Chapter 12 - The Function and Creation of Negotiable Instruments Flashcards Preview

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Flashcards in Chapter 12 - The Function and Creation of Negotiable Instruments Deck (43)
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1

acceleration clause

(1) a clause in an installment contract that provides for all future payments to become due immediately on the the failure to tender timely payments or on the occurrence of a specified event
(2) a clause in a mortgage loan contract that makes the entire loan balance become due if the borrower misses or is late making monthly payments

2

acceptance

(1) in contract law, the offeree's notification to the offeror that the offeree agrees to be bound by the terms of the offeror' proposal. Although historically the terms of acceptance had to be the mirror image of the terms of the offer, the Uniform Commercial Code provides that even modified terms of the offer in a definite expression of acceptance constitute a contract
(2) in negotiable instruments law, the drawee's signed agreement to pay a draft when presented

3

acceptor

- the person (drawee) who accepts a draft and who agrees to be primarily responsible for its payment

4

banker's acceptance

- a negotiable instrument that is commonly used in international trade
- a banker's acceptance is drawn by a creditor against the debtor, who pays the draft at maturity
- the drawer creates a draft without designating a payee
- the draft can pass through many parties' hands before a bank (drawee) accepts it, transforming the draft into a banker's acceptance
- acceptances can be purchased and sold in a way similar to securities

5

bearer

- a person in possession of an instrument payable to bearer or indorsed in blank

6

bearer instrument

- any instrument that is not payable to a specific person, including instruments payable to the bearer or to "cash"

7

certificate of deposit (CD)

- a note of a bank in which a bank acknowledges a receipt from a party and promises to repay the money, with interest, to the party on a certain date

8

check

- a draft drawn by a drawer ordering the drawee bank or financial institution to pay a certain amount of money to the holder on demand

9

draft

- any instrument (such as a check) drawn on by a drawee (such as a bank) that order the drawee to pay a certain sum of money, usually to a third party (the payee), on demand or at a definite future time

10

drawee

- the party that is ordered to pay a draft or check
- with a check, a financial institution is always the drawee

11

drawer

- the party the initiates a draft (writes a check, for example), thereby ordering the drawee to pay

12

extension clause

- a clause in a time instrument that allows the instrument's dats of maturity to be extended into the future

13

holder

- any person in the possession of an instrument drawn, issued, or endorsed to him or her, to his or her order, to bearer, or in blank

14

issue

- the first transfer, or delivery, of an instrument to a holder

15

maker

- one who promises to pay a certain sum to the howler of a promissory note or certificate of deposit (CD)

16

negotiable instrument

- a signed writing that contains an unconditional promise or order to pay an exact sum of money, on demand or at an exact future date, to a specific person or holder, or to bearer

17

order instrument

- a negotiable instrument that is payable "to the order of an identified person" or "to an identified person or order

18

payee

- a person to whom an instrument is made payable

19

presentment

- the act of presenting an instrument to the party liable in the instrument to collect payment; presentment also occurs when a person presents an instrument to a drawee for acceptance

20

promissory note

- a written promise made by one person (the maker) to pay a fixed sum of money to another perish (the payee or a subsequent holder) on demand or on a specified date

21

signature

- under the Uniform Commercial Code, "any symbol executed or adopted by a party with a present intention to authenticate a writing"

22

trade acceptance

- a draft that is drawn by a seller of goods ordering the buyer to pay a specified sum of money to the seller, usually at a states time in the future
- the buyer accepts the draft by signing the face of the draft, thus creating an enforceable obligation to pay the draft when it comes due
- on a trade acceptance, the seller is both the drawee and the payee

23

SAMPLE TEST QUESTIONS
1. On April 1, Richard arranges to buy a sixteen-speed bike from his neighbor Phil for $500. Phil agrees to deliver the bike on May 1. Richard writes a draft for $500 payable to Phil on May 1. In this situation, the draft is :
a. a certificate of deposit
b. a time draft
c. a sight draft
d. a promissory note

ANSWER :
(B)
CORRECT :
(B)

24

SAMPLE TEST QUESTIONS
2. InterComp normally sells $50,000 worth of software to Power Source, a retail electronics store, each summer on terms requiring payment in sixty days. One year, InterComp wants cash, but Power Source wants the usual sixty days. To meet both needs, the parties can arrange :
a. a certificate of deposit
b. a bearer bond
c. a trade acceptance
d. an international letter of credit

ANSWER :
(C)
CORRECT :
(C)

25

SAMPLE TEST QUESTIONS
3. To obtain a business license, Bess writes a check to a certain state agency. Bess is :
a. the drawee
b. the drawer
c. the indorser
d. the payee

ANSWER :
(B)
CORRECT :
(B)

26

SAMPLE TEST QUESTIONS
4. Sarah has a checking account at Secure Bank. Sarah buys her roommate Sophie's two tickets to a Broadway musical for $200. Sarah writes Sophie a check for the tickets. In this situation, Secure Bank is :
a. the drawee
b. the indorser
c. the payee
d. the drawer

ANSWER :
(A)
CORRECT :
(A)

27

FACT PATTERN 12-1B
Thalia signs an instrument unconditionally promising to pay to "Union Bank" $7500 with interest in installments with the final payment due June, 1, 2017.

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28

FACT PATTERN 12-1B
5. Refer to Fact Pattern 12-1B. The instrument that Thalia signed is most likely :
a. a certificate of deposit
b. a draft
c. an order to pay
d. a promissory note

ANSWER :
(D)
CORRECT :
(D)

29

FACT PATTERN 12-1B
6. Refer to Fact Pattern 12-1B. With respect to this instrument, Union Bank is :
a. the drawee
b. the indorser
c. the maker
d. the payee

ANSWER :
(D)
CORRECT :
(D)

30

SAMPLE TEST QUESTIONS
7. Evermore Bank is both the drawer and the drawee with regard to a draft issued to Fernando. The draft is :
a. a certificate of deposit
b. a cashier's check
c. a nonnegotiable instrument
d. a promissory note

ANSWER :
(C)
CORRECT :
(B)