legal

TYPE:

CHAPTER 42: SECURITIES LAW & CORPORATE GOVERNANCE 523

A15. Rico, an engineer for Shur-2-Gro Seed Corporation, learns that Shur-2-Gro has developed a corn hybrid to triple the output of any farm. Rico buys 20,000 shares of Shur-2-Gro stock. He tells Taylor, who buys 15,000 shares. After the new hybrid is announced publicly, the price of Shur-2-Gro stock increases. Rico and Taylor sell their shares for a profit. Under the Securities Exchange Act of 1934, liability may be imposed on a. b. c. d.

none of these parties. Rico and Taylor only. Rico only. Rico, Shur-2-Gro, and Taylor.

ANSWER: B NAT: AACSB Reflective

PAGE:

823 AICPA Legal

TYPE:

A16. Della, an officer for Energy Petrol Corporation (EPC), buys 100 shares of EPC stock. One week later, EPC announces that it will merge with a competitor, Fuel Oil Company, and the price of EPC stock increases. One month later, Della sells her shares for a profit. Under Section 16(b) of the Securities Exchange Act of 1934, Della would not be liable if, after buying the stock, she had waited a. b. c. d.

less than fourteen days to sell it. more than six months to sell it. ninety days to sell it. two months to sell it.

ANSWER: B NAT: AACSB Reflective

PAGE:

823 AICPA Legal

TYPE:

A17. Ridgeline Sports Gear, Inc., is required to register its securities under Section 12 of the Securities Exchange Act of 1934. Section 16(b) of the act covers a. b. c. d.

the declaration of dividends by Ridgeline’s board of directors. the later re-registration of Ridgeline’s securities. the short-swing activities of Ridgeline’s insiders. the solicitation of proxies from Ridgeline’s shareholders.

524

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

ANSWER: C NAT: AACSB Reflective

PAGE:

823 AICPA Legal

TYPE:

A18. Kirk is the chief financial officer of Lemon Corporation, which is required to file certain financial statements with the Securities and Exchange Commission (SEC). Under the Sarbanes-Oxley Act of 2002, Kirk must personally a. b. c. d.

certify that the statements are accurate. delegate the responsibility for preparing the statements. deliver the statements to the appropriate SEC officer. prepare the statements.

ANSWER: A NAT: AACSB Reflective

PAGE:

831 AICPA Legal

TYPE:

A19. Flux Corporation is a public company whose shares are traded in the public securities markets. Under the Sarbanes-Oxley Act of 2002, Flux is subject to the direct corporate governance requirements of a. b. c. d.

any other public company with which Flux exchanges shares. any state in which Flux does business. the federal government. the state in which Flux incorporated.

ANSWER: C NAT: AACSB Reflective

PAGE:

831 AICPA Legal

TYPE:

A20. Catalina promises high returns to Darby and other investors, who then agree to trust their funds to Catalina. She uses these funds to pay previous investors. This is a. b. c. d.

a Ponzi scheme. a stock option. an accredited investor. a tombstone ad.

ANSWER: A NAT: AACSB Reflective

PAGE:

833 AICPA Legal

TYPE:

CHAPTER 42: SECURITIES LAW & CORPORATE GOVERNANCE 525

ESSAY QUESTIONS A1.

In May, National Biotech Corporation generally advertises that it will make a $4 million offering of stock in June. National makes the offering as advertised and, ten days after the first sale, notifies the Securities and Exchange Commission (SEC). All buyers of the stock are given material information about the company, its business, and the stock. Before the end of the year, the offering is completely sold out. The buyers include forty unaccredited investors and fifty accredited investors. National does not register the offering. The SEC files a suit against National, seeking civil sanctions on the ground that this offering was not exempt from registration. National argues that the applicable exemption is Rule 505 of Regulation D of the Securities Act of 1933 and that because of this exemption, any resale of the stock is also exempt. Who is correct? ANSWER: The SEC is correct on both points. To be exempt under Rule 505 of Regulation D of the Securities Act of 1933, a private, noninvestment company offering for less than $5 million in any twelve-month period may be sold to any number of accredited investors but no more than thirty-five unaccredited investors, an offering must not be generally advertised or solicited, and the SEC must be notified of the sales. If a sale involves any unaccredited investor, all investors must be given material information about the offering company before the sale. Precautions must be taken against nonexempt, unregistered resales. In this problem, National’s offering complies with all of the requirements except the following: the offering is generally advertised, and the stock is sold to forty unaccredited investors. This is enough to remove National’s offering from the exemption. Even if the offering were exempt from registration, however, resales might not be exempt. Securities initially exempt under Rule 505 are restricted securities. This means that they must be registered before resale unless they qualify under a Rule 144 or Rule 144A exemption. PAGES: 818–819 NAT: AACSB Reflective

A2.

TYPE: = AICPA Decision Modeling

Standard Corporation is a public company whose shares are traded in public securities markets. Standard’s officers want to set up and maintain a

526

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

system of “good corporate governance.” What is “corporate governance”? What is its practical significance? What, at a minimum, should a “good” system of corporate governance include? ANSWER: Corporate governance is the relationship between a corporation and its shareholders: the system by which business corporations are directed and controlled. Corporate governance is the essential purpose of corporation law, which sets out the structure of a corporation. A “good” system of corporate governance involves, at a minimum, (1) the audited reporting of financial progress at the firm, so that its managers can be evaluated and (2) legal protection for shareholders, so that parties who violate the law to take advantage of shareholders can be punished for their misconduct and their victims can recover damages. Practically, good corporate governance in the form of accountability to investors provides the opportunity to enhance corporate wealth, because firms with expanded shareholder rights—a hallmark of good corporate governance—have been shown to have increased profits, sales growth, company value, and other economic advantages. PAGES: 829–830 NAT: AACSB Reflective

TYPE: = AICPA Decision Modeling

Chapter 43 Law for Small Business N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

An attorney may be helpful when a business negotiates a franchise agreement. ANSWER: T NAT: AACSB Reflective

A2.

837 TYPE: AICPA Critical Thinking

Business networks do not help to identify a knowledgeable attorney. ANSWER: F NAT: AACSB Reflective

A3.

PAGE:

838 TYPE: AICPA Critical Thinking

Factors to consider when choosing a business form include continuity of life. ANSWER: T NAT: AACSB Analytic

PAGE:

838 AICPA Legal

TYPE:

524 A4.

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

A limited liability organization’s limited liability may be lost by failure to comply with the rules for a business form. ANSWER: T NAT: AACSB Analytic

PAGE:

839 AICPA Legal

TYPE:

525

CHAPTER 43: LAW FOR SMALL BUSINESS

A5.

A business entity’s limited personal liability obviates the need to obtain insurance for significant business liability risks. ANSWER: F NAT: AACSB Analytic

A6.

PAGE:

840 TYPE: AICPA Critical Thinking

PAGE:

840 AICPA Legal

TYPE:

A limited liability company’s members must be its managers. ANSWER: F NAT: AACSB Analytic

A9.

TYPE:

A member of a limited liability company must be a natural person. ANSWER: F NAT: AACSB Analytic

A8.

839 AICPA Legal

There are no benefits to establishing a more formal business arrangement than a sole proprietorship. ANSWER: F NAT: AACSB Reflective

A7.

PAGE:

840 AICPA Legal

TYPE:

The duties of a limited liability company’s members may not be limited by its operating agreement. ANSWER: F NAT: AACSB Analytic

PAGE:

842 AICPA Legal

TYPE:

A10. To incorporate, you must first choose a corporate name and file it with the appropriate state office. ANSWER: T NAT: AACSB Analytic

PAGE:

843 AICPA Legal

TYPE:

A11. Corporate bylaws are the company’s governing rules. ANSWER: T NAT: AACSB Analytic

PAGE:

843 AICPA Legal

526

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

A12. Generally, your trademark must be the same as another’s mark or so similar that confusion results. ANSWER: F NAT: AACSB Analytic

PAGE:

843 AICPA Legal

TYPE:

527

CHAPTER 43: LAW FOR SMALL BUSINESS

A13. Companies may require employees who have access to trade secrets to agree in their employment contracts never to divulge those secrets. ANSWER: T NAT: AACSB Reflective

PAGE:

845 TYPE: AICPA Critical Thinking

A14. One way to raise capital to expand a business is to borrow the funds. ANSWER: T NAT: AACSB Reflective

PAGE:

845 TYPE: AICPA Critical Thinking

A15. A business plan describes a company, its products, and its anticipated future performance. ANSWER: T NAT: AACSB Reflective

PAGE:

846 TYPE: AICPA Critical Thinking

A16. The states and the Securities and Exchange Commission jointly created a simplified securities registration process for large businesses. ANSWER: F NAT: AACSB Analytic

PAGE:

848 AICPA Legal

TYPE:

A17. If a new company has only two owners, they do not need a shareholder agreement that defines their relative ownership rights and interests. ANSWER: F NAT: AACSB Reflective

PAGE:

848 TYPE: AICPA Critical Thinking

A18. Standard-form contracts are available on the Internet, but they should be adapted to the specific circumstances of a transaction. ANSWER: T NAT: AACSB Analytic

PAGE:

849 AICPA Legal

TYPE:

A19. Federal immigration laws do not require verifying whether workers are U.S. citizens or are otherwise authorized to work in this country. ANSWER:

PAGE:

850

TYPE:

528

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

NAT: AACSB Analytic

AICPA Legal

529

CHAPTER 43: LAW FOR SMALL BUSINESS

A20. Promises made to an employee in a contract or a handbook may prevent an employer from firing the employee without fulfilling the promise. ANSWER: T NAT: AACSB Analytic

PAGE:

851 AICPA Legal

TYPE:

MULTIPLE CHOICE QUESTIONS A1.

Philo wants to start a new business enterprise. Because it is difficult, if not impossible, to keep up with the many legal rules that govern business conduct, Philo most likely needs to consult a. b. c. d.

an accountant. an attorney. an experienced small-business owner. a partner.

ANSWER: B NAT: AACSB Reflective A2.

837 TYPE: AICPA Critical Thinking

Reb wants to start a new business enterprise. Shari is an accountant. Reb most likely needs to consult Shari because a. b. c. d.

an accountant can be less expensive than an attorney. bookkeeping errors can provoke litigation. ignorance of the law is a defense against liability. keeping up with laws that govern business conduct is difficult.

ANSWER: B NAT: AACSB Reflective A3.

PAGE:

838 TYPE: AICPA Critical Thinking

Max wants to open Max’s Medical Equipment Supply with the assistance of an attorney. To find an attorney, Max should most likely a. b. c. d.

ask a court to appoint a lawyer to assist him. advertise in the “Help Wanted” section of a newspaper or database. review listings in the Martindale-Hubbell Law Directory. audit classes at a local law school.

530

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

ANSWER: C NAT: AACSB Reflective A4.

an equity stake in Cool Air. a promise of Bemis’s future legal business. a flat fee or a retainer. a promise to keep the attorney’s legal advice confidential.

ANSWER: D NAT: AACSB Reflective

PAGE:

838 TYPE: AICPA Critical Thinking

Quia and Rafi form SA, LLC, a limited liability company, to operate Superior Athletics, a fitness center. Compared to a sole proprietorship and a general partnership, a limited liability company has limited a. b. c. d.

business purposes. investment opportunities. personal liability. requirements.

ANSWER: C NAT: AACSB Reflective A6.

838 TYPE: AICPA Research

Bemis is forming Cool Air Company to make and sell a device that removes the heat from working kitchens and other hot rooms. In exchange for legal services to Bemis and his new firm at the start-up stage, an attorney is not likely to accept a. b. c. d.

A5.

PAGE:

839 AICPA Legal

TYPE:

Stingo operates Tropic Burger Restaurant as a corporation. A customer slips and breaks her ankle in the restaurant and is awarded damages by a court. Those damages must most likely be paid by a. b. c. d.

Stingo. Tropic Burger. the customer. the company that supplies the restaurant’s burgers.

ANSWER:

PAGE:

839

TYPE:

CHAPTER 43: LAW FOR SMALL BUSINESS

NAT: AACSB Reflective

531

AICPA Legal

532 A7.

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

Josh and Kya form Longview Associates, a limited partnership, to invest in real estate. Compared to a sole proprietorship and a general partnership, a limited partnership has limited a. b. c. d.

business purposes. investment opportunities. personal liability. requirements.

ANSWER: C NAT: AACSB Reflective A8.

839 AICPA Legal

TYPE:

Quisha operates River Valley Soccer, an athletic equipment shop, as a sole proprietorship. Taxes on the business’s income are paid by a. b. c. d.

no one. Quisha. the state or federal government. the business.

ANSWER: B NAT: AACSB Reflective A9.

PAGE:

839 AICPA Legal

TYPE:

Dallas and Ellyn operate Freestyle Riders, a bicycle shop, as a partnership. Taxes on the business’s income are paid by a. b. c. d.

Dallas and Ellyn. no one. the state or federal government. the business.

ANSWER: A NAT: AACSB Reflective

PAGE:

839 AICPA Legal

TYPE:

A10. Global Tours, a travel agency, is a limited liability company. Global is exempt from legal requirements that relate to a. b.

business name registration. occupational licensing.

533

CHAPTER 43: LAW FOR SMALL BUSINESS

c. d.

state tax registration. none of the choices.

ANSWER: D NAT: AACSB Reflective

PAGE:

839 AICPA Legal

TYPE:

534

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

A11. Jess and Kaley own and operate Little Tykes, a small-business enterprise. Little Tykes pays taxes on its profits, and Jess and Kaley pay taxes on the profits that are afterwards distributed to them. Little Tykes is a. b. c. d.

a corporation. a limited liability company. a partnership. a sole proprietorship.

ANSWER: A NAT: AACSB Reflective

PAGE:

839 AICPA Legal

TYPE:

A12. Mabel and Nahim want to start up and incorporate a new business enterprise. The first step in the incorporation process is to a. b. c. d.

choose and file a corporate name with a state office. draft the bylaws to govern the corporation. hold an initial board of directors’ meeting. prepare and file articles of incorporation with a state office.

ANSWER: A NAT: AACSB Reflective

PAGE:

843 AICPA Legal

TYPE:

A13. Finn wants to incorporate his game store as GameZ, Inc., and files the name with the Idaho secretary of state. Filing will protect the name a. b. c. d.

only within Idaho. throughout the Pacific Northwest. throughout the United States. throughout North America.

ANSWER: A NAT: AACSB Reflective

PAGE:

843 AICPA Legal

TYPE:

535

CHAPTER 43: LAW FOR SMALL BUSINESS

A14. Klee wants to make and sell a computer operating system under a trademark. To obtain the most protection under the law, Klee should choose a mark that is a. b. c. d.

distinctive. similar to an existing mark. the same as an existing mark. non-distinctive.

ANSWER: A NAT: AACSB Reflective

PAGE:

844 AICPA Legal

TYPE:

A15. National Standard Company (NSC) products are identified with a trademark. For several years, NSC allows others to use the mark without permission and without protest. This may be deemed, on NSC’s part, a. b. c. d.

abandonment of the mark. anticompetitive conduct. liability for misleading consumers. liability for misleading competitors.

ANSWER: A NAT: AACSB Reflective

PAGE:

844 AICPA Legal

TYPE:

A16. Demi operates Eyes Wide Open, a small-business optician enterprise. To raise capital, Demi contacts Foster, a venture capitalist. Besides capital, Foster will most likely a. b. c. d.

assist in the drafting of a business plan. decline a proportion of future profits. offer assistance with respect to marketing. refrain from demanding operational control.

ANSWER: C NAT: AACSB Reflective

PAGE:

846 TYPE: AICPA Critical Thinking

536

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

A17. Elan Elite Service Company’s offer of shares of stock in itself to anyone who is willing to pay $600 per share is a. b. c. d.

a shareholder agreement. key-person insurance. a private offering. a public offering.

ANSWER: D NAT: AACSB Reflective

PAGE:

848 AICPA Legal

TYPE:

A18. The five shareholders of Orthopedic Ease, Inc., a medical equipment firm, want to prevent each other from selling the shares to third parties without first being given the opportunity to buy them. This can be provided for in a. b. c. d.

a shareholder agreement. key-person insurance. a private offering. a public offering.

ANSWER: A NAT: AACSB Reflective

PAGE:

848 TYPE: AICPA Risk Analysis

A19. Nero opened Oh! Fudge!, a candy store, as a corporation. When doing business on behalf of the store, to avoid personal liability, Nero should sign contracts a. b. c. d.

as an agent for the corporation. in his individual capacity. as a gourmand. under a false name.

ANSWER: A NAT: AACSB Reflective

PAGE:

850 AICPA Legal

TYPE:

537

CHAPTER 43: LAW FOR SMALL BUSINESS

A20. Bild-It-Rite Corporation uses independent contractors. Bild-It-Rite can a. b. c. d.

be sued by a contractor for a violation of discrimination laws. exercise little control over how the contractors perform. obtain workers’ compensation insurance for the contractors. withhold income taxes from payments to the contractors.

ANSWER: B NAT: AACSB Reflective

PAGE:

851 AICPA Legal

TYPE:

ESSAY QUESTIONS A1.

Ben owns Copyshop and wants to sell Copyshop franchises throughout the United States. In doing so, Ben wants to prevent competitors from imitating the distinctive Copyshop logo and thereby misleading consumers. How can Ben protect the logo? ANSWER: A logo is a trademark. Assuming that a trademark is not too similar to existing marks, it can be registered with the U.S. Patent and Trademark Office (PTO). This provides national protection for a mark that is in use (or will be within six months). Once a mark is federally registered, the symbol ® may be used with it to give notice of the registration. (If a mark is not registered, the symbol ™ can be used.) Registration can be renewed after five years, and every ten years thereafter. The owner of a mark must be vigilant against its misuse. Allowing others to use a mark without restrictions or without protest can constitute abandonment. Also, a mark registered with the PTO that is not used for two years is presumed abandoned. PAGES: 843–844 NAT: AACSB Reflective

A2.

TYPE: = AICPA Decision Modeling

Electro, Inc., makes and sells electric bikes, as well as parts and service, to customers in the United States and other countries. Can Electro prevent its employees from revealing its customer lists, pricing policies, and other confidential information, if the employees resign to work for a competitor or to enter the same business themselves? How?

538

TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

ANSWER: Customer lists, pricing policies, and other trade secrets can be protected. An employer can require employees to agree not to reveal trade secrets or other confidential information if the employees go to work for a competitor or go into business for themselves. An employer can also insist that employees not work for competitors or enter a competing business, in which the employer’s trade secrets will likely be disclosed and utilized. To be enforceable, these covenants not to compete must be reasonable in time and geographic limits. PAGE: 845 NAT: AACSB Reflective

TYPE: = AICPA Decision Modeling

Chapter 44 Administrative Law N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

Like statutory law, administrative law is created by legislatures. ANSWER: F NAT: AACSB Analytic

A2.

TYPE:

PAGE:

860 AICPA Legal

TYPE:

Federal administrative agencies can regulate beyond the powers granted by enabling legislation. ANSWER: F NAT: AACSB Analytic

A4.

860 AICPA Legal

State regulation, when not preempted, may cover many of the same activities as federal regulation. ANSWER: T NAT: AACSB Analytic

A3.

PAGE:

861 AICPA Legal

TYPE:

Federal executive agencies are outside the federal executive departments. 539

540

TEST BANK A—UNIT NINE: GOVERNMENT REGULATION

ANSWER: F NAT: AACSB Analytic

PAGE:

861 AICPA Legal

TYPE:

541

CHAPTER 44: ADMINISTRATIVE LAW

A5.

Administrative agencies can not make legislative rules, or substantive rules, that are as legally binding as laws that the Congress passes. ANSWER: F NAT: AACSB Analytic

A6.

PAGE:

864 AICPA Legal

TYPE:

PAGE:

864 AICPA Legal

TYPE:

Rulemaking—the formulation of new administrative regulations—is a major function of Congress, not administrative agencies. ANSWER: F NAT: AACSB Analytic

A9.

A party can challenge an administrative regulation as so irrational as to be arbitrary and capricious. ANSWER: T NAT: AACSB Analytic

A8.

863 TYPE: AICPA Critical Thinking

A court will not review an administrative agency’s decision until the case is “ripe for review.” ANSWER: T NAT: AACSB Analytic

A7.

PAGE:

866 AICPA Legal

TYPE:

Final administrative rules have binding legal effect unless the courts later overturn them. ANSWER: T NAT: AACSB Analytic

PAGE:

867 AICPA Legal

TYPE:

A10. The period for persons to comment on a proposed administrative rule must be at least thirty days. ANSWER: T NAT: AACSB Analytic

PAGE:

867 AICPA Legal

TYPE:

A11. If the meaning of a statute’s language is unclear and an agency interprets it, a court must overturn the interpretation.

542

TEST BANK A—UNIT NINE: GOVERNMENT REGULATION

ANSWER: F NAT: AACSB Analytic

PAGE:

868 AICPA Legal

TYPE:

543

CHAPTER 44: ADMINISTRATIVE LAW

A12. Informal agency actions are exempt from the Administrative Procedure Act’s requirements. ANSWER: T NAT: AACSB Analytic

PAGE:

868 AICPA Legal

TYPE:

A13. Many agency rules require compliance reporting from regulated entities, and such a report can not trigger an enforcement investigation. ANSWER: F NAT: AACSB Analytic

PAGE:

870 AICPA Legal

TYPE:

A14. There are no limits to the information that an administrative agency can demand from an individual or organization. ANSWER: F NAT: AACSB Analytic

PAGE:

871 AICPA Legal

TYPE:

A15. In most instances, an agency is not required to obtain a search warrant before a physical search for evidence is conducted. ANSWER: F NAT: AACSB Analytic

PAGE:

872 AICPA Legal

TYPE:

A16. If an investigation reveals a suspected violation of an administrative rule, the agency can not issue a formal complaint against the suspected violator. ANSWER: F NAT: AACSB Analytic

PAGE:

872 AICPA Legal

TYPE:

A17. Frequently, disputes over violations of administrative rules are resolved through informal adjudication proceedings. ANSWER: T NAT: AACSB Analytic

PAGE:

873 AICPA Legal

TYPE:

A18. The federal government must disclose certain records to any person or entity on written request only if there is a rational reason for the request.

544

TEST BANK A—UNIT NINE: GOVERNMENT REGULATION

ANSWER: F NAT: AACSB Analytic

PAGE:

874 AICPA Legal

TYPE:

A19. Every portion of every meeting of a federal administrative agency does not have to be open to public observation. ANSWER: F NAT: AACSB Analytic

PAGE:

875 AICPA Legal

TYPE:

A20. An agency must conduct a regulatory flexibility analysis whenever a new regulation will have an impact on a “small number of substantial entities.” ANSWER: F NAT: AACSB Analytic

PAGE:

876 AICPA Legal

TYPE:

MULTIPLE CHOICE QUESTIONS A1.

Boxy’s Packaging Materials Company is subject to regulations issued by the Occupational Safety and Health Administration (OSHA). Like other federal administrative agencies, the OSHA was created by a. b. c. d.

Congress, through enabling legislation. the Federal Trade Commission, through the rulemaking process. the president, through an executive order. the U.S. Department of Labor, through a final order.

ANSWER: A NAT: AACSB Reflective A2.

PAGE:

861 AICPA Legal

TYPE:

Independent regulatory agencies such as the Federal Trade Commission are a. b. c. d.

not part of the government’s executive branch. outside the major departments of the government’s executive branch. subagencies of executive agencies. subject to more executive authority than executive agencies.

ANSWER:

PAGE:

861

TYPE:

CHAPTER 44: ADMINISTRATIVE LAW

NAT: AACSB Reflective

545

AICPA Legal

546 A3.

TEST BANK A—UNIT NINE: GOVERNMENT REGULATION

Executive control over the Federal Communications Commission, and other agencies, may be exercised through a presidential veto of a. b. c. d.

Congress’s modifications of the agency’s authority. the agency’s final rules. the agency’s final orders. none of the choices.

ANSWER: A NAT: AACSB Analytic A4.

TYPE:

changed the agency’s prior policy without justification. followed a consideration of all relevant factors. was accompanied by a rational explanation. was plainly warranted by the evidence.

ANSWER: A NAT: AACSB Reflective

PAGE:

864 AICPA Legal

TYPE:

The Federal Aviation Administration uses notice-and-comment rulemaking. The final rule in such a proceeding has binding legal effect a. b. c. d.

after a court affirms it. until the next presidential election. once Congress approves it. unless a court overturns it.

ANSWER: D NAT: AACSB Analytic A6.

863 AICPA Legal

Pure Water Company is subject to a decision by the Environmental Protection Agency. Pure Water appeals the decision, arguing that it is arbitrary and capricious. This could mean that the decision a. b. c. d.

A5.

PAGE:

867 AICPA Legal

TYPE:

The Securities and Exchange Commission decides to create a new rule relating to the dissemination of material nonpublic information through corporate blogs, tweets, and Web sites. The first step is to a.

compile the rule Regulations.

with

others

the

Code

Federal

547

CHAPTER 44: ADMINISTRATIVE LAW

b. c. d.

conduct an on-site inspection. publish a notice of the proposed rulemaking. solicit public comment.

ANSWER: C NAT: AACSB Reflective

PAGE:

867 AICPA Legal

TYPE:

548 A7.

TEST BANK A—UNIT NINE: GOVERNMENT REGULATION

Before adopting new regulations to govern Internet-based phone services, the Federal Communications Commission may not a. b. c. d.

hold hearings to acquire facts pertinent to the proposed rules. ignore the Administrative Procedure Act to streamline proceedings. order manufacturers to provide certain documents. solicit testimony from interest groups and consumers.

ANSWER: B NAT: AACSB Reflective A8.

867 AICPA Legal

TYPE:

The U.S. Fish and Wildlife Service uses notice-and-comment rulemaking. This involves a period during which a. b. c. d.

judges, legislators, and the president are asked about a proposed rule. potential violators of a proposed rule are notified and publicized. the administrators “notice” a problem and “comment” on it. the public is asked to comment on a proposed rule.

ANSWER: D NAT: AACSB Reflective A9.

PAGE:

867 AICPA Legal

TYPE:

To notify the public of a proposed rule, the Food Safety and Inspection Service, like other federal agencies, publishes the proposal in a. b. c. d.

the news media. a trade journal available to members of the industry. the Federal Register. an office memo that employees are free to take home.

ANSWER: C NAT: AACSB Reflective

PAGE:

867 AICPA Legal

TYPE:

A10. The Federal Aviation Administration uses notice-and-comment rulemaking. The final rule in such a proceeding is sometimes referred to as a. b. c.

a legislative rule. an interpretive rule. an adjudicatory order.

549

CHAPTER 44: ADMINISTRATIVE LAW

an executive edict.

ANSWER: A NAT: AACSB Reflective

PAGE:

867 AICPA Legal

TYPE:

550

TEST BANK A—UNIT NINE: GOVERNMENT REGULATION

A11. The Merit Systems Protection Board issues a rule. Like other administrative agencies’ “legislative rules,” this rule is as a. b. c. d.

binding as a law passed by Congress. persuasive as an expert’s opinion. suggestive as a newspaper’s editorial. unenforceable as a salesperson’s puffery.

ANSWER: A NAT: AACSB Reflective

PAGE:

867 AICPA Legal

TYPE:

A12. After notice-and-comment rulemaking, the U.S. Bureau of Land Management (BLM) issues a new rule and applies it to Clearcut Timber Company. Clearcut appeals the application to a federal court. The court will most likely defer to the BLM’s interpretation of a. b. c. d.

the facts and the law. the agency’s authority. procedural requirements. the Constitution.

ANSWER: A NAT: AACSB Reflective

PAGE:

868 AICPA Legal

TYPE:

A13. The Federal Trade Commission (FTC) orders GR8 Steaks Company to reveal certain information. GR8 Steaks complains to a court, arguing that the order is an abuse of the FTC’s discretion. Like other agencies, the FTC can use a subpoena to a. b. c. d.

compel a party to testify, but not to obtain documents. obtain any information except what a party refuses to reveal. pressure a party to settle an unrelated matter. reveal violations of the law.

ANSWER: D NAT: AACSB Reflective

PAGE:

871 AICPA Legal

TYPE:

551

CHAPTER 44: ADMINISTRATIVE LAW

A14. The Consumer Product Safety Commission (CPSC) wants Monster Toy Company to produce certain records for review. To obtain the records, the CPSC will issue a. b. c. d.

an order for specific performance. a rule for parol evidence. a formal complaint. a subpoena.

ANSWER: D NAT: AACSB Reflective

PAGE:

871 AICPA Legal

TYPE:

A15. The Internal Revenue Service (IRS) wants to seize certain documents of Mortgage Bank, Inc. Deciding whether it is permissible for the IRS to request or seize the documents depends on whether the documents are a. b. c. d.

incriminating. relevant. technical. valuable.

ANSWER: B NAT: AACSB Reflective

PAGE:

871 AICPA Legal

TYPE:

A16. The Food and Drug Administration (FDA) is investigating reports that Caplets Pharmaceutical Corporation is putting potentially harmful additives in Doze, a new pain-relief medication. The FDA’s demands for particular documents from Caplets a. b. c. d.

must be specific and adequately describe the material being sought. must be non-specific so an incriminating item is not overlooked. must be general so as to force an uncooperative party’s compliance. may, but need not, be specific because the FDA is a federal agency.

ANSWER: C NAT: AACSB Reflective

PAGE:

871 AICPA Legal

TYPE:

552

TEST BANK A—UNIT NINE: GOVERNMENT REGULATION

A17. The Nuclear Regulatory Commission (NRC) files a complaint against General Construction Corporation (GCC). GCC may want to settle the dispute, before formal adjudicatory proceedings begin, to avoid a. b. c. d.

appearing uncooperative. eliminating the need for additional proceedings. rectifying the problem to the NRC’s satisfaction. saving the expense of formal proceedings and later appeals.

ANSWER: A NAT: AACSB Reflective

PAGE:

872 TYPE: AICPA Risk Analysis

A18. Guard Personnel Company is charged hiring practices that do not meet requirements set by the Transportation Safety Administration (TSA). The administrative law judge orders Guard to comply with the TSA’s regulations. Guard may a. b. c. d.

appeal to the commission that governs the TSA. appeal to Congress, which created the TSA. appeal to a different, separate agency. ignore the order.

ANSWER: A NAT: AACSB Reflective

PAGE:

873 AICPA Legal

TYPE:

A19. With some exceptions, every portion of every meeting of the Federal Reserve System Board of Governors and other federal administrative agencies must be open to public observation under a. b. c. d.

no federal or state law. the Freedom of Information Act. the Government-in-the-Sunshine Act. the Public Accountability Act.

ANSWER: C NAT: AACSB Analytic

PAGE:

875 AICPA Legal

TYPE:

553

CHAPTER 44: ADMINISTRATIVE LAW

A20. The Regulatory Flexibility Act has helped reduce record-keeping burdens for Hometown Gas Company and other small business firms in the area of a. b. c. d.

accounting practices. asset acquisition. hazardous waste management. tax reporting.

ANSWER: C NAT: AACSB Reflective

PAGE:

875 TYPE: AICPA Critical Thinking

ESSAY QUESTIONS A1.

Administrative agencies—like the Securities and Exchange Commission, the Federal Trade Commission, and the Food and Drug Administration— make rules. What are the two basic types of rules called, and how binding are they? What must an administrative rule NOT do? ANSWER: The rules that are made according to the notice-and-comment rulemaking procedures are sometimes referred to as “legislative rules,” and they are as binding as the laws that Congress makes. Such rules, like laws, must not violate the Constitution. Unlike laws, however, such rules must not exceed the power that Congress conferred on the agency in its enabling legislation. Agencies can adopt rules through less formal actions. These rules may be referred to as “interpretive rules’ and are specifically exempt from the requirements of the Administrative Procedure Act of 1946. Interpretative rules declare an agency’s interpretation of its enabling statute’s meaning, without imposing direct, legally binding obligations or establishing legal rights. They may have practical significance, however, because they can indicate that formal rulemaking may occur if these less formal positions are ignored. PAGE: 863 NAT: AACSB Reflective

A2.

TYPE: = AICPA Decision Modeling

Grapple Market Share Corporation would like to know what information federal agencies have about Grapple’s operations, so that the firm will

554

TEST BANK A—UNIT NINE: GOVERNMENT REGULATION

know what its competitors may be able to learn about it. Can Grapple require the agencies to disclose whatever information they may have concerning it? If so, how should the firm make its request? What federal law applies? Is any information exempt? ANSWER: The Freedom of Information Act (FOIA) of 1966 requires the federal government to reveal certain “records” to “any person” on request. The request may be made via e-mail or fax, or more traditional print methods, and needs to contain only a reasonable description of the information sought. An agency has twenty working days to respond to a request. There are exemptions, but the agency must notify the party seeking the information what is being withheld and which exemptions— national security, or the confidential or personal nature of the information, for example—are being asserted. An agency’s refusal to comply with the FOIA can be challenged in court. Generally, all records must be made available electronically on the Internet, on CD-ROMs, and in other electronic formats, and clearly indexed. Documents must be made computer accessible within a year of their creation. PAGES: 874–875 NAT: AACSB Reflective

TYPE: = AICPA Decision Modeling

Chapter 45 Consumer Law N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

All statutes that serve to protect the interests of consumers are classified as consumer law. ANSWER: T NAT: AACSB Analytic

A2.

Vague generalities advertising.

and

ANSWER: F NAT: AACSB Analytic A4.

880 AICPA Legal

TYPE:

Federal laws often provide more sweeping and significant protections for the consumer than state laws. ANSWER: F NAT: AACSB Analytic

A3.

PAGE:

PAGE: obvious PAGE:

880 AICPA Legal exaggerations 881 AICPA Legal

TYPE:

constitute deceptive TYPE:

Ads cannot be unfair. 551

552

TEST BANK A—UNIT NINE: GOVERNMENT REGULATION

ANSWER: T NAT: AACSB Analytic

PAGE:

882 AICPA Legal

TYPE:

553

CHAPTER 45: CONSUMER LAW

A5.

Bait-and-switch advertising occurs when a salesperson lures a consumer into a store by advertising a low-priced item in order to switch the consumer to a more expensive item. ANSWER: T NAT: AACSB Analytic

A6.

PAGE:

883 AICPA Legal

TYPE:

PAGE:

884 AICPA Legal

TYPE:

Food products are not required to bear labels detailing the nutritional content. ANSWER: F NAT: AACSB Analytic

A9.

TYPE:

Labels must use words that are easily understood by the ordinary marketing executive. ANSWER: F NAT: AACSB Analytic

A8.

882 AICPA Legal

A sanction known as counteradvertising requires a company to advertise the products of its competitor to counter its own false claims. ANSWER: F NAT: AACSB Analytic

A7.

PAGE:

885 AICPA Legal

TYPE:

Labels on fresh meat must indicate where the food originated. ANSWER: T NAT: AACSB Analytic

PAGE:

885 AICPA Legal

TYPE:

A10. Buyers of goods sold door to door can cancel their contracts within three business days. ANSWER: F NAT: AACSB Analytic

PAGE:

886 AICPA Legal

TYPE:

A11. The key federal statute regulating the credit and credit-card industries is basically a disclosure law.

554

TEST BANK A—UNIT NINE: GOVERNMENT REGULATION

ANSWER: T NAT: AACSB Analytic

PAGE:

887 AICPA Legal

TYPE:

555

CHAPTER 45: CONSUMER LAW

A12. Merchants must ship orders within the time promised in their ads. ANSWER: T NAT: AACSB Analytic

PAGE:

887 AICPA Legal

TYPE:

A13. Credit can be denied solely on the basis of marital status. ANSWER: F NAT: AACSB Analytic

PAGE:

888 AICPA Legal

A14. A credit-cardholder is liable for all unauthorized charges made before the creditor is notified that the card has been lost. ANSWER: F NAT: AACSB Analytic

PAGE:

888 AICPA Legal

TYPE:

A15. Major credit reporting agencies must provide consumers with free copies of their own credit reports every twelve months. ANSWER: T NAT: AACSB Analytic

PAGE:

889 AICPA Legal

TYPE:

A16. Creditors attempting to collect debts are generally considered to be debtcollection agencies. ANSWER: F NAT: AACSB Analytic

PAGE:

890 AICPA Legal

TYPE:

A17. A collection agency must include a validation notice whenever it initially contacts a debtor for payment of a debt. ANSWER: T NAT: AACSB Analytic

PAGE:

890 AICPA Legal

TYPE:

A18. A creditor has the right to garnish a debtor’s wages unless the debt has gone unpaid for a prolonged period. ANSWER: F NAT: AACSB Analytic

PAGE:

892 AICPA Legal

TYPE:

556

TEST BANK A—UNIT NINE: GOVERNMENT REGULATION

557

CHAPTER 45: CONSUMER LAW

A19. Drugs can be marketed to the public before they are ensured to be safe and effective. ANSWER: F NAT: AACSB Analytic

PAGE:

892 AICPA Legal

TYPE:

A20. Manufacturers are required to report on any products already sold if the products have proved to be hazardous. ANSWER: T NAT: AACSB Analytic

PAGE:

892 AICPA Legal

TYPE:

MULTIPLE CHOICE QUESTIONS A1.

Through unfair trade practices, Super Sales Company induces Trey and other consumers to enter into one-sided deals. This may be subject to sanctions under a. b. c. d.

federal and state law. federal law only. no law, according to the principles of freedom to contract. state law only.

ANSWER: A NAT: AACSB Reflective A2.

PAGE:

880 AICPA Legal

TYPE:

Home Brand Products, Inc., in its ads, makes claims about its products that are obvious exaggerations and claims that are false but appear to be true. Home Brand may be subject to sanctions for a. b. c. d.

neither the claims nor the exaggerations. only the claims. only the exaggerations. the claims and the exaggerations.

ANSWER: B NAT: AACSB Reflective

PAGE:

881 AICPA Legal

TYPE:

558 A3.

TEST BANK A—UNIT NINE: GOVERNMENT REGULATION

Quackity Quack Company’s ad states that its product is “the best on the market today.” Because of this ad, the Federal Trade Commission is most likely to a. b. c. d.

do nothing. draft a formal complaint. issue a cease-and-desist order. require counteradvertising.

ANSWER: A NAT: AACSB Reflective A4.

881 AICPA Legal

TYPE:

Frosty’s Appliance Store advertises freezers at a “Special Low Price of $299.” When Garth tries to buy one of the freezers, Huey, the salesperson, tells him that they are all sold and no more are obtainable. Huey adds that Frosty’s has other freezers for $2,299. This is a. b. c. d.

a legitimate sales technique. bait-and-switch advertising. counteradvertising. puffery.

ANSWER: B NAT: AACSB Reflective A5.

PAGE:

882 AICPA Legal

TYPE:

Va-Va-Voom Products, Inc., engages in deceptive advertising when it markets its product Weight-No-More as able to help consumers lose weight in their sleep. Va-Va-Voom is ordered to include in all future advertising of Weight-No-More the statement, “This product will not cause anyone to lose weight while sleeping.” This is a. b. c. d.

a counteradvertising order. a multiple product order. a “cooling-off” law. a validation notice.

ANSWER: A NAT: AACSB Reflective

PAGE:

883 AICPA Legal

TYPE:

559

CHAPTER 45: CONSUMER LAW

A6.

Tonya and many other consumers complain to the Federal Trade Commission (FTC) that a Whoopie Wonders Company ad is deceptive. The FTC’s first step is to a. b. c. d.

draft a formal complaint. investigate. issue a cease-and-desist order. require counteradvertising.

ANSWER: B NAT: AACSB Reflective A7.

TYPE:

illegal. legal and smart because such ads are generally cheap. legal but not smart because such ads are generally ineffective. legal but only potentially smart, depending on the response rate.

ANSWER: A NAT: AACSB Reflective

PAGE:

883 AICPA Legal

TYPE:

To generate sales, Yakkity-Yak, Inc., uses phone solicitation. Under federal law, in soliciting business, Yakkity-Yak’s telemarketers must a. b. c. d.

disclose all material facts related to a sale. identify the seller’s name (only if asked). refrain from calling consumers who have not requested a call. speak clearly and conspicuously.

ANSWER: A NAT: AACSB Reflective A9.

883 AICPA Legal

Penny Stock Company faxes ads to Quality Personnel Corporation and other businesses without the recipients’ permission. This is a. b. c. d.

A8.

PAGE:

883 AICPA Legal

TYPE:

Special Roast Coffee, Inc., processes and sells a variety of coffee products. Special Roast’s product packages must include a. b.

the company owner’s identity. the contents’ net quantity.

560

TEST BANK A—UNIT NINE: GOVERNMENT REGULATION

c. d.

the restaurants and stores in which the product is sold. the type of consumer most likely interested in the product.

ANSWER: B NAT: AACSB Reflective

PAGE:

885 AICPA Legal

TYPE:

561

CHAPTER 45: CONSUMER LAW

A10. Sweet Treats, Inc., wants to market a new snack food. On the product’s label, standard nutrition facts are a. b. c. d.

prohibited. required. strictly voluntary. warranted by the nature of the food.

ANSWER: B NAT: AACSB Reflective

PAGE:

885 AICPA Legal

TYPE:

A11. In the ordinary course of business, Xtra Credit Company sells goods to Yvon and other consumers on credit under installment sales contracts that typically require at least one year of monthly payments. Xtra does not disclose all of the credit terms to its customers. This is most likely to result in a. b. c. d.

a cease-and-desist order. a fine. no sanctions. rescission of the contracts.

ANSWER: D NAT: AACSB Reflective

PAGE:

887 AICPA Legal

TYPE:

A12. Wheels & Deals Corporation is subject to the Truth-in-Lending Act, which is a key statute regulating the credit and credit-card industries and concerns a. b. c. d.

the credit-worthiness of financial institutions. the disclosure of credit terms. the limits on types of credit. the limits on types of debt.

ANSWER: B NAT: AACSB Analytic

PAGE:

887 AICPA Legal

TYPE:

562

TEST BANK A—UNIT NINE: GOVERNMENT REGULATION

A13. Kristen receives unsolicited merchandise in the mail. Kristen a. b. c. d.

may keep the merchandise without any obligation to the sender. must return the merchandise within five days to avoid payment. must return the merchandise within fifteen days to avoid payment. must return the merchandise within thirty days to avoid payment.

ANSWER: A NAT: AACSB Reflective

PAGE:

887 AICPA Legal

TYPE:

A14. Shep buys a car from his neighbor, Tyrone, for $8,000 and agrees to make monthly payments of $800 until the price is paid. This transaction is not subject to federal credit regulations because a. b. c. d.

the parties are two consumers. the transaction is a sale. the sale involves a car. the parties are neighbors.

ANSWER: A NAT: AACSB Reflective

PAGE:

887 AICPA Legal

TYPE:

A15. Bodie’s application to City Bank for a credit card is denied. Bodie can obtain information on her credit history in a credit agency’s files under a. b. c. d.

no federal law. the Equal Credit Opportunity Act. the Fair Credit Reporting Act. the Fair Debt Collection Practices Act.

ANSWER: C NAT: AACSB Reflective

PAGE:

888 AICPA Legal

TYPE:

563

CHAPTER 45: CONSUMER LAW

A16. On behalf of RiteNow Collection Agency, Sid poses as a police officer in an attempt to collect payment from Tylo for a shipment of scuba equipment that she returned to Undersea Company two months earlier. This violates a. b. c. d.

no federal law. the Fair Credit Reporting Act. the Fair Debt Collection Practices Act. the Truth-in-Lending Act.

ANSWER: C NAT: AACSB Reflective

PAGE:

890 AICPA Legal

TYPE:

A17. Dita takes out a student loan from Everloan Bank. When she fails to make the scheduled payments for six months, Everloan advises her of further action that it will take. This violates a. b. c. d.

no federal law. the Fair and Accurate Credit Transactions Act. the Fair Debt Collection Practices Act. the Truth-in-Lending Act.

ANSWER: A NAT: AACSB Reflective

PAGE:

890 AICPA Legal

TYPE:

A18. Kip opens an account at a Lotsa Goodies Store, and buys a digital music player and other items, but makes no payments on the account. To collect the debt, Mako, the manager, contacts Kip’s parents. This violates a. b. c. d.

no federal law. the Fair and Accurate Credit Transactions Act. the Fair Debt Collection Practices Act. the Truth-in-Lending Act.

ANSWER: A NAT: AACSB Reflective

PAGE:

890 AICPA Legal

TYPE:

564

TEST BANK A—UNIT NINE: GOVERNMENT REGULATION

A19. Green Grocer Corporation makes and markets a variety of processed food products. The federal agency responsible for enforcing health regulations concerning food is a. b. c. d.

the Consumer Product Safety Commission. the Federal Reserve Board of Governors. the Federal Trade Commission. the Food and Drug Administration.

ANSWER: D NAT: AACSB Reflective

PAGE:

892 AICPA Legal

TYPE:

A20. Fun-E Products, Inc., makes and sells toys. The government agency that has the authority to remove a potentially hazardous toy from the market is a. b. c. d.

the Consumer Product Safety Commission. the Federal Reserve Board of Governors. the Federal Trade Commission. the Food and Drug Administration.

ANSWER: A NAT: AACSB Reflective

PAGE:

892 AICPA Legal

TYPE:

ESSAY QUESTIONS A1.

Darren wants to go into the business of direct merchandise sales. What are the legal problems that Darren might encounter in telemarketing? In selling door-to-door? In marketing over the Internet? In soliciting sales through the mail? ANSWER: Telemarketers are the target of many consumer complaints, and must reveal extensive information to comply with state and federal laws. Telemarketers must tell customers that they are receiving a sales call, name the business and products to be sold, state the total cost of the products, and make other disclosures. Door-to-door salespersons make contracts that buyers may rescind within three days of signing. This federally-mandated “cooling-off” period has an impact on sales. The Internet is a rapidly growing tool for sales, but Darren should be aware that it is not

CHAPTER 45: CONSUMER LAW

565

unregulated. All laws that apply to more traditional forms of commerce, such as deceptive practice laws, generally apply to Internet commerce. Finally, direct mail is appropriate for advertisements, but Darren should know that unsolicited products sent through the mail can be kept by their recipients without tendering payment. In general, Darren should know that legitimate businesses can and do make proper and profitable use of all these sales methods, but state and federal laws police all of them for fraudulent operators. PAGE: 882–884 & 886–887 NAT: AACSB Reflective A2.

TYPE: = AICPA Decision Modeling

Milo buys an all-terrain-vehicle (ATV) from No-Limit Toys, Inc., on credit but makes no payments on the account. Odell, the owner of No-Limit Toys, calls Milo at home on a Monday morning at three A.M. Odell represents himself as PayNow Collection Agency and demands payment “or else.” The next day, Odell sends Milo notice that he has thirty days to request verification of the debt, during which its payment will be suspended, but that if he does not pay the full amount due within five business days, Odell will arrange for the “destruction of Milo’s good credit rating.” Which laws has Odell violated, if any, and in what ways? ANSWER: Odell, No-Limit Toys’s owner, is in violation of the Fair Debt Collection Practices Act (FDCPA). Odell can attempt to collect the debt to No-Limit Toys without being subject to the provisions of the FDCPA, which applies only to debt-collection agencies that regularly attempt to collect debts on someone else’s behalf. But by misrepresenting that he is acting on behalf of a collection agency, Odell has fallen under an exception in the FDCPA. Causing Milo, or any other consumer, to believe that Odell is a representative of a collection agency subjects Odell to the law. The FDCPA prohibits contacting a debtor during an inconvenient or unusual time, which Odell has done in this problem with the early morning call. If the “or else” phrase is construed as harassment or intimidation—as a threat of potential violence, for example—Odell will be in further violation of the FDCPA. Also, the statement in the notice that Milo has thirty days to request verification of the debt but only five business days to pay it violates the FDCPA. The five-day demand is misleading and nullifies the thirty-day suspension

566

TEST BANK A—UNIT NINE: GOVERNMENT REGULATION

PAGES: 890–891 NAT: AACSB Reflective

TYPE: = AICPA Decision Modeling

Chapter 46 Environmental Law N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

All environmental law consists of statutes and regulations. ANSWER: F NAT: AACSB Analytic

A2.

TYPE:

PAGE:

897 AICPA Legal

TYPE:

State laws may restrict a business’s discharge of chemicals into the air or water. ANSWER: T NAT: AACSB Analytic

A4.

897 AICPA Legal

Under the common law doctrine of nuisance, persons may be liable if they file a suit against a business polluter that views the suit as a nuisance. ANSWER: F NAT: AACSB Analytic

A3.

PAGE:

898 AICPA Legal

TYPE:

States may restrict emissions from motor vehicles. 563

564

TEST BANK A—UNIT NINE: GOVERNMENT REGULATION

ANSWER: T NAT: AACSB Analytic

PAGE:

898 AICPA Legal

TYPE:

CHAPTER 46: ENVIRONMENTAL LAW

A5.

An environmental impact statement is required for every major federal action that significantly affects the quality of the environment. ANSWER: T NAT: AACSB Analytic

A6.

TYPE:

PAGE:

899 AICPA Legal

TYPE:

PAGE:

899 AICPA Legal

TYPE:

There are no plans to develop national standards regulating the fuel economy and emissions for medium- and heavy-duty trucks. ANSWER: F NAT: AACSB Analytic

A9.

898 AICPA Legal

The Environmental Protection Agency periodically updates the pollution standards. ANSWER: T NAT: AACSB Analytic

A8.

PAGE:

Federal statutes and regulations do not cover mobile sources of air pollution. ANSWER: F NAT: AACSB Analytic

A7.

565

PAGE:

899 AICPA Legal

TYPE:

The primary responsibility for implementing air-quality standards rests with the federal government. ANSWER: F NAT: AACSB Analytic

PAGE:

900 AICPA Legal

TYPE:

A10. Only the Environmental Protection Agency can sue violators of emission limits under the Clean Air Act. ANSWER: F NAT: AACSB Analytic

PAGE:

901 TYPE: AICPA Critical Thinking

A11. Different standards for air quality apply to existing sources of pollution and major new sources. ANSWER: T NAT: AACSB Analytic

PAGE:

901 AICPA Legal

TYPE:

566

TEST BANK A—UNIT NINE: GOVERNMENT REGULATION

A12. Corporate officers cannot be subject to penalties for violations of the Clean Air Act. ANSWER: F NAT: AACSB Analytic

PAGE:

901 AICPA Legal

TYPE:

A13. Any point source emitting pollutants into water must have a permit. ANSWER: T NAT: AACSB Analytic

PAGE:

902 AICPA Legal

TYPE:

A14. The Clean Water Act includes special provisions for toxic chemicals and for oil spills. ANSWER: T NAT: AACSB Analytic

PAGE:

902 AICPA Legal

TYPE:

A15. New sources of water pollutants must install pollution-control equipment before beginning operations. ANSWER: T NAT: AACSB Analytic

PAGE:

902 AICPA Legal

TYPE:

A16. The Environmental Protection Agency defines wetlands as “lands that are wet.” ANSWER: F NAT: AACSB Analytic

PAGE:

904 AICPA Legal

TYPE:

A17. States have the primary responsibility for enforcing the permit system for point-source water pollution control. ANSWER: T NAT: AACSB Analytic

PAGE:

905 AICPA Legal

TYPE:

A18. The Environmental Protection Agency sets minimum levels for pollutants in public water systems. ANSWER:

PAGE:

906

TYPE:

CHAPTER 46: ENVIRONMENTAL LAW

NAT: AACSB Analytic

567

AICPA Legal

A19. The Environmental Protection Agency can regulate a substance that poses an imminent hazard but cannot prohibit the use of a substance altogether. ANSWER: F NAT: AACSB Analytic

PAGE:

907 AICPA Legal

TYPE:

A20. The government can recover the cost to clean up a hazardous waste disposal site from the persons who were even remotely responsible. ANSWER: T NAT: AACSB Analytic

PAGE:

908 AICPA Legal

TYPE:

MULTIPLE CHOICE QUESTIONS A1.

Fabio makes a living by farming near Gastric Combustibles, Inc., which has discharged pollutants into the area’s air and water. In a suit by Fabio for an injunction against Gastric on the ground of nuisance, the court is most likely to rule in Gastric’s favor if a. b. c. d.

Fabio’s operation also pollutes, with pesticides and herbicides. Fabio’s operation suffers harm distinct from the general public. Gastric’s operation is the core of the local economy. Gastric’s operation uses reasonable care to avoid harm to Fabio.

ANSWER: C NAT: AACSB Reflective A2.

PAGE:

897 AICPA Legal

TYPE:

Consolidated Trucking Company transports radioactive materials. Darla suffers from cancer. To succeed in a suit against Consolidated on the ground of strict liability, Darla must show that her injury was caused by a. b. c. d.

Consolidated’s failure to use reasonable care to avert herm to Darla. Consolidated’s intentional lack of regard for the general public. Consolidated’s operation. radiation from any source.

ANSWER:

PAGE:

897

TYPE:

TEST BANK A—UNIT NINE: GOVERNMENT REGULATION

568

NAT: AACSB Reflective A3.

Valley Disposal Center operates a recycling plant. Wendy and other Valley neighbors file a suit, alleging injuries from the plant. To succeed, they must show that Valley failed to use reasonable care if the suit is based on a. b. c. d.

a negligence theory. a nuisance theory. any legal theory. a strict liability theory.

ANSWER: A NAT: AACSB Reflective A4.

PAGE:

897 AICPA Legal

TYPE:

Congress enacts air quality legislation. To implement and enforce this law, as is typical of other environmental statutes and regulations, the federal government will most likely rely on a. b. c. d.

all levels of government. local chambers of commerce. local police departments. polluters’ self-monitoring.

ANSWER: A NAT: AACSB Reflective A5.

AICPA Legal

PAGE:

898 AICPA Legal

TYPE:

The Environmental Protection Agency (EPA) has the authority to regulate “any air pollutant.” Fresher Air Group, a private organization, supports cleaner air. Fresher Air can file a suit against the EPA to a. b. c. d.

compel the EPA to act only. compel the EPA to act or prevent it from acting. neither compel the EPA to act nor prevent it from acting. prevent the EPA from acting only.

ANSWER: B NAT: AACSB Reflective

PAGE:

898 AICPA Legal

TYPE:

CHAPTER 46: ENVIRONMENTAL LAW

A6.

Ski Resorts, Inc., wants to add a new run to its facility in a national park on federal land. For this action, an environmental impact statement is a. b. c. d.

prohibited. required. unnecessary. voluntary.

ANSWER: B NAT: AACSB Reflective A7.

PAGE:

898 AICPA Legal

TYPE:

Truckers Storage Depot, a private company, wants to build a warehouse on private land. For this action, an environmental impact statement is a. b. c. d.

prohibited. required. unnecessary. voluntary.

ANSWER: C NAT: AACSB Reflective A8.

569

PAGE:

898 AICPA Legal

TYPE:

Metal Smelting, Inc., operates a plant—a “major source”—that emits hazardous air pollutants for which the Environmental Protection Agency has set maximum levels of emission. The plant does not use any equipment to reduce its emissions. Under the Clean Air Act, this is most likely a. b. c. d.

a violation. not a violation because a “major source” is exempt. not a violation because the plant does not use any equipment. not a violation because the plant is not a mobile source.

ANSWER: A NAT: AACSB Reflective

PAGE:

901 AICPA Legal

TYPE:

TEST BANK A—UNIT NINE: GOVERNMENT REGULATION

570 A9.

Industrial Solvents, Inc., averages $15,000 profit per day before deciding to ignore air pollution standards, after which the average is $30,000. Industrial Solvents is subject to a fine of a. b. c. d.

$0. $15,000 per day. $30,000 per day. $30,000 total.

ANSWER: C NAT: AACSB Reflective

PAGE:

901 AICPA Legal

TYPE:

A10. Quickly Motor Company makes the Rock, a new model of sport utility vehicle, and sells it at the market’s lowest price. The Rock does not, however, satisfy federal emission standards and Quickly fails to maintain relevant, required records. The Environmental Protection Agency may assess a. b. c. d.

civil penalties, additional fines, and criminal penalties. civil penalties and additional fines only. civil penalties only. criminal penalties, including fines and imprisonment, only.

ANSWER: A NAT: AACSB Reflective

PAGE:

901 AICPA Legal

TYPE:

A11. Fried Food, Inc., operates a commercial frying plant, discharging pollutants into the air. Greg reports the violations to the Environmental Protection Agency. Greg a. b. c. d.

is not entitled to a payment. may be paid up to any amount. may be paid up to $1,000. may be paid up to $10,000.

ANSWER: D NAT: AACSB Reflective

PAGE:

901 AICPA Legal

TYPE:

CHAPTER 46: ENVIRONMENTAL LAW

571

A12. A barge owned by Oceanic Shipping Company accidentally runs aground, spilling the oil contained in its hold into the sea and onto the shore. Under the Clean Water Act, this is most likely a. b. c. d.

a violation. not a violation because an oil spill is an accident. not a violation because a floating barge is not a stationary source. not a violation because a ship’s hold is not a point source.

ANSWER: A NAT: AACSB Reflective

PAGE:

902 AICPA Legal

TYPE:

A13. Video Products Company operates a DVD manufacturing plant on Wandering River. Discharging pollutants from the plant into the river can result in a. b. c. d.

civil penalties and criminal penalties. civil penalties only. criminal penalties only. no penalties.

ANSWER: A NAT: AACSB Reflective

PAGE:

905 AICPA Legal

TYPE:

A14. Metro City operates its own municipal public drinking water system for which the Environmental Protection Agency has set maximum levels of pollutants. Metro does not use any equipment to meet these standards. With regard to any contamination of the water, under the Safe Drinking Water Act, this is most likely a. b. c. d.

a violation. not a violation because Metro does not set the standards. not a violation because water is not a stationary source. not a violation because Metro does not use any equipment.

ANSWER: A NAT: AACSB Reflective

PAGE:

906 AICPA Legal

TYPE:

TEST BANK A—UNIT NINE: GOVERNMENT REGULATION

572

A15. Under the Marine Protection, Research, and Sanctuaries Act (the Ocean Dumping Act), Bayside Chemical Company may dump its chemical waste into the ocean a. b. c. d.

after obtaining a permit. before obtaining a permit. without a permit. not at all.

ANSWER: D NAT: AACSB Reflective

PAGE:

906 AICPA Legal

TYPE:

A16. Fruitful Garden Company makes and sells pesticides. For the pesticides to remain on the market, the acceptable level of risk to people of developing cancer from exposure to the products is a. b. c. d.

one-in-a-hundred. one-in-a-million. one-in-a-thousand. zero.

ANSWER: B NAT: AACSB Reflective

PAGE:

907 AICPA Legal

TYPE:

A17. ChemoCorp, Inc., makes and sells pesticides. If a substance is identified as harmful and the harm is imminent, the Environmental Protection Agency can a. b. c. d.

conduct an inspection of ChemoCorp’s plant. declare the substance to be unregulated and allow its production. ignore the risk if the benefit outweighs the harm. order the substance to be sold in an adulterated form.

ANSWER: A NAT: AACSB Reflective

PAGE:

907 AICPA Legal

TYPE:

CHAPTER 46: ENVIRONMENTAL LAW

573

A18. Industry Processes Corporation generates solid waste considered hazardous. Industry labels and packages properly all waste to be transported to a disposal site. Under the Resource Conservation and Recovery Act, this is most likely a. b. c. d.

not a violation. a violation because Industry generates solid waste. a violation because the waste is transported off-site. a violation because the waste is considered hazardous.

ANSWER: B PAGE: NAT: AACSB Communication

907 AICPA Legal

TYPE:

A19. Before being transported, hazardous waste generated by Xtreme Industries, Inc., must be properly labeled and packaged under the Resource Conservation and Recovery Act by a. b. c. d.

the federal Environmental Protection Agency. the local Resource Conservation and Recovery Committee. the state Environmental Regulatory Commission. Xtreme Industries, Inc.

ANSWER: D NAT: AACSB Reflective

PAGE:

907 AICPA Legal

TYPE:

A20. United Disposal, Inc., operates a hazardous waste disposal site that accepts waste transported by Ace Trucking Company from General Manufacturing Corporation. United sells the site to Investment Properties, Inc. A release of the waste is discovered at the site, and the Environmental Protection Agency (EPA) cleans it up. The EPA can recover the cost of the cleanup from a. b. c. d.

United only. United or General only. United, General, or Ace only. United, General, Ace, or Investment Properties.

ANSWER: D NAT: AACSB Reflective

PAGE:

908 AICPA Legal

TYPE:

574

TEST BANK A—UNIT NINE: GOVERNMENT REGULATION

ESSAY QUESTIONS A1.

Cozy City lies on the shore of a bay that empties into the Atlantic Ocean. Downcycler Waste Company picks up garbage and trash from local businesses. Further inland, Eschew Corporation collects radioactive waste from the local utility’s nuclear power plant. On the other side of the bay, Fort Cozy Military Base stores chemical warfare supplies for disposal. Can Downcycler, Eschew, or Fort Cozy dump their waste in the ocean? ANSWER: The local waste removal service Downcycler may be able to dispose of some of its waste in the ocean. Federal law (the Marine Protection, Research, and Sanctuaries Act, also known as the Ocean Dumping Act) regulates the transportation and dumping of pollutants in ocean waters, and provides permit programs for some materials. Certain areas are designated marine sanctuaries. Dumping of chemical warfare supplies and high-level radioactive waste (as well as other radiological, chemical, and biological wastes) into the ocean is prohibited under the Ocean Dumping Act, however. Civil penalties and criminal fines are possible up to $50,000 each. Imprisonment for up to a year and an injunction may also be ordered. PAGE: 906 NAT: AACSB Reflective

A2.

TYPE: = AICPA Decision Modeling

Odiferous Waste Company is a subsidiary of Precarious Investments, Inc. Odiferous operates a hazardous waste disposal site. QuikChem Corporation is one of many parties who generate waste disposed of at the site. Odiferous borrows money from Regal Bank, which takes over the site when Odiferous goes bankrupt. The Environmental Protection Agency discovers a leak at the site. Can any of these private parties be forced to pay for the clean up? If so, who? ANSWER: Any of the private parties mentioned in the question can be required to pay the entire cost for the clean up of the site. Under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), potentially responsible parties on whom such costs may be imposed include persons who generated wastes disposed of at the site (QuikChem) and persons who owned or operated the site at the time of the disposal (Odiferous). Precarious, Odiferous’s parent company, may also be liable, as may Regal Bank and any other lender who actually participates in managing a hazardous waste disposal site that requires a clean up.

CHAPTER 46: ENVIRONMENTAL LAW

PAGE: 908 NAT: AACSB Reflective

575

TYPE: = AICPA Decision Modeling

Chapter 47 Antitrust Law N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

The basic purpose of antitrust law is to restrict competition. ANSWER: F NAT: AACSB Reflective

A2.

913 TYPE: AICPA Critical Thinking

Unilateral conduct can not result in a violation of antitrust law. ANSWER: F NAT: AACSB Analytic

A3.

PAGE:

914 AICPA Legal

TYPE:

Under the rule of reason, a court will consider the effect or the potential effect of a business agreement on competition. ANSWER: T NAT: AACSB Analytic

PAGE:

914 AICPA Legal

TYPE:

576 A4.

TEST BANK A—UNIT NINE: GOVERNMENT REGULATION

Any agreement among competitors to fix prices constitutes a per se violation of antitrust law. ANSWER: T NAT: AACSB Analytic

A5.

PAGE:

917 AICPA Legal

TYPE:

PAGE:

917 AICPA Legal

TYPE:

PAGE:

918 AICPA Legal

TYPE:

Territorial and customer restrictions are currently considered per se violations of antitrust law. ANSWER: F NAT: AACSB Analytic

A9.

A horizontal restraint of trade results from an agreement between firms at different levels in the manufacturing and distribution process. ANSWER: F NAT: AACSB Analytic

A8.

TYPE:

Joint ventures undertaken by competitors are not subject to antitrust laws. ANSWER: F NAT: AACSB Analytic

A7.

916 AICPA Legal

Most group boycotts are legal. ANSWER: F NAT: AACSB Analytic

A6.

PAGE:

918 AICPA Legal

TYPE:

Resale price maintenance agreements are subject to analysis under the rule of reason. ANSWER: T NAT: AACSB Analytic

PAGE:

918 AICPA Legal

TYPE:

A10. A firm may be a monopolist even though it is not the sole seller in a market. ANSWER: T NAT: AACSB Analytic

PAGE:

920 AICPA Legal

TYPE:

577

CHAPTER 47: ANTITRUST LAW

A11. For products that are sold nationwide, there are no geographic boundaries for the market. ANSWER: F NAT: AACSB Analytic

PAGE:

921 AICPA Legal

TYPE:

578

TEST BANK A—UNIT NINE: GOVERNMENT REGULATION

A12. Any action challenged as an attempt to monopolize must have been specifically intended to exclude competitors and garner monopoly power. ANSWER: T NAT: AACSB Analytic

PAGE:

922 AICPA Legal

TYPE:

A13. Monopsony power is market power on the buy side of a market. ANSWER: T NAT: AACSB Analytic

PAGE:

922 AICPA Legal

TYPE:

A14. Price discrimination occurs when a seller charges the same price to competing buyers for identical goods or services. ANSWER: F NAT: AACSB Analytic

PAGE:

924 AICPA Legal

TYPE:

A15. A contract under which a seller forbids a buyer to purchase products from the seller’s competitors is a tying arrangement. ANSWER: F NAT: AACSB Analytic

PAGE:

924 AICPA Legal

TYPE:

A16. When a small number of companies share a large part of a market, the market is concentrated. ANSWER: T NAT: AACSB Analytic

PAGE:

925 AICPA Legal

TYPE:

A17. Mergers between firms that compete in the same market are vertical mergers. ANSWER: F NAT: AACSB Analytic

PAGE:

925 AICPA Legal

TYPE:

A18. Only the U.S. Department of Justice can prosecute violations of all of the antitrust laws.

579

CHAPTER 47: ANTITRUST LAW

ANSWER: F NAT: AACSB Analytic

PAGE:

926 AICPA Legal

TYPE:

580

TEST BANK A—UNIT NINE: GOVERNMENT REGULATION

A19. In a situation involving a price-fixing agreement, normally each competitor is liable for the total amount of any damages. ANSWER: T NAT: AACSB Analytic

PAGE:

927 AICPA Legal

TYPE:

A20. Any conspiracy—even if it occurs outside the United States—that has a substantial effect on U.S. commerce is within the reach of the U.S. antitrust laws. ANSWER: T NAT: AACSB Analytic

PAGE:

928 AICPA Legal

TYPE:

MULTIPLE CHOICE QUESTIONS A1.

North Mining Company and South Excavation Company agree to abide by the decisions of East Coast Financial Corporation as to their respective levels of production, markets, and prices, effectively reducing competition and increasing profits. This is most likely a. b. c. d.

a common, legal, time-honored type of business arrangement. an illegal restraint on trade. an innovative, legally efficient approach to doing business. an outdated, but legal business trust.

ANSWER: B NAT: AACSB Reflective A2.

PAGE:

913 AICPA Legal

TYPE:

Helio Company can process hydrogen into an inexpensive fuel for internal combustion engines. As an innovator in its market, Helio currently has the power to affect the price of its product. This is a. b. c. d.

market power. predatory pricing. price discrimination. price-fixing.

ANSWER:

PAGE:

914

TYPE:

CHAPTER 47: ANTITRUST LAW

NAT: AACSB Reflective

581

AICPA Legal

582 A3.

TEST BANK A—UNIT NINE: GOVERNMENT REGULATION

Health Resources Corporation makes and sells Intake, the most prescribed name-brand cholesterol-lowering medication. Jenerica Company has the potential to make a generic version of the same drug. Health Resources pays Jenerica not to sell its product. This is a. b. c. d.

a customer restriction. a joint venture. an exclusive-dealing contract. a price-fixing agreement.

ANSWER: D NAT: AACSB Reflective A4.

916 AICPA Legal

TYPE:

Delta Services, Inc., is the major wholesale distributor of software in the state of Florida. Its closest competitor is Efficient Systems Company, another Florida firm. The two firms agree that Delta will operate in south Florida and Efficient will operate in north Florida. This is a. b. c. d.

a group boycott. a market division. a price-fixing agreement. a tying arrangement.

ANSWER: B NAT: AACSB Reflective A5.

PAGE:

917 AICPA Legal

TYPE:

Engine Components, Inc., a manufacturer of vehicle parts, refuses to sell to Fix-It, Inc., a national vehicle service firm. Engine Components convinces Greasy Motor Parts Company, a competitor, to do the same. This is a. b. c. d.

a group boycott. an exclusive-dealing contract. a price-fixing agreement. a tying arrangement.

ANSWER: A NAT: AACSB Reflective

PAGE:

917 AICPA Legal

TYPE:

583

CHAPTER 47: ANTITRUST LAW

A6.

Lightning Cycles, Inc., makes Lightning-brand motorcycles and accessories, which are distributed to authorized dealers, including Macho Motors, Inc. Macho operates dealerships in several locations. Lightning imposes territorial restrictions on Macho to insulate other dealers from direct competition. This is a. b. c. d.

a situation that neither restrains trade or harms competition. a legal restraint of trade. a per se violation of antitrust law. subject to analysis under the rule of reason.

ANSWER: D NAT: AACSB Reflective A7.

918 AICPA Legal

TYPE:

USA Cellphone Corporation requires all distributors of its products to sell the products at specified minimum prices. This resale price maintenance agreement is a. b. c. d.

a per se violation of antitrust law. a legal restraint of trade. subject to evaluation under the rule of reason. not subject to antitrust law.

ANSWER: C NAT: AACSB Reflective A8.

PAGE:

918 AICPA Legal

TYPE:

Imperio Caffeine Corporation makes and sells coffee under a variety of brand names. Imperio wants to merge with Java Company, its main competitor. In weighing a challenge to the deal, a court looks at the relevant product market. This most likely includes coffee and a. b. c. d.

no other products. products that are not identical but are related, such as spin-offs. products that are reasonably interchangeable. products with identical attributes only.

ANSWER: C NAT: AACSB Reflective

PAGE:

920 AICPA Legal

TYPE:

584 A9.

TEST BANK A—UNIT NINE: GOVERNMENT REGULATION

International Products, Inc. (ICI), has exclusive control over the market for its product. ICI’s market power is most likely a. b. c. d.

a situation that neither restrains trade or harms competition. a legal restraint of trade. a per se violation of antitrust law. subject to further evaluation.

ANSWER: D NAT: AACSB Reflective

PAGE:

920 AICPA Legal

TYPE:

A10. To acquire monopoly power in its market, Pure Plastics, Inc., sets its prices substantially below the normal costs of production. Under antitrust law, this is a. b. c. d.

a per se violation. a violation if its competitors make similar deals. a violation if it thereby acquires monopoly power. not a violation.

ANSWER: C NAT: AACSB Reflective

PAGE:

920 AICPA Legal

TYPE:

A11. Rally Speedboat Corporation refuses to sell its products to Super Weekends, Inc., a recreational water products dealership. This is a. b. c. d.

a group boycott. a horizontal market division. attempted monopolization. a unilateral refusal to deal.

ANSWER: D NAT: AACSB Reflective

PAGE:

921 AICPA Legal

TYPE:

585

CHAPTER 47: ANTITRUST LAW

A12. A suit is filed against Urbana Corporation, alleging that the firm committed the offense of monopolization. To determine whether Urbana has monopoly power requires looking at a. b. c. d.

the company’s size alone. business ethics and corporate gamesmanship. production methods and marketing techniques. the relevant geographic market and the relevant product market.

ANSWER: D NAT: AACSB Reflective

PAGE:

921 AICPA Legal

TYPE:

A13. Seaside Cannery, Inc., is one of many producers of canned seafood. Seaside refuses to sell its products to Port Harbor Restaurant Corporation. Under antitrust law, this refusal is most likely a. b. c. d.

a per se violation. a violation if its competitors make similar deals. a violation if it thereby acquires monopoly power. not a violation.

ANSWER: D NAT: AACSB Reflective

PAGE:

921 AICPA Legal

TYPE:

A14. An antitrust action is brought against Tri-State Transport Company, alleging the offense of attempted monopolization. To be guilty of this offense, Tri-State’s attempt must have a. b. c. d.

a dangerous probability of success. a deadly guaranty of success. a distant possibility of success. a distinct improbability of success.

ANSWER: A NAT: AACSB Reflective

PAGE:

922 AICPA Legal

TYPE:

586

TEST BANK A—UNIT NINE: GOVERNMENT REGULATION

A15. To prevent its competitors from obtaining sufficient supplies to make their products, Molded Plastics, Inc., uses its market power to increase the prices of those supplies. This is a. b. c. d.

a refusal to deal. business judgment. predatory bidding. predatory pricing.

ANSWER: C NAT: AACSB Reflective

PAGE:

922 AICPA Legal

TYPE:

A16. By contract, Quality Metals Corporation forbids Resource Refining, Inc., a wholesale buyer of Quality’s products, from purchasing the products of Quality’s competitors. This exclusive-dealing contract is allowed a. b. c. d.

under any circumstances. unless its effect is to cause a competitor a loss of any business. unless its effect is to substantially lessen competition. unless there is no effect on a competitor.

ANSWER: C NAT: AACSB Reflective

PAGE:

924 AICPA Legal

TYPE:

A17. To drive its competitors out of a certain geographic segment of its market, Fryin’ Potatoes, Inc., sets the prices of its products below cost for the buyers in that area. This is a. b. c. d.

a refusal to deal. business judgment. predatory bidding. price discrimination.

ANSWER: D NAT: AACSB Reflective

PAGE:

924 AICPA Legal

TYPE:

587

CHAPTER 47: ANTITRUST LAW

A18. Integrated Software, Inc., conditions the sale of one of its products on Inventory Office System’s agreeing to buy another of Integrated’s products. This deal is a. b. c. d.

legal, depending on its purpose and the effect on competition. legal, depending on production and transportation costs. legal under any circumstances. not legal under any circumstances.

ANSWER: A NAT: AACSB Reflective

PAGE:

925 AICPA Legal

TYPE:

A19. Midwest Agri-Products Corporation offers to sell its sugar substitute to Nice Candies, Inc., only if Nice Candies agrees to buy all the corn it needs from Midwest Agri-Products, even though there are other corn sellers from whom Nice Candies could buy. This is a. b. c. d.

an exclusive-dealing contract. a tying arrangement. price discrimination. price fixing.

ANSWER: B NAT: AACSB Reflective

PAGE:

925 AICPA Legal

TYPE:

A20. Mango Corporation believes that Melon Corporation engages in anticompetitive behavior in an attempt to drive Mango, its chief competitor, out of the market. Antitrust laws can be enforced against Melon by a. b. c. d.

only a disinterested third party. Congress. Mango. none of the choices.

ANSWER: C NAT: AACSB Reflective

PAGE:

927 AICPA Legal

TYPE:

588

A1.

TEST BANK A—UNIT NINE: GOVERNMENT REGULATION

Finely Engineered Parts Corporation (FEPC) and Great Gears & Gauges, Inc. (3G), are competitors selling certain machine parts that are otherwise generally unattainable in their geographic market. This market includes the states of California, Oregon, Washington, and Idaho. FEPC and 3G agree that FEPC will no longer sell in California and that 3G will no longer sell in Oregon, Washington, and Idaho. Have FEPC and 3G violated any antitrust law? If so, which one? Explain. If they had divided their market by type of customer rather than geographic are, would the result be the same? Why or why not? ANSWER: FEPC and 3G have violated antitrust law. The major antitrust law they have violated is the Sherman Act, Section 1. FEPC and 3G are engaged in interstate commerce, and the agreement to divide marketing territories between them is a horizontal market division—a contract in restraint of trade. This sort of concerted action reduces the costs to the competitors and allows each of them to increase the prices of the parts sold in their respective territories. The U.S. Department of Justice (DOJ) could seek criminal penalties against each corporation, including fines and imprisonment. In addition, the DOJ could institute civil proceedings to restrain this conduct. If these competitors had divided their market by type of customers—retailers and wholesalers, or manufacturers and distributors, for example—the result would most likely be the same. PAGES: 917 & 926–927 NAT: AACSB Reflective

A2.

TYPE: = AICPA Decision Modeling

Java Bean Company imports coffee beans and sells them under two-year contracts to Mellow Roast, Inc., and other coffeemakers. The contracts require that during the two-year term a coffeemaker not buy beans from Java Bean’s competitors. The contracts do not limit the coffeemakers’ purchase of tea or other beverage ingredients from other suppliers, however. In the second year of the contract, Mellow Roast protests that this arrangement violates antitrust law. Is Mellow Roast correct? If not, why not? If so, under which antitrust statute, or statutes, could these contracts be held illegal? ANSWER: Java Bean’s contracts are exclusive-dealing contracts. These contracts may be held illegal under the Sherman Act, the Clayton Act, or

CHAPTER 47: ANTITRUST LAW

589

the Federal Trade Commission (FTC) Act. Section 1 of the Sherman Act prohibits any agreement that is an unreasonable restraint of trade. Under this prohibition, a contract is subject to the rule of reason. A court would consider the purpose of the arrangement, the powers of the parties, and the effect of their actions in restraining trade. If the anticompetitive effects outweigh the competitive benefits, the contracts would be held unlawful. Section 3 of the Clayton Act specifically prohibits exclusive-dealing contracts when their effect is to substantially lessen competition or tend to create a monopoly. Section 5 of the FTC Act prohibits unfair methods of competition in or affecting commerce. If these contracts are held to be otherwise illegal under one of these statutes, that the contracts are limited to two-year terms and do not proscribe the coffeemakers’ purchase of tea and other beverage ingredients from other suppliers are not factors that would make them legal. PAGES: 924–925 & 926–927 NAT: AACSB Reflective

TYPE: = AICPA Decision Modeling

Chapter 48 Professional Liability and Accountability N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

Professionals are required to deliver competent services. ANSWER: T NAT: AACSB Analytic

A2.

933 AICPA Legal

TYPE:

Accountants and other professionals do not face liability under the common law for any breach of contract. ANSWER: F NAT: AACSB Analytic

A3.

PAGE:

933 AICPA Legal

TYPE:

Generally, an accountant must possess the skills that an ordinarily prudent accountant would have. ANSWER: T NAT: AACSB Analytic

PAGE:

934 AICPA Legal

TYPE:

588

TEST BANK A—UNIT NINE: GOVERNMENT REGULATION

589

CHAPTER 48: PROFESSIONAL LIAILITY AND ACCOUNTABILITY

A4.

An accountant normally will be held liable to the client for a mistake in judgment. ANSWER: F NAT: AACSB Analytic

A5.

PAGE:

935 AICPA Legal

TYPE:

PAGE:

936 AICPA Legal

TYPE:

PAGE:

936 AICPA Legal

TYPE:

Under rules of professional conduct, an attorney should not engage in conduct involving “misrepresentation.” ANSWER: T NAT: AACSB Analytic

A9.

In all cases involving allegations of negligence, the plaintiff must prove that the professional’s breach of the duty of care actually caused some injury. ANSWER: T NAT: AACSB Analytic

A8.

TYPE:

Under rules of professional conduct, committing a criminal act that reflects adversely on a person’s “honesty” is professional misconduct. ANSWER: T NAT: AACSB Analytic

A7.

934 AICPA Legal

An accountant who performs an audit is liable for failing to detect misconduct even if a normal audit would not have revealed it. ANSWER: F NAT: AACSB Analytic

A6.

PAGE:

936 AICPA Legal

TYPE:

A professional’s gross negligence in performing a duty constitutes actual fraud. ANSWER: F NAT: AACSB Analytic

PAGE:

936 AICPA Legal

TYPE:

A10. An innocent professional is never liable for a co-professional’s misconduct.

590

TEST BANK A—UNIT NINE: GOVERNMENT REGULATION

ANSWER: F NAT: AACSB Analytic

PAGE:

938 AICPA Legal

TYPE:

A11. In some states, in the absence of privity, a party cannot recover from am accountant. ANSWER: T NAT: AACSB Analytic

PAGE:

938 AICPA Legal

TYPE:

A12. In most courts, accountants are subject to liability for negligence only to their clients. ANSWER: F NAT: AACSB Analytic

PAGE:

939 AICPA Legal

TYPE:

A13. An attorney may be liable in negligence to any third party. ANSWER: F NAT: AACSB Analytic

PAGE:

939 AICPA Legal

TYPE:

A14. The Sarbanes-Oxley Act of 2002 applies only to domestic public accounting firms that provide auditing services to “issuers.” ANSWER: F NAT: AACSB Analytic

PAGE:

941 TYPE: AICPA Critical Thinking

A15. Under the Sarbanes-Oxley Act of 2002, accountants must dispose of working papers relating to an audit or review. ANSWER: F NAT: AACSB Analytic

PAGE:

942 AICPA Legal

TYPE:

A16. An accountant may be liable for a misstatement or omission of material fact in a registration statement. ANSWER: T NAT: AACSB Analytic

PAGE:

942 AICPA Legal

TYPE:

591

CHAPTER 48: PROFESSIONAL LIAILITY AND ACCOUNTABILITY

A17. An accountant is not liable for a misstatement in a registration statement to a purchaser of securities if the misstatement was not of a material fact. ANSWER: T NAT: AACSB Analytic

PAGE:

942 AICPA Legal

TYPE:

A18. An accountant is not liable for a false statement that affects the price of a security if the buyer or seller of the security knew the statement was false. ANSWER: T NAT: AACSB Analytic

PAGE:

945 AICPA Legal

TYPE:

A19. For a plaintiff to recover damages under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, ordinary negligence is enough. ANSWER: F NAT: AACSB Analytic

PAGE:

946 AICPA Legal

TYPE:

A20. In no states are communications between an accountant and his or her client privileged. ANSWER: F NAT: AACSB Analytic

PAGE:

949 AICPA Legal

TYPE:

MULTIPLE CHOICE QUESTIONS A1.

Leslie, an accountant, enters into a contract to provide services to Marty. Leslie does not finish the work within the contract’s deadline. Leslie is a. b. c. d.

liable for breach of contract. not liable, because Leslie is a professional. not liable, because Leslie’s failure must have been Marty‘s fault. not liable, because the work took longer than foreseen.

ANSWER: A NAT: AACSB Reflective

PAGE:

933 AICPA Legal

TYPE:

592 A2.

TEST BANK A—UNIT NINE: GOVERNMENT REGULATION

Lucille, an accountant, is subject to the accounting conventions, rules, and procedures that constitute generally accepted accounting principles (GAAP). GAAP are determined by a. b. c. d.

the International Accounting Standards Board. the American Bar Association. the American Institute of Certified Public Accountants. the Financial Accounting Standards Board.

ANSWER: D NAT: AACSB Reflective A3.

934 TYPE: AICPA Critical Thinking

Jim, an accountant, contracts to perform services for Kasey. Jim acts in good faith and conforms with generally accepted accounting principles, but makes a mistake in judgment. Jim is most likely a. b. c. d.

liable if Jim failed to discover a defalcation. liable if Jim failed to discover a fraud. liable if Jim failed to discover an impropriety. not liable.

ANSWER: D NAT: AACSB Reflective A4.

PAGE:

934 AICPA Legal

TYPE:

Dwayne can be described as “a reasonably competent general practitioner of ordinary skill, experience, and capacity.” This is the normal standard for judging the performance of a. b. c. d.

a client. an accountant. an attorney. a tax preparer.

ANSWER: C NAT: AACSB Reflective

PAGE:

935 AICPA Legal

TYPE:

593

CHAPTER 48: PROFESSIONAL LIAILITY AND ACCOUNTABILITY

A5.

Penelope is an attorney. Penelope’s conduct is governed by rules of professional conduct established by the state in which she is licensed, and the Model Rules of Professional Conduct drafted by a. b. c. d.

federal courts. the American Bar Association. the American Institute of Certified Public Accountants. the International Accounting Standards Board.

ANSWER: B NAT: AACSB Reflective A6.

detrimental reliance. intent to deceive. justifiable reliance. materiality.

ANSWER: B NAT: AACSB Reflective

PAGE:

936 AICPA Legal

TYPE:

Jim, an attorney, allows a statute of limitations to lapse on a claim by Midwest Manufacturing Company, a client. Jim a. b. c. d.

can be held liable for malpractice. has violated an ethical standard but cannot be held liable. is subject to criminal penalties under the statute of limitations. will be automatically disbarred.

ANSWER: A NAT: AACSB Reflective A8.

935 TYPE: AICPA Critical Thinking

National Business Systems Corporation (NBS) files a suit against Molly, its former accountant, alleging constructive fraud. NBS need not prove a. b. c. d.

A7.

PAGE:

936 AICPA Legal

TYPE:

Grover Nut Company files a suit against Hud, its former accountant, alleging actual fraud. Grover must prove a. b.

intent to deceive. misrepresentation of a non-material fact.

594

TEST BANK A—UNIT NINE: GOVERNMENT REGULATION

c. d.

the lack of an injury. unjustifiable reliance.

ANSWER: A NAT: AACSB Reflective

PAGE:

936 AICPA Legal

TYPE:

595

CHAPTER 48: PROFESSIONAL LIAILITY AND ACCOUNTABILITY

A9.

Bob, an accountant, intentionally misstates a material fact to mislead Consolidated Industries, Inc., a client. Consolidated justifiably relies on the misstatement to its detriment. Bob is most likely liable for a. b. c. d.

actual fraud. constructive fraud. destructive fraud. virtual fraud.

ANSWER: A NAT: AACSB Reflective

PAGE:

936 AICPA Legal

TYPE:

A10. Lebron accuses Moe, an attorney, of committing malpractice. Malpractice is a. b. c. d.

a breach of ethics. a defalcation. a mistake in judgment. professional negligence.

ANSWER: D NAT: AACSB Reflective

PAGE:

936 AICPA Legal

TYPE:

A11. Marquis Company’s liabilities exceed its assets, but the firm’s employees falsify its books to reflect a positive net worth. Marquis hires Nan & Ollie, an accounting firm, to prepare a balance sheet, which is certified to show a net worth. Pure Credit Corporation relies on the balance sheet to make a loan to Marquis. When the firm defaults, Pure Credit files a suit against Nan & Ollie. Under the Ultramares rule, the accounting firm is most likely a. b. c. d.

liable because Nan & Ollie owed a duty of care to all third parties. liable because Nan & Ollie owed a duty of care to Marquis. liable because Nan & Ollie owed a duty to any foreseeable user. not liable because Nan & Ollie and Pure Credit were not in privity.

ANSWER: D NAT: AACSB Reflective

PAGE:

938 AICPA Legal

TYPE:

596

TEST BANK A—UNIT NINE: GOVERNMENT REGULATION

A12. Faith and Gordon are accountants who work together. Faith and Gordon can limit their potential liability for each other’s misconduct by organizing their business as a. b. c. d.

a foreign corporation. a non-professional corporation. an unincorporated corporation. a professional corporation.

ANSWER: D NAT: AACSB Reflective

PAGE:

938 AICPA Legal

TYPE:

A13. Rollo is an attorney whose clients include Superior Credit Company. If Rollo is negligent in his work for Superior, under the Restatement (Second) of Torts, Rollo may be liable to Superior and a. b. c. d.

any third party. no third party. third parties who are foreseen users of the work. third parties who are reasonably foreseeable users of the work.

ANSWER: C NAT: AACSB Reflective

PAGE:

939 AICPA Legal

TYPE:

A14. Quin, an accountant, prepares for Reddy, Inc., a financial statement that omits a material fact. The statement is included in Reddy’s registration statement with the Securities and Exchange Commission. Timor, who reads the statement, and Ubi, who does not, each buy Reddy stock. Velma reads the statement but does not buy the stock. Under Section 11 of the Securities Act of 1933, Quin may be liable to a. b. c. d.

no one. Timor and Ubi. Timor, Ubi, and Velma. Ubi only.

ANSWER: B NAT: AACSB Reflective

PAGE:

942 AICPA Legal

TYPE:

CHAPTER 48: PROFESSIONAL LIAILITY AND ACCOUNTABILITY

597

598

TEST BANK A—UNIT NINE: GOVERNMENT REGULATION

A15. Craig is an accountant whose clients include Digby National Corporation. Elbert is Craig’s attorney. Working papers that Craig develops when preparing financial reports for Digby are owned by a. b. c. d.

Craig. Digby. Elbert. no one—the papers must be destroyed immediately after use.

ANSWER: A NAT: AACSB Reflective

PAGE:

942 AICPA Legal

TYPE:

A16. Pat, an accountant, includes a false statement in a report for Quantity, Inc., that is filed with the Securities and Exchange Commission. Quantity publishes a misleading ad about its future prospects. Rita sees the ad and calls Stan, who buys stock in Quantity. Under Section 18 of the Securities Exchange Act of 1934, liability may attach to a. b. c. d.

Pat’s report. Quantity’s ad. Rita’s call. Stan’s purchase.

ANSWER: A NAT: AACSB Reflective

PAGE:

945 AICPA Legal

TYPE:

A17. Longhaul Freight, Inc., files a suit against Midge, an accountant, under the antifraud provisions of the Securities Exchange Act of 1934 and Rule 10b-5 of the Securities and Exchange Commission. To succeed, Longhaul must show that Midge a. b. c. d.

acted with scienter. bought or sold a security. is incompetent. knows nothing about securities.

ANSWER: A NAT: AACSB Reflective

PAGE:

946 AICPA Legal

TYPE:

599

CHAPTER 48: PROFESSIONAL LIAILITY AND ACCOUNTABILITY

A18. Flynn, an accountant, helps Grange Supply Company prepare and file a false federal corporate income tax return. Under the Internal Revenue Code, this is a. b. c. d.

a felony punishable by a fine and imprisonment. a felony punishable only by a fine. a misdemeanor punishable only by a fine. a civil violation subject to a liability suit but not a crime.

ANSWER: A NAT: AACSB Reflective

PAGE:

948 AICPA Legal

TYPE:

A19. Feder prepares federal corporate income tax returns for Giant Stores, Inc., and other firms. Under the Internal Revenue Code, with respect to an understatement of a client’s tax liability, Feder may be liable for a. b. c. d.

negligent or willful misconduct. no misconduct. only negligent misconduct. only willful misconduct.

ANSWER: A NAT: AACSB Reflective

PAGE:

948 AICPA Legal

TYPE:

A20. Pace is an attorney, whose clients include Quikfeet Running Shoes Company. Unless Quikfeet has violated securities law, the contents of Pace’s file on Quikfeet may be disclosed to someone other than Quikfeet a. b. c. d.

only to a third party who is a foreseeable user of the information. only under a court order (with or without Quikfeet’s consent). only with Quikfeet’s consent. under any circumstances.

ANSWER: C NAT: AACSB Reflective

PAGE:

949 AICPA Legal

TYPE:

ESSAY QUESTIONS

600 A1.

TEST BANK A—UNIT NINE: GOVERNMENT REGULATION

Bowie, a certified public accountant, prepares and certifies Candy Products Corporation’s financial statements. These statements are included in Candy’s registration statement filed with the Securities and Exchange Commission before Candy’s offering of securities. Dona buys a security covered by the registration statement. Based on this transaction, Dona files a suit against Bowie under Section 11 and Section 10(b) of the Securities Exchange Act of 1934. To succeed in the suit, what must Dona prove? Bowie responds that Dona was not in privity with him and that even if she had been in privity, she cannot prove his lack of due diligence. Can Bowie prevail on these grounds? Why or why not? ANSWER: To prevail in her suit against Bowie, Dona must allege and prove, under both Section 11 and Section 10(b), that there was a material misstatement or omission of fact in the financial statements that were filed with Candy’s registration statement. Dona must show, under both statutes, that she suffered a monetary loss on the security. To establish liability under Section 10(b) and collect damages from Bowie under that statute, Dona must show that she relied on the misstatement or omission in making the purchase. Under Section 10(b), Dona must also prove that Bowie had scienter—intent to manipulate, deceive, or defraud—and that the misstatement or omission caused Dona to suffer a monetary loss. Privity is not required under either statute, so Bowie cannot successfully defend against the suit on this ground. Lack of due diligence is not an element that Dona must prove under either Section 11 or Section 10(b), although after Dona has proved her loss on the security, Bowie must show that he exercised due diligence in the preparation of the financial statements to avoid liability. PAGES: 942 & 944 & 945–947 NAT: AACSB Reflective

A2.

TYPE: = AICPA Decision Modeling

Sian, an accountant, prepares a tax return for a client, Toy Sales Company. Vita, who is not an accountant, prepares a tax return for Wu’s business, Xtra Delivery Service. Is an accountant who prepares a tax return for a client liable for any false statements in the return? Is a person who is not an accountant and who prepares a tax return for someone else liable for any false statements in the return?

CHAPTER 48: PROFESSIONAL LIAILITY AND ACCOUNTABILITY

601

ANSWER: Yes, in both cases. Aiding or assisting in the preparation of a false tax return and understating a client’s tax liability are both crimes under the Internal Revenue Code. Liability does not depend on a person’s professional or nonprofessional status. PAGE: 948 NAT: AACSB Reflective

TYPE: = AICPA Decision Modeling

Chapter 49 Personal Property and Bailments N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

Tangible personal property represents a set of rights and interests but has no real physical existence. ANSWER: F NAT: AACSB Reflective

A2.

956 TYPE: AICPA Critical Thinking

Generally, individuals are not required to pay annual taxes on personal property that is used for business. ANSWER: F NAT: AACSB Analytic

A3.

PAGE:

956 AICPA Legal

TYPE:

Real property cannot be turned into personal property by detaching it from the land. ANSWER: F NAT: AACSB Analytic

PAGE:

957 AICPA Legal

TYPE:

604 A4.

TEST BANK A—UNIT TEN: PROPERTY AND ITS PROTECTION

A trade fixture is personal property that is installed for a commercial purpose by a tenant. ANSWER: T NAT: AACSB Analytic

PAGE:

958 AICPA Legal

TYPE:

605

CHAPTER 49: PERSONAL PROPERTY AND BAILMENTS

A5.

Those who find lost property cannot acquire ownership rights through mere possession of it. ANSWER: F NAT: AACSB Analytic

A6.

PAGE:

959 AICPA Legal

TYPE:

PAGE:

959 AICPA Legal

TYPE:

A gift causa mortis does not become absolute if the donor does not die. ANSWER: T NAT: AACSB Analytic

A9.

TYPE:

Delivery of intangible personal property must always be accomplished by actual delivery. ANSWER: F NAT: AACSB Analytic

A8.

959 AICPA Legal

A gift is a voluntary transfer of property for which no consideration is given. ANSWER: T NAT: AACSB Analytic

A7.

PAGE:

961 AICPA Legal

TYPE:

Property voluntarily placed by its owner and inadvertently forgotten is abandoned property. ANSWER: F NAT: AACSB Analytic

PAGE:

962 AICPA Legal

TYPE:

A10. A finder of lost property can claim title to the property against the whole world—except the true owner. ANSWER: T NAT: AACSB Analytic

PAGE:

962 AICPA Legal

TYPE:

A11. A finder of lost property who knows the true owner and fails to return the property is guilty of the tort of conversion.

606

TEST BANK A—UNIT TEN: PROPERTY AND ITS PROTECTION

ANSWER: T NAT: AACSB Analytic

PAGE:

963 AICPA Legal

TYPE:

607

CHAPTER 49: PERSONAL PROPERTY AND BAILMENTS

A12. A bailment of real property is possible. ANSWER: F NAT: AACSB Analytic

PAGE:

964 AICPA Legal

TYPE:

A13. All transactions involving the delivery of property from one person to another create a bailment. ANSWER: F NAT: AACSB Analytic

PAGE:

964 AICPA Legal

TYPE:

A14. A bailment agreement can be express or implied. ANSWER: T NAT: AACSB Analytic

PAGE:

965 AICPA Legal

A15. In a commercial bailment, the bailee must exercise ordinary care. ANSWER: T NAT: AACSB Analytic

PAGE:

966 AICPA Legal

TYPE:

A16. In most bailments, the bailee can retain the goods given by the bailor and return equivalent property. ANSWER: F NAT: AACSB Analytic

PAGE:

967 AICPA Legal

TYPE:

A17. If the bailed property has been lost or is returned damaged, a court will presume that the bailee was negligent. ANSWER: F NAT: AACSB Analytic

PAGE:

967 AICPA Legal

TYPE:

A18. Property that is leased from a bailor must be fit for the intended purpose of the bailment. ANSWER: T NAT: AACSB Analytic

PAGE:

969 AICPA Legal

TYPE:

608

TEST BANK A—UNIT TEN: PROPERTY AND ITS PROTECTION

A19. The delivery of goods to a common carrier creates a relationship between the shipper and the carrier. ANSWER: T NAT: AACSB Analytic

PAGE:

970 AICPA Legal

TYPE:

609

CHAPTER 49: PERSONAL PROPERTY AND BAILMENTS

A20. A hotel owner is always strictly liable for the safety of a guest’s automobile. ANSWER: F NAT: AACSB Analytic

PAGE:

971 AICPA Legal

TYPE:

MULTIPLE CHOICE QUESTIONS A1.

Helen owns heavy construction equipment and the tools to service it, as well as office furniture, including computers. Ilya owns a number of patents, trademarks that identify the products made under those patents, and stock in the company that sells those products. Personal property includes the items owned by a. b. c. d.

Helen and Ilya. Helen only. Ilya only. neither Helen nor Ilya.

ANSWER: A NAT: AACSB Reflective A2.

PAGE:

956 AICPA Legal

TYPE:

Chita owns the land on which Downwind Farm is situated, plus the farmhouse, barn, and other structures permanently attached to the land. Chita’s brother Elmo owns everything else on the farm—implements, seed, and so on. The real property is owned by a. b. c. d.

Chita and Elmo. Chita only. Downwind Farm. Elmo only.

ANSWER: B NAT: AACSB Reflective

PAGE:

956 AICPA Legal

TYPE:

610 A3.

TEST BANK A—UNIT TEN: PROPERTY AND ITS PROTECTION

Baksheesh owns a house. In the house, on a tile floor is a throw rug. Most likely to meet the definition of a fixture is a. b. c. d.

the house. the throw rug. the tile floor. none of these choices.

ANSWER: C NAT: AACSB Reflective A4.

957 AICPA Legal

TYPE:

Fanny buys clay to throw pottery, which is glazed and fired in a kiln. The finished products are sold to Gifte Shoppe, which sells these items and others to customers who often present them as gifts. The most common way to acquire personal property is to a. b. c. d.

buy it. commingle it. produce it. receive it as a gift.

ANSWER: A NAT: AACSB Reflective A5.

PAGE:

959 TYPE: AICPA Critical Thinking

Rocco gives Sequoia a computer as a gift. Using the computer, Sequoia develops a new computer game, for which she obtains intellectual property protection, and forms Titan Games, LLC, to make and market the game. Sequoia’s acquisition of the game is by a. b. c. d.

gift. accession. confusion. production.

ANSWER: D NAT: AACSB Reflective

PAGE:

959 AICPA Legal

TYPE:

611

CHAPTER 49: PERSONAL PROPERTY AND BAILMENTS

A6.

Ansel owns Bar-B Ranch. Ansel’s only son Cy owns Double-D Ranch in the same county. Ansel gives 90 percent of the Bar-B to Etta, a short-term employee. This gift a. b. c. d.

may lack the required element of “donative intent.” may lack the required element of “donor’s acknowledgement.” may lack the required element of “heir’s acquiescence.” meets all of the requirements for an effective gift.

ANSWER: A NAT: AACSB Reflective A7.

959 AICPA Legal

TYPE:

Kade and Lila each press certain quantities of olive oil to sell to Mediterranean Products, Inc., and agree to share storage costs until Mediterranean can take delivery. The oil is commingled so that Kade’s cannot be distinguished from Lila’s. This is a. b. c. d.

accession. confusion. conversion. dominion.

ANSWER: B NAT: AACSB Reflective A8.

PAGE:

961 AICPA Legal

TYPE:

Idaho Farms mistakenly puts its potatoes in Jackson Co-op’s storage bin, which already contains Kelly Spud Farm’s potatoes. It is impossible to tell which potatoes originally belonged to which party. This is a. b. c. d.

a bailment. accession. confusion. production.

ANSWER: C NAT: AACSB Reflective

PAGE:

961 AICPA Legal

TYPE:

612 A9.

TEST BANK A—UNIT TEN: PROPERTY AND ITS PROTECTION

Floyd tells his daughter Glenda that she can have his Harley Davidson when he dies, but he does not add this to his will. This is a. b. c. d.

a valid gift causa mortis. a valid gift inter vivos. a valid gift testamentary. not a valid gift.

ANSWER: D NAT: AACSB Reflective

PAGE:

961 AICPA Legal

TYPE:

A10. Inadvertently, Morris leaves his backpack at NuWay Launderers when he stops to pick up his clothes. The backpack is a. b. c. d.

abandoned property. gifted property. lost property. mislaid property.

ANSWER: D NAT: AACSB Reflective

PAGE:

962 AICPA Legal

TYPE:

A11. Jennifer finds a full duffel bag that she believes may be subject to an estray statute. Estray statutes apply to a. b. c. d.

abandoned property. bailed property. lost property. mislaid property.

ANSWER: C NAT: AACSB Reflective

PAGE:

963 AICPA Legal

TYPE:

A12. Emily checks her luggage at Flyaway Airlines’s ticket counter before boarding her flight to Houston. Subject to a bailment is a. b. c.

Emily. Emily’s luggage. Emily’s ticketed seat on the flight.

613

CHAPTER 49: PERSONAL PROPERTY AND BAILMENTS

none of the choices.

ANSWER: B NAT: AACSB Reflective

PAGE:

964 AICPA Legal

TYPE:

614

TEST BANK A—UNIT TEN: PROPERTY AND ITS PROTECTION

A13. Delacroix discovers a boat adrift, and retrieves and anchors it. The boat features a number on its side and other evidence pointing to its owner, Elvira. This is a. b. c. d.

an involuntary bailment. a voluntary bailment. an express bailment. no bailment.

ANSWER: A NAT: AACSB Reflective

PAGE:

965 AICPA Legal

TYPE:

A14. Mona asks Ned if she can store her furniture in his garage while she serves a tour of duty with the U.S. Marines Corps. Ned agrees. This is a bailment for a. b. c. d.

neither party’s benefit. the parties’ mutual benefit. the sole benefit of the bailee. the sole benefit of the bailor.

ANSWER: D NAT: AACSB Reflective

PAGE:

965 AICPA Legal

TYPE:

A15. Jill loans her laptop to Kyle. This is a bailment for a. b. c. d.

neither party’s benefit. the parties’ mutual benefit. the sole benefit of the bailee. the sole benefit of the bailor.

ANSWER: C NAT: AACSB Reflective

PAGE:

965 AICPA Legal

615

CHAPTER 49: PERSONAL PROPERTY AND BAILMENTS

A16. Sid borrows Tony’s paint sprayer to paint his house. Uma allows Vic to store his posthole digger in her shed. The party with a right to use the bailed property is a. b. c. d.

neither Sid nor Uma. Sid and Uma. Sid only. Uma only.

ANSWER: C NAT: AACSB Reflective

PAGE:

966 AICPA Legal

TYPE:

A17. Quint rents a riding mower from Rent-All, Inc. Quint leaves the mower in a remote location overnight. When he returns to retrieve it, it is gone. Liability for the loss most likely rests with a. b. c. d.

Quint and Rent-All. Quint only. Rent-All only. neither Quint nor Rent-All.

ANSWER: B NAT: AACSB Reflective

PAGE:

967 AICPA Legal

TYPE:

A18. Bob rents a golf cart at Country Club Golf Course. The brakes are worn, and while Bob is driving the cart, they fail. The cart crashes into a tree, and Bob is injured. Country Club could have discovered, with reasonable diligence, that the brakes were worn. Liability for Bob’s injuries most likely rests with a. b. c. d.

Bob and Country Club. Bob only. Country Club only. neither Bob nor Country Club.

ANSWER: C NAT: AACSB Reflective

PAGE:

969 AICPA Legal

TYPE:

616

TEST BANK A—UNIT TEN: PROPERTY AND ITS PROTECTION

A19. Beta Company arranges to have Carrier Corporation, a common carrier, transport fifty HDTVs from New York to California. Dan is Carrier’s driver. Carrier will not be liable to Beta for failing to deliver the TVs on time if a. b. c. d.

authorities are stopping and searching all trucks entering California. Carrier’s dispatcher mistakenly delays Dan’s departure. Carrier’s truck is broken into and the TVs are stolen. Dan has to wait two days in Denver for the truck to be repaired.

ANSWER: A NAT: AACSB Reflective

PAGE:

970 AICPA Legal

TYPE:

A20. Tab stores video equipment with U-Store-It, Inc., under a contract that excuses the warehouser from liability for any damage. A fire due to UStore-It’s negligence destroys the equipment. The loss is most likely to be imposed on a. b. c. d.

neither Tab nor U-Store-It. Tab and U-Store-It. Tab only. U-Store-It only.

ANSWER: D NAT: AACSB Reflective

PAGE:

970 AICPA Legal

TYPE:

ESSAY QUESTIONS A1.

During a storm on Blue Lake, a boat sinks, but its owner Cappy survives. Cappy plans to return to the site of wreck to salvage its equipment and his possessions, but he delays. Meanwhile, Dick, an amateur diver, discovers the wreck and strips it clean of useful items. Cappy learns of the recovery and files a suit against Dick, claiming that the items are his. Dick responds that the sunken boat was abandoned and therefore he has good title to whatever he took possession of. What is the court likely to rule, and why? ANSWER: The court is most likely to rule that the property recovered from the wreck rightfully belongs to the boat’s owner, because in this problem Cappy did not abandon the boat. Someone who discovers another’s

CHAPTER 49: PERSONAL PROPERTY AND BAILMENTS

617

property can lay claim to it if it was abandoned. Abandonment requires an intent to give title to the property to the first person who discovers it. That intent is lacking in this problem, because Cappy intended to return to the site of the sunken boat and recover what he could from the wreck. There was no intent to pass title to whoever else might have stumbled onto the wreck and “discovered” it and its property. Thus, Cappy retained good title to the property of the boat, and Dick is most likely to be ordered to return it. Dick might also have argued that the property on the boat was mislaid or lost, but those arguments would likewise fail. Neither the boat nor its equipment qualify as mislaid or lost, and, even if they did, mislaid or lost property must be returned to its owner if the owner comes forward or is found. PAGES: 962–963 NAT: AACSB Reflective A2.

TYPE: = AICPA Decision Modeling

Frenchy’s Fast Fries (3F) requires that its employees wear uniforms and protective clothing while on the job. 3F provides a locker room for the employees to leave their street clothes and personal items while working. A sign on the back of the locker room door states, “Frenchy’s is not responsible for the loss of any property in the locker room.” Grant, a 3F employee, changes his clothes in the locker room before starting work and leaves his wallet and watch in a pocket of his jacket hanging in his locker. When he returns after his shift, the wallet and watch are gone. Does Grant’s leaving personal items in the locker room constitute a bailment? If so, what type of bailment? If not, what legal relationship is it? Does 3F’s sign exculpate the company for Grant’s loss? Why or why not? ANSWER: Employees’ storing of personal property in an employer-provided locker room, as a requirement of the job, creates a bailment. The employees deliver their personal property to the possession of the employer, in the locker room, with the intent to give up exclusive possession and control over the property while they are working. This bailment is for the mutual benefit of the bailee (the employer) and the bailors (the employees). This is the most common type of bailment and involves some benefit to each party. Here, the employees, including Grant, benefit from the use of the locker room to store their personal items. The employer, 3F, benefits from the employees’ not taking their items into the work area, the employees’ uniform appearance, a safer work area, and a likely decrease in accidents

618

TEST BANK A—UNIT TEN: PROPERTY AND ITS PROTECTION

and injuries. In this type of bailment, the bailee is liable for ordinary negligence, or the failure to exercise ordinary care, which is the care that a reasonably prudent person would use under the circumstances. In this situation, a bailee has the right to limit his or her liability if the limit is called to the attention of the bailor and it is not against public policy. Here, the employer’s exculpatory clause, on the sign on the back of the door, may be conspicuous enough to be brought to the employees’ attention, but the wording is too broad. A bailee cannot exclude liability for the bailee’s own negligence. PAGES: 965–969 NAT: AACSB Reflective

TYPE: = AICPA Decision Modeling

Chapter 50 Real Property and Landlord-Tenant Relationships N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

The owner of real property has relatively exclusive rights to the airspace above the land. ANSWER: T NAT: AACSB Analytic

A2.

TYPE:

PAGE:

976 AICPA Legal

TYPE:

Plant life is not considered to be real property. ANSWER: F NAT: AACSB Analytic

A4.

975 AICPA Legal

The owner of a fee simple absolute has the right to use property for whatever purpose he or she sees fit. ANSWER: T NAT: AACSB Analytic

A3.

PAGE:

976 AICPA Legal

Only two persons can hold property as tenants in common. 615

616

TEST BANK A—UNIT TEN: PROPERTY AND ITS PROTECTION

ANSWER: F NAT: AACSB Analytic

PAGE:

978 AICPA Legal

TYPE:

617

CHAPTER 50: REAL PROPERTY & LANDLORD-TENANT RELATIONSHIPS

A5.

A tenancy by the entirety is created by a conveyance of all of a parcel of real property to a single tenant. ANSWER: F NAT: AACSB Analytic

A6.

PAGE:

979 AICPA Legal

TYPE:

PAGE:

979 AICPA Legal

TYPE:

A profit is the right to make limited use of another person’s real property without taking anything from the property. ANSWER: F NAT: AACSB Analytic

A9.

TYPE:

A fixed-term tenancy is created when a lease does not specify its duration. ANSWER: F NAT: AACSB Analytic

A8.

979 AICPA Legal

If property is owned as community property, a spouse owns an undivided one-half interest in it. ANSWER: T NAT: AACSB Analytic

A7.

PAGE:

980 AICPA Legal

TYPE:

The sale of real estate involves a transfer of ownership with no specific warranties—if there are warranties, the transfer is not a sale. ANSWER: F NAT: AACSB Analytic

PAGE:

982 AICPA Legal

TYPE:

A10. In most states, the seller of a new house warrants that it is fit for habitation even if the deed does not include such a warranty. ANSWER: T NAT: AACSB Analytic

PAGE:

983 AICPA Legal

TYPE:

A11. Metes and bounds is the traditional term for the negotiations that result in a transfer of real property.

618

TEST BANK A—UNIT TEN: PROPERTY AND ITS PROTECTION

ANSWER: F NAT: AACSB Analytic

PAGE:

984 AICPA Legal

TYPE:

A12. A quitclaim deed conveys to the grantee whatever interest the grantor had. ANSWER: T NAT: AACSB Analytic

PAGE:

985 AICPA Legal

TYPE:

A13. A recording statute allows deeds to be recorded in the public record. ANSWER: T NAT: AACSB Analytic

PAGE:

985 AICPA Legal

TYPE:

A14. Eminent domain is the right of an owner in fee simple absolute to use property to whomever he or she wishes. ANSWER: F NAT: AACSB Analytic

PAGE:

988 AICPA Legal

TYPE:

A15. Inverse condemnation occurs when an owner simply gives private property to the government without accepting any compensation. ANSWER: F NAT: AACSB Analytic

PAGE:

990 AICPA Legal

TYPE:

991 AICPA Legal

TYPE:

992 AICPA Legal

TYPE:

A16. Zoning laws manage the development and use of land. ANSWER: T NAT: AACSB Analytic

PAGE:

A17. Zoning restrictions are absolute. ANSWER: F NAT: AACSB Analytic

PAGE:

A18. Constructive eviction occurs when a tenant moves off the premises in retaliation against the landlord. ANSWER:

PAGE:

993

TYPE:

619

CHAPTER 50: REAL PROPERTY & LANDLORD-TENANT RELATIONSHIPS

NAT: AACSB Analytic

AICPA Legal

A19. A tenant can withhold rent for any reason. ANSWER: F NAT: AACSB Analytic

PAGE:

995 AICPA Legal

TYPE:

620

TEST BANK A—UNIT TEN: PROPERTY AND ITS PROTECTION

A20. Usually, a lease terminates when its terms ends. ANSWER: T NAT: AACSB Analytic

PAGE:

995 AICPA Legal

TYPE:

MULTIPLE CHOICE QUESTIONS A1.

Kailin owns a farm near Manhattan, Kansas, with a farmhouse, barn, and other structures permanently attached. Kailin grows soybeans on the property. A pond lies within the boundaries. Land includes a. b. c. d.

the pond, the soil, and the structures. the pond and the soil only. the soil only. the structures and the soil only.

ANSWER: A NAT: AACSB Reflective A2.

PAGE:

975 AICPA Legal

TYPE:

Luke owns a farm near Marshalltown, Iowa, with stands of trees serving as windbreaks. Luke grows corn on the property. When Luke sells the farm to Nina, if the contract does not specify otherwise, the sale includes a. b. c. d.

neither the crops nor the trees. the crops and the trees. the crops only. the trees only.

ANSWER: B NAT: AACSB Reflective

PAGE:

976 AICPA Legal

TYPE:

621

CHAPTER 50: REAL PROPERTY & LANDLORD-TENANT RELATIONSHIPS

Fact Pattern 50-1A (Questions A3–A4 apply) Nikita owns land in Ohio. Her ownership rights include the right to sell or give away the property without restriction, and the right to commit waste, if she chooses. A3.

Refer to Fact Pattern 50-1A. Nikita’s ownership interest is a. b. c. d.

a fee simple absolute. a leasehold estate. a life estate. an easement.

ANSWER: A NAT: AACSB Reflective A4.

976 AICPA Legal

TYPE:

Refer to Fact Pattern 50-1A. Nikita conveys some of her land to Reggie with the right to possess and use the property for a certain period of time. Nikita has given Reggie a. b. c. d.

a fee simple absolute. a leasehold estate. a life estate. an easement.

ANSWER: B NAT: AACSB Reflective A5.

PAGE:

979 AICPA Legal

TYPE:

Klondike and Leola own 10,000 shares of stock in My-T Gro Corporation. On the death of ether owner, that owner’s interest in the stock passes to the surviving owner. This is a. b. c. d.

a joint tenancy. a life estate. a tenancy in common. ownership in fee simple absolute.

ANSWER: A NAT: AACSB Reflective

PAGE:

978 AICPA Legal

TYPE:

622 A6.

TEST BANK A—UNIT TEN: PROPERTY AND ITS PROTECTION

Buster conveys one square block in Center City “to Diana for life, then to Center City.” For Diana, this creates a. b. c. d.

a fee simple absolute. a leasehold estate. a life estate. an easement.

ANSWER: C NAT: AACSB Reflective A7.

978 AICPA Legal

TYPE:

Quito and Raul own a condo near San Francisco Bay as joint tenants. Raul sells his ownership rights in the condo to Timor. Quito and Timor own the condo as a. b. c. d.

community property owners. joint tenants. tenants at sufferance. tenants in common.

ANSWER: D NAT: AACSB Reflective A8.

PAGE:

978 AICPA Legal

TYPE:

LaDonna signs a one-year lease with Mae to occupy an apartment in Ames, Iowa, near the University of Iowa. LaDonna needs the apartment only for two semesters and may have to sublet it for the rest of the term. LaDonna’s tenancy is a. b. c. d.

a periodic tenancy. a tenancy at will. a tenancy by the entirety. a fixed-term tenancy.

ANSWER: D NAT: AACSB Reflective

PAGE:

979 AICPA Legal

TYPE:

623

CHAPTER 50: REAL PROPERTY & LANDLORD-TENANT RELATIONSHIPS

A9.

Glen, the owner of Harvest Farm, and Ima, the tenant of the farmhouse on the property, may create a fixed-term tenancy by a. b. c. d.

deed. express contract. implication. sufferance.

ANSWER: B NAT: AACSB Reflective

PAGE:

979 AICPA Legal

TYPE:

A10. Uberto and Vicki are married and own a mountain cabin in Wyoming in such a way that neither may transfer separately his or her interest during his or her lifetime. Uberto and Vicki own the lodge as a. b. c. d.

community property owners. tenants at sufferance. tenants by the entirety. tenants in common.

ANSWER: C NAT: AACSB Reflective

PAGE:

979 AICPA Legal

TYPE:

A11. Cow Country Corporation (CCC) sells half of its land to the Double R Ranch. On the land is a reservoir. In the deed, CCC retains the right to remove a limited amount of water per day from the reservoir. This right is a. b. c. d.

a leasehold estate. a license. an easement. a profit.

ANSWER: D NAT: AACSB Reflective

PAGE:

980 AICPA Legal

TYPE:

624

TEST BANK A—UNIT TEN: PROPERTY AND ITS PROTECTION

A12. Mix-It Concrete Company has the right to enter Nim’s land and remove the rock from Nim’s quarry. This is a. b. c. d.

a fee simple absolute. a license. an easement. a profit.

ANSWER: D NAT: AACSB Reflective

PAGE:

980 AICPA Legal

TYPE:

A13. Region Construction Company has a right to drive its trucks across Staple Business, Inc.’s property, which is adjacent to Region’s office. This right is a. b. c. d.

a leasehold estate. a license. an easement. a profit.

ANSWER: C NAT: AACSB Reflective

PAGE:

980 AICPA Legal

TYPE:

A14. Tyro has the right to drive across Ula’s land, which is next to Tyro’s property, to reach an access road. Tyro’s right is a. b. c. d.

an easement appurtenant. an easement in gross. a profit appurtenant. a profit in gross.

ANSWER: A NAT: AACSB Reflective

PAGE:

980 AICPA Legal

TYPE:

A15. Elsa, the owner of Fertile Farm, sells Gina a right to camp on Fertile land overnight. Gina’s right is a. b. c.

a leasehold estate. a license. an easement.

625

CHAPTER 50: REAL PROPERTY & LANDLORD-TENANT RELATIONSHIPS

a profit.

ANSWER: B NAT: AACSB Reflective

PAGE:

981 AICPA Legal

TYPE:

626

TEST BANK A—UNIT TEN: PROPERTY AND ITS PROTECTION

A16. Moby leases from National Theater Corporation a theater in which to stage a series of concerts. Ollie buys a ticket to the series. What distinguishes Moby, a tenant, from Ollie, a licensee, is a. b. c. d.

the exclusivity of possession. the quiet enjoyment of rights. the temporary nature of possession. the title to the property.

ANSWER: A NAT: AACSB Reflective

PAGE:

981 AICPA Legal

TYPE:

A17. Dora leases a house from Evan for a two-year term. To ensure the validity of their lease, it should include a. b. c. d.

a description of the premises. a due date for the payment of the property taxes. a requirement that Dora perform structural repairs to the house. a requirement that Evan carry liability insurance.

ANSWER: A NAT: AACSB Reflective

PAGE:

993 AICPA Legal

TYPE:

A18. Rita believes that Shady Grove Apartments, Inc., her landlord, has violated the law in a way that entitles her to withhold the rent. This remedy is generally associated with a. b. c. d.

breach of the covenant of quiet enjoyment. breach of the implied warranty of habitability. discrimination. failure to provide security against crimes in common areas.

ANSWER: B NAT: AACSB Reflective

PAGE:

995 AICPA Legal

TYPE:

627

CHAPTER 50: REAL PROPERTY & LANDLORD-TENANT RELATIONSHIPS

A19. Xavier owns a duplex that he leases to Yves and Zeb. Xavier may sell a. b. c. d.

the duplex at any time. the duplex, but only after the lease expires and the tenants move out. the duplex, but only with the tenants’ permission. the lease, but not the duplex.

ANSWER: A NAT: AACSB Reflective

PAGE:

995 AICPA Legal

TYPE:

A20. Hobby Farms, Inc., owns rural property that it leases to various tenants, including Ira. Ira’s transfer of his entire interest in the leased property to a Jason is a. b. c. d.

an assignment. an eviction. a right of entry. a sublease.

ANSWER: A NAT: AACSB Reflective

PAGE:

995 AICPA Legal

TYPE:

ESSAY QUESTIONS A1.

Chrissy and Devon are not married to each other, but they share the ownership of Elm Street Offices, a commercial building. When they acquired the building, they agreed in writing that if one dies, the other inherits his or her interest. Are Chrissy and Devon concurrent owners? If so, in what type of concurrent ownership are their rights held? If not, how is their ownership classified? Fagin leases an office in the Elm Street building for a one-year term. If Fagin moves out before the end of the term of the lease, what happens to the leased property? ANSWER: Chrissy and Devon hold the Elm Street Offices building in concurrent ownership as joint tenants. The main distinguishing feature of a joint tenancy is that it includes a right of survivorship. This is what Chrissy and Devon provided for themselves when they acquired their

628

TEST BANK A—UNIT TEN: PROPERTY AND ITS PROTECTION

building, and thus their ownership is not a tenancy in common. Because they are not married to each other, they cannot be tenants by the entirety or community property owners. As for Fagin’s act, a tenant’s moving out before the end of a lease term with no intent of returning constitutes an abandonment of the premises. In many states, the tenant remains liable for the rent until the end of the term regardless of the existence of other potential tenants. In some jurisdictions, the landlord may be required to mitigate his or her damages, however, by making reasonable efforts to relet the premises. In those jurisdictions, damages may be limited by the amount mitigated, or the amount that could have been mitigated, less the landlord’s reasonable costs. PAGES: 978–979 & 995–996 NAT: AACSB Reflective A2.

TYPE: = AICPA Decision Modeling

Andy leases to Burgertown Franchise Corporation a 10,000 square-foot building under a written lease with a twenty-year term, rent payable annually. The lease includes a clause stating that Burgertown is responsible for making all necessary repairs, including rebuilding the structure after its destruction by any cause beyond Andy’s control. The lease does not include a clause concerning its assignment. One day after the tenth rental payment, Burgertown, without Andy’s knowledge or consent, assigns its interest in the lease to Chicken Hut Restaurants, Inc. Meanwhile, Andy dies and Dotty inherits Andy’s interest in the building. Without the knowledge or consent of either Burgertown or Chicken Hut, Dotty sells the building to Earnest Investments, Inc. The next month, the building is destroyed in the flood of a nearby river. Burgertown rebuilds it and files a suit against Earnest for the expense. Earnest responds that the lease has terminated. Is Earnest correct? If so, when did the lease terminate? If not, is Earnest liable for the cost of rebuilding the structure? Why or why not? ANSWER: Earnest is not correct. The lease has not terminated. Absent a provision in the lease to the contrary, its assignment is not prohibited, even without the consent of the landlord. The death of a landlord does not terminate a lease, unlike some other contracts. The owner’s sale of leased premises to a third party does not terminate a lease, even without the consent of the tenant. Normally, the destruction of rental property would terminate a lease, but this commercial lease contained, as do many longterm commercial leases, a clause that required the tenant to rebuild the

CHAPTER 50: REAL PROPERTY & LANDLORD-TENANT RELATIONSHIPS

629

structure if it was destroyed by a cause beyond the landlord’s control, which includes a flood. Such clauses are legally binding. Thus, none of these events—Burgertown’s assignment of the lease to Chicken Hut, Andy’s death, Dotty’s sale of the property to Earnest, or the destruction of the building in a flood—terminated this lease. Although there may be a reduction in the amount of rent Burgertown, who remains liable despite the assignment, must pay while the premises are being rebuilt. Earnest is not liable for the cost of rebuilding the structure. Again, the lease required the tenant to rebuild the destroyed structure at the tenant’s expense. PAGES: 995–996 NAT: AACSB Reflective

TYPE: = AICPA Decision Modeling

Chapter 51 Insurance N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

The consideration paid to an insurer to obtain an insurance policy is the premium. ANSWER: T NAT: AACSB Analytic

A2.

TYPE:

PAGE:

1000 TYPE: AICPA Critical Thinking

A party who would sustain a financial loss from the destruction of property has an insurable interest in it. ANSWER: T NAT: AACSB Analytic

A4.

1000 AICPA Legal

Insurance companies are prohibited from practicing risk management. ANSWER: F NAT: AACSB Reflective

A3.

PAGE:

1001 AICPA Legal

TYPE:

A sibling may have an insurable interest in his or her sibling’s life. 627

628

TEST BANK A—UNIT TEN: PROPERTY AND ITS PROTECTION

ANSWER: T NAT: AACSB Analytic A5.

PAGE:

1002 AICPA Legal

TYPE:

PAGE:

1002 AICPA Legal

TYPE:

PAGE:

1002 AICPA Legal

TYPE:

Liability insurance protects against liability imposed on the insured as a result of injuries to the person or property of another. ANSWER: T NAT: AACSB Analytic

A9.

A loss sustained between the time of application and the delivery of an insurance policy may not be covered ANSWER: T NAT: AACSB Analytic

A8.

TYPE:

An insurance application is part of the insurance contract. ANSWER: T NAT: AACSB Analytic

A7.

1001 AICPA Legal

The existence of an insurable interest is a primary concern when determining liability under an insurance policy. ANSWER: T NAT: AACSB Analytic

A6.

PAGE:

1003 AICPA Legal

TYPE:

A coinsurance clause provides that two or more people will receive payment on a claim under the same insurance policy. ANSWER: F NAT: AACSB Reflective

PAGE:

1004 TYPE: AICPA Critical Thinking

A10. State law may mandate that an incontestability clause be included in an insurance policy. ANSWER: T NAT: AACSB Reflective

PAGE:

1004 TYPE: AICPA Critical Thinking

629

CHAPTER 51: INSURANCE

A11. Under an antilapse clause, an insurance policy will lapse only if no premium is paid on the date due. ANSWER: F NAT: AACSB Reflective

PAGE:

1005 TYPE: AICPA Critical Thinking

630

TEST BANK A—UNIT TEN: PROPERTY AND ITS PROTECTION

A12. Cash surrender value is the amount an insured must pay to cancel a policy. ANSWER: F NAT: AACSB Analytic

PAGE:

1005 AICPA Legal

TYPE:

A13. An insured who has policies with several companies covering the same insurable interest has multiple insurance coverage. ANSWER: T NAT: AACSB Analytic

PAGE:

1005 AICPA Legal

TYPE:

A14. The insured can cancel a policy at any time. ANSWER: T NAT: AACSB Analytic

PAGE:

1006 AICPA Legal

A15. Because insurance law follows contract law, bad faith tort actions against insurers are not allowed. ANSWER: F NAT: AACSB Analytic

PAGE:

1008 AICPA Legal

TYPE:

A16. An insured’s lack of an insurable interest is an absolute defense against payment. ANSWER: T NAT: AACSB Analytic

PAGE:

1008 AICPA Legal

TYPE:

A17. Term insurance provides life insurance with an accumulated cash surrender value that can be used as collateral for a loan. ANSWER: F NAT: AACSB Reflective

PAGE:

1009 TYPE: AICPA Critical Thinking

A18. A fire insurance policy covers losses to the insured as a result of fire and lightning, but not damage from smoke and water. ANSWER:

PAGE:

1010

TYPE:

CHAPTER 51: INSURANCE

NAT: AACSB Reflective

AICPA Legal

631

632

TEST BANK A—UNIT TEN: PROPERTY AND ITS PROTECTION

A19. Automobile liability insurance covers liability for bodily injury and property damage. ANSWER: T NAT: AACSB Reflective

PAGE:

A20. A business may procure coverage comprehensive general liability policy. ANSWER: T NAT: AACSB Analytic

PAGE:

1013 TYPE: AICPA Critical Thinking for

product

liability

1014 AICPA Legal

TYPE:

+ under a N

MULTIPLE CHOICE QUESTIONS A1.

Bret obtains a fire insurance policy on his rental house with Continental Insurance Company. Like all insurance, this policy is an arrangement for a. b. c. d.

avoiding the assumption of responsibility. predicting a potential loss based on unknown factors. shifting the imposition of liability. transferring and allocating risk.

ANSWER: D NAT: AACSB Reflective A2.

PAGE:

1000 AICPA Legal

TYPE:

International Foods Corporation insures its real and personal property, as well as the lives of its key employees, to protect its financial interest should some event undermine its security. This is a. b. c. d.

risk management. risk pooling. risky. risqué.

ANSWER: A NAT: AACSB Reflective

PAGE:

1000 TYPE: AICPA Critical Thinking

633

CHAPTER 51: INSURANCE

A3.

Dhani is the beneficiary of a life insurance policy on Elmo’s life obtained from Famous Insurance Company. The insurer of this policy is a. b. c. d.

Dhani. Elmo. Famous. the agent or broker through whom the policy was obtained.

ANSWER: C NAT: AACSB Reflective A4.

1000 AICPA Legal

TYPE:

Grover is an executive accountant with the firm of Hall & Associates, which obtains insurance from Interstate Insurance, Inc, on Grover’s life. Grover dies. The proceeds of the policy belong to a. b. c. d.

Grover’s heirs. Hall & Associates. Interstate Insurance. the state.

ANSWER: B NAT: AACSB Reflective A5.

PAGE:

1001 AICPA Legal

TYPE:

EZ Rentals Company wants to insure the equipment that it rents to the public. To obtain insurance, EZ must have an insurable interest in the equipment a. b. c. d.

at any time. at the time a loss occurs. at the time a policy is obtained. continuously from the time a policy is obtained to the time a loss occurs.

ANSWER: B NAT: AACSB Reflective

PAGE:

1001 AICPA Legal

TYPE:

634 A6.

TEST BANK A—UNIT TEN: PROPERTY AND ITS PROTECTION

Chocolate Gourmet Company obtains an insurance policy to protect against losses incurred by the firm as a result of being held liable for personal injuries or property damage sustained by others. This is a. b. c. d.

casualty insurance. fire insurance. life insurance. title insurance.

ANSWER: A NAT: AACSB Reflective A7.

1002 TYPE: AICPA Critical Thinking

Shingle & Tile Roofing Contractor, LLC, obtains an insurance policy against liability for injuries or losses sustained by employees during the course of their employment. The policy covers claims not covered by workers’ compensation insurance. This is a. b. c. d.

casualty insurance. fidelity or guaranty insurance. key-person life insurance. employer’s liability insurance.

ANSWER: D NAT: AACSB Reflective A8.

PAGE:

1002 TYPE: AICPA Critical Thinking

Bob applies to City Insurance Company for homeowners’ insurance. City issues a policy, but later discovers that Bob’s application includes several misstatements. Most likely, these misstatements can a. b. c. d.

affect the coverage under the policy but cannot void the policy. bind Bob but cannot affect the coverage. not bind Bob or affect the policy. void the policy.

ANSWER: D NAT: AACSB Reflective

PAGE:

1002 AICPA Legal

TYPE:

635

CHAPTER 51: INSURANCE

A9.

Grace applies for a homeowners’ insurance policy on her house with Heroic Insurance Company through Ian, a broker. In this transaction, Ian is a. b. c. d.

an agent for both parties. Grace’s agent, and not Heroic’s agent. Heroic’s agent, and not Grace’s agent. not an agent.

ANSWER: B NAT: AACSB Reflective

PAGE:

1003 AICPA Legal

TYPE:

A10. Investors Commercial Property Corporation obtains an insurance policy that protects against any losses incurred as a result of existing claims against or liens on certain property at the time of its purchase. This is a. b. c. d.

casualty insurance. fire insurance. life insurance. title insurance.

ANSWER: D NAT: AACSB Reflective

PAGE:

1003 TYPE: AICPA Critical Thinking

A11. Ginny obtains a health insurance policy for her family from Hope Insurance Company. The policy includes an incontestability clause. Under such a clause, after a policy has been in force for two or three years a. b. c. d.

Ginny cannot contest Hope’s insurable interest. Ginny cannot contest Hope’s refusal to pay a claim under the policy. Hope cannot contest Ginny’s eligibility for continued coverage. Hope cannot contest Ginny’s statements in the application.

ANSWER: D NAT: AACSB Reflective

PAGE:

1004 AICPA Legal

TYPE:

636

TEST BANK A—UNIT TEN: PROPERTY AND ITS PROTECTION

A12. Rolling Transport & Storage Corporation wants to insure its warehouse to obtain the maximum possible recovery for the lowest possible premium. To obtain the maximum recovery under a coinsurance clause, the percentage of the value of the property that should be insured is a. b. c. d.

80 percent. 90 percent. 100 percent. 120 percent.

ANSWER: A NAT: AACSB Reflective

PAGE:

1004 TYPE: AICPA Critical Thinking

A13. Boyce obtains from Capital Insurance Company a policy that provides that if the parties cannot agree on the amount of a loss covered by the policy, an estimate of the value by an impartial third party can be demanded. This is a. b. c. d.

an antilapse clause. an arbitration clause. an appraisal clause. an incontestability clause.

ANSWER: C NAT: AACSB Reflective

PAGE:

1005 TYPE: AICPA Critical Thinking

A14. General Allied Company obtains insurance policies with Hy-Rate Insurance, Inc., and Ideal InsurCo against the risk of loss of General’s office building in a fire. Each policy includes a multiple insurance clause. A fire partially destroys the building. General can collect from HyRate a. b. c. d.

all of the loss. half of the loss. its proportionate share of the loss to the total amount of insurance. none of the loss.

ANSWER: C NAT: AACSB Reflective

PAGE:

1005 TYPE: AICPA Critical Thinking

637

CHAPTER 51: INSURANCE

A15. Dag obtains from Expedient Insurance Company a policy that provides Dag has thirty days after a premium’s due date to pay it before the policy will be canceled. This is a. b. c. d.

an antilapse clause. an arbitration clause. an appraisal clause. an incontestability clause.

ANSWER: A NAT: AACSB Reflective

PAGE:

1005 TYPE: AICPA Critical Thinking

A16. Myles obtains a business liability insurance policy from Nova Insurance Company for Myles’s Hydraulics & Transmission Repair shop. Nova can cancel the policy a. b. c. d.

if Myles increases the risk assumed by the Nova. if Myles files a claim under the policy. if Myles appears as a witness in a case brought against Nova. under no circumstances.

ANSWER: A NAT: AACSB Reflective

PAGE:

1006 AICPA Legal

TYPE:

A17. Brassy obtains an insurance policy for her electric guitar collection from Crest Insurance Company. Brassy can cancel the policy a. b. c. d.

at any time. only at the end of a period for which a premium has been paid. only if Brassy no longer has an insurable interest in the collection. only on advance written notice.

ANSWER: A NAT: AACSB Reflective

PAGE:

1006 AICPA Legal

TYPE:

638

TEST BANK A—UNIT TEN: PROPERTY AND ITS PROTECTION

A18. Edy obtains a homeowners’ insurance policy with First Source Insurance Company. First Source can cancel the policy a. b. c. d.

if Edy appears as a witness in a case against First Source. if Edy fails to pay the premiums. if Edy makes changes that add to the home’s value. under no circumstances.

ANSWER: B NAT: AACSB Reflective

PAGE:

1006 AICPA Legal

TYPE:

A19. Speedy Shipping Corporation applies to TransInsurance Company for a fire insurance policy on Speedy’s warehouse. On the application, Speedy misrepresents the age of the property to obtain a lower premium. When a fire soon destroys the warehouse, TransInsurance can a. b. c. d.

deny payment, because a fire destroyed Speedy’s warehouse. deny payment, because of Speedy’s fraud in the application. not deny payment, because a fire destroyed Speedy’s warehouse. not deny payment, because the application is not part of the policy.

ANSWER: B NAT: AACSB Reflective

PAGE:

1008 AICPA Legal

TYPE:

A20. Lila obtains a life insurance policy with no cash surrender value and names her son Maurice as the beneficiary. This is a. b. c. d.

casualty insurance. decreasing-term life insurance. health insurance. term life insurance.

ANSWER: D NAT: AACSB Reflective

PAGE:

1009 TYPE: AICPA Critical Thinking

ESSAY QUESTIONS

CHAPTER 51: INSURANCE

A1.

639

Ace Investments, Inc., is the mortgagee for a warehouse owned by Best Storage, Inc. Ace obtains an insurance policy from Complete Insurance Corporation (CIC) to cover the warehouse. Best also obtains a policy from CIC to cover the warehouse. Later, Best sells the warehouse to Delta Company but keeps the policy. Delta also obtains a policy from CIC to cover the warehouse. Ace agrees to act as Delta’s mortgagee. A fire totally destroys the warehouse. Who can recover for the loss? ANSWER: Ace has an insurable interest in the warehouse. To have an insurable interest, one must be in a position to suffer a loss from its destruction. A mortgagee can have an insurable interest in the property that serves as the security for the mortgage, because the mortgagee can suffer a loss if the property is destroyed. With an insurable interest, there can be an enforceable insurance contract. Thus, Ace can recover for the loss of the warehouse up to the amount of its mortgage. Delta can also recover for the loss up to the amount of its interest in the warehouse. Because an insured must have an insurable interest in property at the time that the loss occurs, Best cannot recover for the loss of the warehouse, even though it retained the insurance policy after selling the property. Best’s insurable interest terminated when it sold the property. PAGES: 1001 & 1012 NAT: AACSB Reflective

A2.

TYPE: = AICPA Decision Modeling

Tira obtains two fire insurance policies on her house. Each is an open policy with a pro rata clause. Tira’s policy with Unity Insurance Company is for a maximum amount of $100,000. Her policy with Verity Insurance Company is for a maximum amount of $50,000. Each policy includes a pro rata clause. Due to defective electrical wiring, Tira’s house catches fire and burns completely. The value the house at the time of the loss is $120,000. Tira files a proof of loss with each insurer. What is an open policy? What is a pro rata clause? What is the liability of Unity and Verity for this event? ANSWER: Under an open policy, an insurer’s liability is limited to the fair market value of the property at the time of loss or the maximum liability stated in the policy, whichever is less. A pro rata clause requires that when a loss is subject to multiple insurance coverage, as in this problem, any loss is shared proportionately by all insurers. Under any fire insurance policy, within a specified period an insured must file a proof

640

TEST BANK A—UNIT TEN: PROPERTY AND ITS PROTECTION

of loss. This Tira did. Because Tira had two policies covering the same risk, each insurer’s liability is subject to the terms of each policy’s pro rata clause. Thus the insurers share the loss proportionately. This proportionate share is determined by the percentage of the total amount of insurance each is responsible for. In this situation, because Tira has open value policies, her recovery is limited to the fair market value of the property at the time of loss, $120,000. As Tira insured the property with two insurers, under the pro rata clauses each must share in the $120,000 loss proportionately to the percentage of the total amount of insurance that each is responsible for. Because Unity insured up to $100,000 and Verity $50,000, Unity is required to pay Tira $80,000 ($100,000 – $150,000 x $120,000 = $80,000) and Verity $40,000 ($50,000 – $150,000 x $120,000 = $40,000). PAGE: 1005 NAT: AACSB Reflective

TYPE: = AICPA Decision Modeling

Chapter 52 Wills and Trusts N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + =

A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS A1.

One who dies after having made a valid will is said to have died testate. ANSWER: T NAT: AACSB Analytic

A2.

TYPE:

PAGE:

1018 AICPA Legal

TYPE:

A gift of real estate other than by will is called a devise. ANSWER: F NAT: AACSB Analytic

A4.

1018 AICPA Legal

An executor is a personal representative named in a will. ANSWER: T NAT: AACSB Analytic

A3.

PAGE:

1020 AICPA Legal

A gift of personal property other than by will is called a legacy. ANSWER:

PAGE:

1020

TYPE:

640

TEST BANK A—UNIT TEN: PROPERTY AND ITS PROTECTION

NAT: AACSB Analytic

AICPA Legal

641

CHAPTER 52: WILLS AND TRUSTS

A5.

A lapsed legacy will occur if the testator predeceases the gift. ANSWER: F NAT: AACSB Analytic

A6.

PAGE:

1021 AICPA Legal

TYPE:

PAGE:

1021 AICPA Legal

TYPE:

Undue influence may be inferred when a named beneficiary is in a position to influence the making of a will. ANSWER: T NAT: AACSB Analytic

A9.

TYPE:

To execute a valid will, a testator must remember the “natural objects of his or her bounty.” ANSWER: T NAT: AACSB Analytic

A8.

1021 AICPA Legal

In most states, a person must be sixteen years of age to execute a valid will. ANSWER: F NAT: AACSB Analytic

A7.

PAGE:

1021 AICPA Legal

TYPE:

1023 AICPA Legal

TYPE:

A holographic will is an oral will. ANSWER: F NAT: AACSB Analytic

PAGE:

A10. A nuncupative will is a will that is completely in the handwriting of the testator. ANSWER: F NAT: AACSB Analytic

PAGE:

1023 AICPA Legal

TYPE:

1023 AICPA Legal

TYPE:

A11. Once executed, a will cannot be revoked. ANSWER: F NAT: AACSB Analytic

PAGE:

A12. To “publish” a will means to release it to the media. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

642

TEST BANK A—UNIT TEN: PROPERTY AND ITS PROTECTION

ANSWER: F NAT: AACSB Analytic

PAGE:

1023 AICPA Legal

TYPE:

643

CHAPTER 52: WILLS AND TRUSTS

A13. A divorce necessarily revokes an entire will. ANSWER: F NAT: AACSB Analytic

PAGE:

1025 AICPA Legal

TYPE:

A14. A married person who makes a will generally cannot avoid leaving a certain portion of the estate to the surviving spouse. ANSWER: T NAT: AACSB Analytic

PAGE:

1025 AICPA Legal

TYPE:

A15. Per capita is a method of dividing an intestate share of an estate. ANSWER: T NAT: AACSB Analytic

PAGE:

1028 AICPA Legal

TYPE:

A16. The trustee is the person for whose benefit a trust is held. ANSWER: F NAT: AACSB Analytic

PAGE:

1029 AICPA Legal

TYPE:

A17. A living trust is created or declared in explicit terms. ANSWER: T NAT: AACSB Analytic

PAGE:

1029 AICPA Legal

A18. A trust that a grantor executes orally in contemplation of immediate death is a testamentary trust. ANSWER: F NAT: AACSB Analytic

PAGE:

1030 AICPA Legal

TYPE:

A19. In a spendthrift trust, a beneficiary can transfer his or her right to the trust’s principal if the transfer is “thrifty.” ANSWER: F NAT: AACSB Analytic

PAGE:

1030 AICPA Legal

TYPE:

A20. If a trust does not provide for its termination, it will not terminate. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

644

TEST BANK A—UNIT TEN: PROPERTY AND ITS PROTECTION

ANSWER: F NAT: AACSB Analytic

PAGE:

1034 AICPA Legal

TYPE:

645

CHAPTER 52: WILLS AND TRUSTS

MULTIPLE CHOICE QUESTIONS A1.

Skyler dies after having made a valid will. Skyler has died a. b. c. d.

in escheat. in probate. intestate. testate.

ANSWER: D NAT: AACSB Reflective A2.

TYPE:

an administrator. an executor. a settlor. a testator.

ANSWER: D NAT: AACSB Reflective

PAGE:

1018 AICPA Legal

According to the terms of Carmen’s will, specific gifts are made, and taxes and other estate expenses and debts are paid. The assets of Carmen’s estate that remain are most likely to be distributed a. b. c. d.

by codicil. holographically. per capita. through a residuary clause.

ANSWER: D NAT: AACSB Reflective A4.

1018 AICPA Legal

Jock makes a will. As a person who makes a will, Jock is a. b. c. d.

A3.

PAGE:

1020 AICPA Legal

TYPE:

Patsy makes a gift of real estate in her will to Quinn. This gift is a. b. c.

a bequest. a devise. a legacy.

646

TEST BANK A—UNIT TEN: PROPERTY AND ITS PROTECTION

an abatement.

ANSWER: B NAT: AACSB Reflective

PAGE:

1020 AICPA Legal

TYPE:

647

CHAPTER 52: WILLS AND TRUSTS

A5.

Travis’s will states, “I give to my brother Ubi my gold pocket watch.” This is a. b. c. d.

a general legacy. a residuary. a specific bequest. a specific devise.

ANSWER: C NAT: AACSB Reflective A6.

1020 AICPA Legal

TYPE:

Gigi, a twenty-year-old, wants to execute a will before she undertakes a mountain-climbing trip on a peak in the Himalaya Mountains. In most states, the legal age for executing a will is a. b. c. d.

sixteen years of age. eighteen years of age. twenty-one years of age. twenty-five years of age.

ANSWER: B NAT: AACSB Reflective A7.

PAGE:

1021 AICPA Legal

TYPE:

Dieter opens an account for $100,000 at East State Bank. The account provides that its funds, which represent most of Dieter’s assets, are held in trust for Flo, the bank employee who opens the account and who retains the card required to access it. Less than a year later, Dieter dies, and Flo withdraws the funds. These facts indicate a. b. c. d.

a living trust. a nuncupative will. descent by election. undue influence.

ANSWER: D NAT: AACSB Reflective

PAGE:

1021 AICPA Legal

TYPE:

648 A8.

TEST BANK A—UNIT TEN: PROPERTY AND ITS PROTECTION

The assets in Dong’s estate, including the value of his home on Elm Street and its contents, are insufficient to pay in full all of the gifts provided for in his will. His heirs will receive a. b. c. d.

full payment in order of seniority until the assets are exhausted. nothing—the assets will descend to the state. reduced benefits. the option of distributing the assets according to their wishes.

ANSWER: C NAT: AACSB Reflective A9.

PAGE:

1021 AICPA Legal

TYPE:

Before dying from injuries suffered in an auto accident, Beamer tells his relatives that on his death, Clotilde is to have all of his possessions. Beamer has made a. b. c. d.

a codicil. a constructive will. an inter vivos will. a nuncupative will.

ANSWER: D NAT: AACSB Reflective

PAGE:

1023 AICPA Legal

TYPE:

A10. Brick executes a will, telling the witnesses that the document they are about to sign is his “last will and testament.” After Brick’s death, the will is admitted for probate. Cecily, his lawyer, reads the will to his heirs. The publication of the will is a. b. c. d.

Brick’s declaration to the witnesses. Brick’s execution of the will. Cecily’s reading of the will to Brick’s heirs. the admission of the will for probate.

ANSWER: A NAT: AACSB Reflective

PAGE:

1023 AICPA Legal

TYPE:

649

CHAPTER 52: WILLS AND TRUSTS

A11. Before dying from injuries suffered in a fall from a horse, Inez tells her cousin Juana that on her death, Lysander is to be given possession of Inez’s Rancho Mirage. In most states, this oral “will” would be a. b. c. d.

not permitted. permitted. solid. valid.

ANSWER: A NAT: AACSB Reflective

PAGE:

1023 AICPA Legal

TYPE:

A12. Ratzo is asked to be a witness to Sade’s will. Before attesting to the will, a. b. c. d.

Ratzo does not have to read the will or be informed of its contents. Ratzo must read the will and recite its contents. Sade must orally tell Ratzo of the will’s contents. Sade’s attorney must read the will aloud to Ratzo.

ANSWER: A NAT: AACSB Reflective

PAGE:

1023 AICPA Legal

TYPE:

A13. Don executes a will leaving half of his farm to his spouse Elsie and the rest to his sons, Frank and Greg, in equal shares. The will disinherits a third son, Hal. Don and Elsie divorce, but Don dies before changing his will. Under the Uniform Probate Code a. b. c. d.

Elsie receives half of the farm, and Frank and Greg share the rest. Elsie receives half of the farm, and Frank, Greg, and Hal share the rest. Frank and Greg receive the entire estate in equal shares. the state inherits the entire estate.

ANSWER: C NAT: AACSB Reflective

PAGE:

1025 AICPA Legal

TYPE:

650

TEST BANK A—UNIT TEN: PROPERTY AND ITS PROTECTION

A14. Amelia executes a separate written instrument to amend her prior will. This separate document is a. b. c. d.

a codicil. a holographic will. a living will. a nuncupative will.

ANSWER: A NAT: AACSB Reflective

PAGE:

1025 AICPA Legal

TYPE:

A15. Violet dies without a will. State laws that determine how the estate of Violet, or of any decedent, will be distributed in such a circumstance are known as a. b. c. d.

constructive trusts. durable powers of attorney. statutes of descent and distribution. will substitutes.

ANSWER: C NAT: AACSB Reflective

PAGE:

1026 AICPA Legal

TYPE:

A16. Sherman dies without a will, survived by his granddaughter Roxy and Roxy’s brother Pio. Roxy and Pio are Sherman’s a. b. c. d.

collateral heirs. settlors. trustees. lineal descendants.

ANSWER: D NAT: AACSB Reflective

PAGE:

1027 AICPA Legal

TYPE:

651

CHAPTER 52: WILLS AND TRUSTS

A17. Grey has two children, Ham (the eldest) and Ivy, both of whom predecease Grey. Ham is survived by a daughter, Jess, and Ivy by two sons, Kato and Lars. On Grey’s death, if the estate is distributed per stirpes a. b. c. d.

each grandchild receives one-third of the estate. Jess receives one-half of the estate, and Kato and Lars each receive one-fourth. Jess receives the entire estate. the grandchildren receive nothing.

ANSWER: B NAT: AACSB Reflective

PAGE:

1028 AICPA Legal

TYPE:

A18. Orin creates a living trust to pass his assets, including stock in Petro Oil Company and other business investments, to his heirs. One advantage of this arrangement is that a. b. c. d.

income taxes do not have to be paid on trust earnings. the assets are sheltered from the payment of estate taxes. the assets can be transferred without going through probate. the trust does not come into existence until the grantor’s death .

ANSWER: C NAT: AACSB Reflective

PAGE:

1029 AICPA Legal

TYPE:

A19. Dotty creates a trust by her will for the benefit of Eppie and her family to come into existence on Dotty’s death. This is a. b. c. d.

a constructive trust. an inter vivos trust. a resulting trust. a testamentary trust.

ANSWER: D NAT: AACSB Reflective

PAGE:

1030 AICPA Legal

TYPE:

652

TEST BANK A—UNIT TEN: PROPERTY AND ITS PROTECTION

A20. Mason creates a trust to prevent his son, Newt, the beneficiary, from assigning his rights to future payments of income from the trust. This is a. b. c. d.

a charitable trust. a constructive trust. a spendthrift trust. an illegal trust.

ANSWER: C NAT: AACSB Reflective

PAGE:

1030 AICPA Legal

TYPE:

ESSAY QUESTIONS A1.

Aaron owns a certificate of deposit with Beth, his sister, and an apartment building with Carl, his brother, in both cases as a joint tenant. Aaron, a partner with Debra in Aaron & Debra Accountants, obtains a life insurance policy with Debra as the designated beneficiary. Aaron writes a will that gives particular items of personal property, as well as specific amounts of cash, to his children and his friends. The will leaves the residue of the estate to Eve, Aaron’s favorite cousin. Carl dies. Aaron, on his own deathbed, makes a gift to the United Way. Will the certificate of deposit, the apartment building, the proceeds from the life insurance policy, and the gift to the United Way become part of Aaron’s estate and be distributed under the will? If not, how will these items be distributed and to whom? ANSWER: Of the items listed in the question, only the apartment building will become part of Aaron’s estate and be distributed in accordance with his will. When property is owned in joint tenancy, each joint tenant has a right of survivorship, which means that if a joint tenant dies, the survivor becomes the sole owner of the property. Because Aaron owned the apartment building in joint tenancy with his brother, and the brother predeceased him, Aaron became the sole owner. As such, Aaron could transfer the property in any way he wished. The apartment building passes under the will, because, unlike the other items in this question, no other disposition for it was made. The interest in the certificate of deposit, which Aaron and his sister Beth held as joint tenants, passes to Beth, who survives Aaron. The gift that Aaron made to the United Way on his deathbed is effective and thus would not become part of Aaron’s estate. The

CHAPTER 52: WILLS AND TRUSTS

653

proceeds of the life insurance policy would pass to Debra, the beneficiary, without becoming part of the estate. PAGE: 1026 NAT: AACSB Reflective

TYPE: = AICPA Decision Modeling

654 A2.

TEST BANK A—UNIT TEN: PROPERTY AND ITS PROTECTION

Ruby, an elderly woman, is diagnosed with lung cancer. She realizes her condition may worsen, and that there is a chance that at some point she will become so weak the only way she will be able to breathe is with the help of medical machinery. She does not want to be kept alive in such a “vegetative state.” What are Ruby’s options? ANSWER: Ruby has several options to control in advance what medical treatment may be used. She could give a health-care power of attorney to an adult child or some other person who understands her wishes and will see that they are carried out. Or, if her state allows it, she could create a living will, in which she can designate that she does not want certain lifesaving procedures to be undertaken in her case. These options are particularly attractive when the treatment would not result in a reasonable quality of life. PAGE: 1035 NAT: AACSB Reflective

TYPE: = AICPA Decision Modeling