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Flashcards in Chapter 8 Deck (91):
1

Which of the following events will release a noncompensated surety from liability to the creditor?

A noncompensated surety will be discharged from liability if the principal debtor and the creditor modify the terms of the contract in any way. A partial surrender of the debtor's collateral is a modification that will release a noncompensated surety from liability.

2

What is a SURETY?

someone who can pay the debt if the principal debtor goes bankrupt, it is having someone co-sign a loan

3

Mechanic's lein?

A mechanic's lien arises from improvements made on real property. It does require notice of legal action before selling the debtor's property to satisfy the debt.

A mechanic's lien is placed on property such as an automobile and will prevent the owner from transferring "clean" title without paying the mechanic's lien. A mechanic's lien does not, by itself, allow the creditor to collect money from a debtor's wages.

4

Artisan's lein?

An artisan's lien arises from improvements made to personal property. It does require notice of legal action before selling the debtor's property to satisfy the debt.

5

Which of the following acts always will result in the total release of a compensated surety?

Tender of performance by the principal debtor completely releases the surety, even a compensated surety.

6

When a principal debtor defaults and a surety pays the creditor the entire obligation, which of the following remedies gives the surety the best method of collecting from the debtor?

Subrogation, which is the right a surety has by which the surety succeeds to the creditor's rights against the principal when the surety pays the principal's obligations.

7

Under the Federal Fair Debt Collection Practices Act, which of the following would a collection service using improper debt collection practices be subject to?

The FDCPA gives parties injured by unfair collection practices the right to sue for damages. 15 USC 1692k(a)(1)

Civil lawsuit for damages for violating the Act

8

Which of the following prejudgment remedies would be available to a creditor when a debtor owns no real property?

A writ of attachment is an order by the court to a sheriff to seize a person's property. The writ can apply to personal property and to real property, and so the writ can be used even when a person owns no real property. Garnishment is an order to a third person who holds property of the debtor to turn the property over to a creditor. The property involved usually are wages and/or other property owed by the third person to the debtor. There is no requirement that the property be the debtor's real property.

9

A writ of attachment is an order by the court to a sheriff to seize a person's property. The writ can apply to personal property and to real property, and so the writ can be used even when a person owns no real property. Garnishment is an order to a third person who holds property of the debtor to turn the property over to a creditor. The property involved usually are wages and/or other property owed by the third person to the debtor. There is no requirement that the property be the debtor's real property.

Release of a co-surety is treated the same as release of security. The release discharges the other co-sureties to the extent of the impairment of their rights. Had West not been released, Quill would have had a right of contribution against West for half of the debt. Thus, Quill is discharged to that extent.

10

Which of the following methods will allow a creditor to collect money from a debtor's wages?

A writ of garnishment will allow a creditor to collect money from a debtor's wages.

11

A party contracts to guarantee the collection of the debts of another. As a result of the guaranty, which of the following statements is correct?

The Statute of Frauds requires promises to pay the debts of another to be evidenced by a writing containing the material terms.

12

Which of the following events will release a noncompensated surety from liability?

Modification by the principal debtor and creditor of their contract that materially increases the surety's risk of loss

Note that any variation on an uncompensated surety's risk releases the surety.

13

The federal Fair Debt Collection Practices Act prohibits a debt collector from engaging in unfair practices. Under the Act, a debt collector generally can be prevented from:

The Fair Debt Collection Practices Act prohibits contacting the debtor directly if an attorney represents the debtor.

14

Which of the following bonds are an obligation of a surety?

An official bond is a type of surety bond.

15

On June 1, Year 1, Decker orally guaranteed the payment of a $5,000 note Decker's cousin owed Baker. Decker's agreement with Baker provided that Decker's guaranty would terminate in 18 months. On June 3, Year 2, Baker wrote Decker confirming Decker's guaranty. Decker did not object to the confirmation. On August 23, Year 2, Decker's cousin defaulted on the note and Baker demanded that Decker honor the guaranty. Decker refused. Which of the following statements is correct?

Under the Statute of Frauds a promise to pay the debt or default of another (a "surety" contract) must be evidenced by a writing signed by the surety (the party to be charged). Decker orally guaranteed the debt owed by Decker's cousin. Thus, Decker's promise is not enforceable. Baker's confirmation is irrelevant.

16

A distinction between a surety and a co-surety is that only a co-surety is entitled to:

Only a co-surety has the right of contribution against other co-sureties. Contribution results in the sharing of liability on a pro-rata basis among co-sureties.

17

Which of the following defenses would a surety be able to assert successfully to limit the surety's liability to a creditor?

A surety may raise his or her own contract defenses to limit his or her liability; thus, the surety's own incapacity is a defense to the surety promise.

18

Which of the following statements is(are) correct regarding the relationship between an agent and a nondisclosed principal?

A principal owes her agent the duty of indemnification, which is a type of reimbursement for costs and liabilities incurred by the agent as a result of authorized acts on behalf of the principal.
Actual authority is the authority that the agent reasonably believes she possesses because of the principal's communications to the agent. The agent has the same actual authority whether the principal is disclosed or undisclosed.

19

Thorp was a purchasing agent for Ogden, a sole proprietor, and had the express authority to place purchase orders with Ogden's suppliers. Thorp placed an order with Datz, Inc. on Ogden's behalf after Ogden was declared incompetent in a judicial proceeding. Thorp was aware of Ogden's incapacity. Which of the following statements is correct concerning Ogden's liability to Datz?

An agency is terminated by operation of law upon the incapacity of the principal; no notice is needed.

20

Young Corp. hired Wilson as a sales representative for six months at a salary of $5,000 per month plus 6% of sales. Which of the following statements is correct?

Wilson is obligated to act solely in Young's interest in matters concerning Young's business.

An agent owes the principal a duty of loyalty, which includes the duty to act solely in the principal's interest in matters relating to the agency.

21

Easy Corp. is a real estate developer and regularly engages real estate brokers to act on its behalf in acquiring parcels of land. The brokers are authorized to enter into such contracts, but are instructed to do so in their own names without disclosing Easy's identity or relationship to the transaction. If a broker enters into a contract with a seller on Easy's behalf:

The broker will have the same actual authority as if Easy's identity had been disclosed.

Actual authority arises from the communications between the principal and the agent. Whether the agent discloses the principal to the third party with whom the agent contracts has no effect on the communications between the principal and the agent.

22

An agent will usually be liable under a contract made with a third party when the agent is acting on behalf of a(an):

An agent generally is not liable on contracts that the agent makes on the principal's behalf if the principal is disclosed, but the agent is personally liable on contracts the agent makes on behalf of the principal when the principal is undisclosed.

23

Which of the following rights will a third party be entitled to after validly contracting with an agent representing an undisclosed principal?

Performance of the contract by the agent. If the principal is undisclosed, the third party with whom the agent dealt can hold the agent liable on the contract.

24

A general agent's apparent authority to bind her principal to contracts with third parties will cease without notice to those third parties when the:

Principal has received a discharge in bankruptcy under the liquidation provisions of the Bankruptcy Code.

Generally, a general agent's apparent authority does not cease unless and until notice is given. However, if the principal has received a discharge in bankruptcy, notice is not required to terminate the agent's apparent authority.

25

Apparent authority is?

Apparent authority is based on the reasonable beliefs of the third party with whom the agent deals.

26

Actual authority?

actual authority is that authority which the agent reasonably believes he has, and here North told Sutter that he no longer had authority to make unlimited purchases.

27

Once an undisclosed principal becomes known to the third party:

the third party can elect to hold either the agent or the principal liable for breach of contract.

28

What is the doctrine under which a corporation is made liable for the torts of the corporation's employees when the torts are committed within the scope of employment?

Under the doctrine of Respondeat Superior, a principal, including a corporation, can be held liable for an employee's tort committed within the scope of employment.

29

Which of the following is a prerequisite for the creation of an agency relationship?

The principal must have capacity. Creation of an agency relationship requires the consent of the parties and that the principal be competent (not a minor and not incompetent).

Note: writing to establish an agency-principal agreement is generally not needed unless: (i) the agent is to buy/sell land on behalf of the principal and/or (ii) the agency relationship cannot be performed within one year.

30

Under agency law, which of the following statements best describes ratification?

If (i) a person acts without authority but purportedly on behalf of a principal, (ii) the principal subsequently becomes aware of all of the material facts regarding the transaction, and (iii) the principal either expressly or by implication (e.g., by retaining the benefits of the transaction when he or she could have declined or returned the benefits) affirms the person's unauthorized acts, a ratification has occurred.

31

After which of the following situations would it usually not be necessary to notify third parties of the termination of an agency's existence?

Notification to third parties is not required when actual authority of an agency relationship terminates as an operation of law. These include death of either the principal or the agent, incapacity of the principal, discharge in bankruptcy of the principal, failure to acquire a necessary license, destruction of the subject matter, or subsequent illegality.

32

In a principal-agent relationship that is not contractual, which of the following remedies is not available to the agent whose principal is guilty of violating a duty owed the agent?

If a principal violates a duty owed the agent, the agent cannot demand specific performance from the principal.

33

What is generally included in a corporation's articles of incorporation?

Rule: The articles of incorporation generally must contain both the name of a registered agent upon whom process may be served and the number of shares authorized to be issued.

34

The limited liability of a stockholder in a closely held corporation may be challenged successfully if the stockholder:

The limited liability of a shareholder in a closely held corporation may be challenged where the shareholder undercapitalized the corporation when it was formed. Courts can "pierce the corporate veil."

35

An LLP:

Limited Liability Partnership, does not pay taxes on its earnings. Instead, the profits and losses flow through to the partners as in a general partnership. The LLP files an informational tax return like that of a general partnership. The partners may agree to have the entity managed by one or more of the partners. A partner may be another entity.

36

Which of the following statements is a general requirement for the merger of two corporations?

Both corporations must give shareholders notice and a summary of the merger plan.

37

Under the Revised Model Business Corporation Act, which of the following statements is correct regarding corporate officers of a public corporation?

A corporation may indemnify its officers for liabilities incurred in a suit by stockholders, especially if the officer prevails.

38

Which of the following statements is(are) correct regarding the methods a target corporation may use to ward off a takeover attempt?

Rule: A tender offer is a general invitation by a bidder to the shareholders of a target company to tender their shares to the bidder at a specified price during a specified time. A target of a takeover may ward off a tender offer by offering to repurchase shares from its shareholders. If a takeover will violate federal antitrust law, a court will enjoin the takeover.

39

Acorn Corp. wants to acquire the entire business of Trend Corp. Which of the following methods of business combination will best satisfy Acorn's objectives without requiring the approval of the shareholders of either corporation?

A parent corporation owning 90% or more of a subsidiary may merge the subsidiary (short form merger) into the parent without the approval of the shareholders of either corporation or the approval of the subsidiary's board.

40

Limited Liability Company:

All members in a limited liability company have limited liability. Unless they choose otherwise, all members of a limited liability company may participate in management. A limited liability company is dissolved upon the death, retirement, resignation, bankruptcy, etc., of a member.

41

Harry, Betty, and Jim decide to form a hair salon business. Betty and Jim agree to equally manage the business and have agreed to accept full personal liability for obligations of the business. Harry contributes money to help them get started. Harry does not want any personal liability but does want access to the books and records and to share in the profits. They have all agreed that unanimous consent is needed to transfer their ownership interests. Assume any necessary filings have been made. What type of business entity best reflects the terms of their agreement?

A limited partnership best reflects the terms of the parties' agreement. A limited partnership has one or more general partners and one or more limited partners. The general partners are personally liable for partnership obligations and run the business (such as Betty and Jim agreed). A limited partner does not have personal liability for partnership obligations and does not take part in management; however, limited partners have a right to inspect partnership books and records relevant to their interest. Thus, a limited partnership has the attributes that Harry agreed to. Finally, all partners must unanimously consent to a transfer of an ownership interest in a limited partnership, as the parties agreed here. Thus, a limited partnership best reflects the agreement of the parties.

42

Which of the following provisions must a for-profit corporation include in its articles of incorporation to obtain a corporate charter?

Rule: In order to obtain a corporate charter, a for-profit corporation must include in its articles of incorporation the name of the corporation and a provision for the authorization of voting stock. In addition, the articles of incorporation must include the names of the incorporators and the name and address of the registered agent.

43

The corporate veil is most likely to be pierced and the shareholders held personally liable if:

The shareholders have commingled their personal funds with those of the corporation.

Generally, a corporation is treated as an entity distinct from its shareholders and shareholders are not liable for the corporation's debts. However, where the shareholders do not treat the corporation as a distinct entity, such as where they commingle their personal funds with the corporation's funds, courts are likely to ignore the corporate form as well.

44

Absent a specific provision in its articles of incorporation, a corporation's board of directors has the unilateral power to do all of the following, except:

Amendment of the articles of incorporation, albeit (although) proposed by the directors, cannot usually be effected without the affirmative vote of the shareholders.

45

Which of the following rights is a holder of a public corporation's cumulative preferred stock always entitled to?

Dividend carryovers from years in which dividends were not paid, to future years.

Cumulative preferred dividends are dividends that must be paid before any dividend can be paid to holders of non-preferred shares. The right to the dividend accumulates if it is not paid in a particular year.

46

Which of the following securities are corporate debt securities?

BONDS

47

Under the Revised Model Business Corporation Act, a dissenting stockholder's appraisal right generally applies to which of the following corporate actions?

Rule: Shareholders who are dissatisfied with the terms of a merger, consolidation or sale of assets are permitted to compel the corporation to buy their shares at fair market value. This is known as the right of appraisal or the dissenting right.

48

For what purpose will a stockholder of a publicly held corporation be permitted to file a stockholders' derivative suit in the name of the corporation?

To recover damages from corporate management for an ultra vires management act.

A derivative action is an action by a stockholder in the name of the corporation to recover damages or to seek some other remedy on behalf of the corporation when the corporation does not enforce its own rights. Such actions are often brought when the directors or officers have breached their duty to the corporation and have refused to sue themselves. An ultra vires act is an act outside of a director's or an officer's scope of authority and thus is a breach of duty to the corporation.

49

Under the Revised Model Business Corporation Act, when a corporation's bylaws grant stockholders preemptive rights, which of the following rights is(are) included in that grant?

Rule: Preemptive rights provide a shareholder with a right of first refusal to buy a share of newly issued shares sufficient to maintain the shareholder's proportionate share of rights in any newly issued shares.

50

To which of the following rights is a stockholder of a public corporation entitled?

Stockholders have a right to inspect certain corporate records.

51

A parent corporation owned more than 90% of each class of the outstanding stock issued by a subsidiary corporation and decided to merge that subsidiary into itself. Under the Revised Model Business Corporation Act, which of the following actions must be taken?

In a short form merger (one between a parent and a subsidiary 90% of which is owned by the parent), the subsidiary's shareholders have a right to dissent and take advantage of the appraisal remedy.

52

Leslie, Kelly, and Blair wanted to form a business. Which of the following business entities does not require the filing of organization documents with the state?

A joint venture is like a partnership. A partnership or joint venture can be formed without filing any documents with the state.

53

Following the formation of a corporation, which of the following terms best describes the process by which the promoter is released from, and the corporation is made liable for, pre-incorporation contractual obligations?

Novation

A promoter is personally liable for the contracts he or she enters into prior to incorporation. A corporation may become liable by adoption of the contract, and through the process of novation (an agreement among all of the parties), the promoter may be released from contractual obligations.

54

Which of the following entities does not require the approval of the state in which the entity is formed?

General Partnership

55

Which of the following statements describes the same characteristic for both an S corporation and a C corporation?

Either entity's shareholders may contribute property to the corporations without being taxed and may contribute such property as an exchange for stock as appraised by the directors.

56

Smith was an officer of CCC Corp. As an officer, the business judgment rule applies to Smith in which of the following ways?

If Smith makes, in good faith, a serious but honest mistake in judgment, Smith is generally not liable to CCC for damages caused.

The business judgment rule applies to officers as well as directors, who in their capacity, act in a manner the officer believes to be in the best interest of the corporation, and with the care an ordinarily prudent person in a like position would exercise. If the standards of the business judgment rule are met, the officer is not liable to the company for resulting damages.

57

Which of the following statements is correct regarding the declaration of a stock dividend by a corporation having only one class of par value stock?

A stock dividend is a corporation's ratable distribution of additional shares of stock to its stockholders.

Stock dividends are dividends in the corporation's own authorized but unissued shares given to existing shareholders on account of their shares.

58

Which of the following corporate actions is subject to shareholder approval?

Shareholders have the right to elect and remove directors through the voting process.

59

Which of the following is a requirement for a small business corporation to elect S corporation status?

It has only one class of stock.

A corporation can elect S corporation status only if its shareholders are individuals, estates, or certain types of trusts. Also, can have UP to 100 shareholders.

60

The president of a company has signed a $10 million contract with a construction company to build a new corporate office. Which of the following corporate documents sets forth the scope of authority under which this transaction is governed?

Bylaws, these usually contain the rules for running the corporation

61

Which of the following statements best states the purpose of cumulative voting?

To allow minority shareholders to gain representation on the board of directors.

In cumulative voting, each share is entitled to one vote for each director position that is being filled and the shareholders may cast the votes in any way, including casting all for a single candidate.

62

Which of the following forms of business generally provides all owners with limited liability while avoiding federal taxation of income at the entity level?

In a subchapter S corporation the entity is taxed liked a partnership, but the shareholders still enjoy the limited liability of the corporate form.

63

What is the most likely effect if a court pierces the corporate veil?

When the "corporate veil is pierced," courts disregard the corporate form and hold shareholders, officers or directors personally liable. Courts generally will pierce the corporate veil for commingling of funds, inadequate capitalization at time of formation or fraud. The corporate veil of limited liability may be pierced and the personal assets of the shareholders may be reached to satisfy corporate obligations if the corporation was inadequately (thinly) capitalized at the time of its formation. Also, using corporate assets for owner's personal purposes.

64

Hughes and Brody start a business as a closely-held corporation. Hughes owns 51 of the 100 shares of stock issued by the firm and Brody owns 49. One year later, the corporation decides to sell another 200 shares. Which of the following types of rights would give Hughes and Brody a preference over other purchasers to buy shares to maintain control of the firm?

Pre-emptive rights

The right to purchase new issuances of additional stock in order to maintain current proportional ownership is known as a pre-emptive right.

65

A corporate stockholder is entitled to which of the following rights?

A stockholder has the right of approval over fundamental corporate changes such as dissolution.

66

Which of the following must take place for a corporation to be voluntarily dissolved?

For a corporation to dissolve, the directors must adopt a resolution recommending dissolution

67

Davis, an inventor, developed a new product, but lacked money to get the product to the marketplace. Before creating a corporation to raise capital, Davis leased office space and equipment, entered into contracts with third parties, and identified investors. Who has liability for pre-incorporation debts?

Davis acted as a promoter (a person who procures capital and other commitments for a corporation to be formed). Promoters are personally liable for contracts that they enter into on behalf of the corporation to be formed. They remain liable on the contracts even after the corporation is formed unless the parties enter into a novation (i.e., an agreement among the parties to substitute the corporation for the promoter).

68

Which of the following corporate shareholder rights is enforceable by means of a derivative suit?

A derivative action is used when a corporation fails to enforce a right that it has against a third party; the shareholder brings suit on behalf of the corporation. A suit against a third party to enforce the corporation's rights against the third party is an example of a corporate shareholder right enforceable by derivative suit.

69

A joint venture is a(an):

A joint venture is an association of persons engaged as co-owners in a single (special transaction) undertaking for profit. A joint venture is treated as a partnership for most important legal respects.

70

Green Trees, LP is a limited partnership. Dave is a limited partner. Seeds Today, Inc. is a creditor of the limited partnership. Upon dissolution of the partnership, the assets of Green Trees, LP will be distributed to pay:

Rule: Upon dissolution, the assets of a limited partnership are first used to pay off creditors. The contributions of limited partners, such as Dave, are returned next.

71

A limited partnership must have:

Rule: A limited partnership must have at least one general partner and one limited partner.

72

Doug was the sole general partner in Heavy Foot, Limited Partnership. While driving to work one morning, Doug died in a car accident. The limited partnership:

Rule: The death of a general partner will, by operation of law, dissolve the limited partnership. Because the dissolution is by operation of law, there is no requirement of obtaining a judicial decree. Remaining limited partners do not automatically become general partners as a result of the death of the general partner.

73

Tim, Peter, and Rick want to form a limited liability company. What document must they file with the state?

The Articles of Organization must be filed with the secretary of state.

74

The articles of organization for a limited liability company must contain everything, except the following:

Limited liability companies do not issue "shares" held by shareholders like in a corporation. Instead, members (the owners) are said to have "interests" in the LLC.

75

Unless there is an agreement to the contrary, the voting power of members in a limited liability company is determined by:

Rule: Absent an agreement otherwise, all members generally participate in management, and their voting strength is determined in proportion to ownership interest. This is calculated by comparing each member's capital contribution to that of the other members.

76

What term is used to describe a partnership without a specified duration?

A partnership at will.

77

Will the bankruptcy of a partner result in the dissociation of a partner?

Yes

78

Which of the following statements is correct regarding the apparent authority of a partner to bind the partnership in dealings with third parties? The apparent authority:

May allow a partner to bind the partnership to representations made in connection with the sale of goods.

79

Gillie, Taft, and Dall are partners in an architectural firm. The partnership agreement is silent about the payment of salaries and the division of profits and losses. Gillie works full-time in the firm, and Taft and Dall each work half time. Taft invested $120,000 in the firm, and Gillie and Dall invested $60,000 each. Dall is responsible for bringing in 50% of the business, and Gillie and Taft 25% each. How should profits of $120,000 for the year be divided?

Gillie $40,000, Taft $40,000, Dall $40,000.

Rule: In the absence of an agreement to the contrary, the profits will be shared equally regardless of investment of money or time.

FOR A PARTNERSHIP

80

Heather, Erika, and Shelby are members in HES LLC. Heather works 40 hours per week and Erika and Shelby work 20 hours per week. Heather contributed $30,000 to the LLC and Erika and Shelby contributed $60,000 each. Erika and Shelby have each originated 45% of the LLC's business and Heather has originated the other 10%. Absent an agreement to the contrary, how will the LLC's $120,000 profits be divided among the members?

$24,000 heather
$48,000 erika
$48,000 shelby

THIS IS A LLC

Rule: Absent an agreement to the contrary, the LLC's profits will be divided among the members in proportion to their contributions.

81

Which of the following partners of a limited liability partnership (LLP) may avoid personal liability when a partner commits a negligent act?

LLP partners are liable only for their own negligence and the negligence of anyone who commits a wrongful act under the partner's direct control.

82

Which of the following statements best describes the effect of the assignment of an interest in a general partnership?

The assignee of an interest in a partnership receives the assignor's rights to profits and surplus.

83

Which of the following statements is correct concerning liability when a partner in a general partnership commits a tort while engaged in partnership business?

Each partner is jointly and severally liable for torts committed by any partner while in the course of partnership business.

84

Joint venture is similar to?

GENERAL PARTNERSHIP

85

What business entity can be voluntarily dissolved and terminated only by filing a dissolution document with the state of organization?

Voluntary dissolution of a corporation requires the filing of articles of dissolution with the state.

86

Taxes payable under the Federal Unemployment Tax Act (FUTA) are:

FUTA tax is payable by the employer. It is deductible as a business expense. It is not withheld and is not payable on all wages.

87

Which of the following Acts prohibit(s) an employer from discriminating among employees based on sex?

The Equal Pay Act prohibits discrimination in compensation based on sex. Title VII prohibits discrimination in the hiring, firing, promotion, compensation, etc., based on many traits, including sex.

88

Taxes payable under the Federal Unemployment Tax Act (FUTA) are:

Taxes paid under "FUTA" are deductible by the employer as a business expense for federal income tax purposes.

89

Under the UCC, a bill of lading:

A bill of lading is negotiable if by its terms the goods are to be delivered to bearer or to the order of a named person. UCC 7-104

90

Under the Documents of Title Article of the UCC, which of the following correctly describes the standard of liability that must be established to hold a warehouser liable for loss or damage to stored property?

Under the Documents of Title Article, a warehouser is liable for loss of stored goods on a showing of ordinary negligence.

91

The apparent authority of a partner to bind the partnership in dealing with third parties:

Will be effectively limited by a formal resolution of the partners of which third parties are aware.