Incorrect Questions 1 Flashcards
1
Q
If you learn that the tax return that you prepared for your client last year contained a material error, you should:
A. Promptly inform your client.
B. Inform the IRS even before informing your client.
C. A and B.
D. None of the above.
A
A. Promptly inform your client.
Like the AICPA Code of Professional Conduct, Circular 230 requires the tax practitioner to promptly inform a client of such a material error.
2
Q
Under Circular 230, it is proper to delay as long as possible in fulfilling an IRS request for records or information if:
A. You have investigated and believe in good faith that the information is privileged.
B. It would benefit your client strategically in his tax dispute with the IRS.
C. A and B
D. None of the above.
A
A. You have investigated and believe in good faith that the information is privileged.
Section 10.20 requires prompt compliance with an IRS request for information or records unless the practitioner believes in good faith and on reasonable grounds that they are privileged.
3
Q
A CPA prepared a tax return for a client who will receive a refund check. The client is traveling abroad and asked the CPA to pick up the check at the client’s home address. Under Treasury Circular 230, any of the following actions, if taken by the CPA relating to the refund check, would be a violation of the rules of practice before the Internal Revenue Services, except
A. Endorsing the check and depositing it into the client’s bank account.
B. Holding the check for safe keeping and awaiting the client’s return.
C. Holding the check until the client is billed, then endorsing and depositing the check in to the CPA’s account as payment for the bill.
D. Endorsing the check and dep
A
B. Holding the check for safe keeping and awaiting the client’s return.
4
Q
Under Treasury Circular 230, in which of the following situations is a CPA prohibited from giving written advice concerning one or more federal tax issues?
A. The CPA takes into account the possibility that a tax return will not be audited.
B. The CPA reasonably relies upon representations of the client.
C. The CPA considers all relevant facts that are known.
D. The CPA takes into consideration assumptions about future events related to the relevant facts.
A
A. The CPA takes into account the possibility that a tax return will not be audited.
A CPA should never give tax advice turning upon the possibility that the IRS might not audit the client’s tax return.
5
Q
Teo has a private company audit client. He also provides it with tax services. For which of the following services may he charge a contingent fee and still be in compliance with Circular 230?
A. Preparation of an original income tax return.
B. A claim for refund filed in connection with a determination of statutory interest or penalties.
C. Representing the client in judicial proceedings.
D. B and C only.
A
D. B and C only.
Section 10.27 allows contingent fees in only three situations, and A. is not one of them. There are too many chances to win the “audit lottery” with original tax returns.
6
Q
CPA Sharon annually prepares MBC’s tax returns. Which of the following actions or inactions would violate the SSTSs?
A. Sharon signs a tax return containing a position that she believes to have a realistic possibility of being sustained without disclosing it.
B. Sharon relies upon the representations of MBC’s officers without independently verifying their accuracy.
C. Sharon uncovers a material misstatement made in last year’s return but fails to promptly inform the taxing authority of the error.
D. None of the above.
A
C. Sharon uncovers a material misstatement made in last year’s return but fails to promptly inform the taxing authority of the error.
Without the client’s permission, Sharon cannot inform the taxing authority of the error.
7
Q
CPA Amanda has been Kathy’s tax accountant for a few years. Under which of the following situations has Amanda violated the SSTSs?
A. There is a tax law change that could affect Kathy’s previous returns and Amanda doesn’t tell her because she had not agreed to do so.
B. For the last three years, Kathy has grossed $400,000, $500,000, and $450,000, respectively, but this year the W-2 indicates an income of only $375,000. The W-2 seems to be genuine. Amanda files the return without asking Kathy any questions about the reduction in income.
C. Amanda does the tax returns for a limited partnership in which Kathy is a limited partner. She notices that the partnership’s records indicate a higher payout to Kathy than Kathy had told Amanda. Amanda makes no inquiry about the discrepancy.
D. Kathy wants to take a position that Amanda believes has a 30% chance of being sustained if it is reviewed by the relevant tax authority in a jurisdiction where SSTS No. 1 applies. Amanda discloses the position.
A
C. Amanda does the tax returns for a limited partnership in which Kathy is a limited partner. She notices that the partnership’s records indicate a higher payout to Kathy than Kathy had told Amanda. Amanda makes no inquiry about the discrepancy.
Amanda has violated SSTS No. 3 by ignoring this red flag regarding the accuracy of Kathy’s return.
8
Q
A CPA prepares a client’s tax return containing business travel expenses without inquiring about the existence of documentation for the expenses. Which statement best describes the consequence of the CPA’s lack of inquiry?
A. The CPA may be assessed a tax return preparer penalty.
B. The CPA may be charged with preparing a fraudulent return.
C. The client will not owe an understatement penalty if the return is audited and the expenses disallowed.
D. The client will not be subject to a fraud penalty.
A
A. The CPA may be assessed a tax return preparer penalty.
Business travel expenses require documentation, and if a CPA acting as a tax return preparer does not inquire as to whether that documentation exists before claiming the deduction, may be punished.
9
Q
Pratt was a CPA and tax partner. He prepared Hutchinson’s personal income tax returns for many years. One year, Pratt discovered an error he had made in the previous year’s return. Had the return been properly prepared, Hutchinson would have owed the IRS $23.59 more than he had paid. Which of the following is true?
A. Pratt must tell the IRS.
B. Pratt must tell Hutchinson.
C. Because the error was immaterial, Pratt does not need to tell anyone.
D. A and B.
A
C. Because the error was immaterial, Pratt does not need to tell anyone.
The C choice is best. Had the amount been material, B would have been the best choice. As noted, whether material or not, Pratt is not to inform the IRS absent Hutchinson’s permission.
10
Q
CPA Alden prepared the individual income tax returns for Sterling for many years. When preparing 2009’s return, Alden discovered a material error in the 2008 return that had caused Sterling to substantially underpay his taxes for 2008. Alden informed Sterling of the error and urged him to inform the IRS. Sterling refused, and threatened to fire Alden if he went to the IRS. Which of the following is true?
A. Alden must refuse to prepare Sterling’s 2009 return.
B. Alden should consider refusing to prepare Sterling’s 2009 return.
C. If Alden does prepare Sterling’s 2009 return, he must ensure that 2008’s error is not repeated.
D. B and C.
A
D. B and C.
11
Q
Stanley, a CPA who has grown tired of his audit career, has just shifted to a tax position. In getting up to speed, which of the following pieces of advice for Stanley would not be accurate?
A. No standard format is required for tax advice.
B. Written communications are preferable for important matters.
C. Written communications are required for complicated matters.
D. A and B.
A
C. Written communications are required for complicated matters.
SSTS No. 7 does not require written advice for complicated matters so this is the best answer.
12
Q
A CPA assists a taxpayer in tax planning regarding a transaction that meets the definition of a tax shelter as defined in the Internal Revenue Code. Under the AICPA Statements on Standards for Tax Services, the CPA should inform the taxpayer of the penalty risks unless the transaction, at the minimum, meets which of the following standards for being sustained if challenged?
A. More likely than not.
B. Not frivolous.
C. Realistic possibility.
D. Substantial authority.
A
A. More likely than not.
SSTS No. 1 advises that “[w]hen recommending a tax return position or when preparing or signing a tax return on which a position is taken, a member should, when relevant, advise the taxpayer regarding potential penalty consequences of such tax return position and the opportunity, if any, to avoid such penalties through disclosure.”
13
Q
According to the AICPA Statement on Standards for Tax Services, which of the following factors should a CPA consider in choosing whether to provide oral or written advice to a client?
A. Whether the client will seek a second opinion.
B. The tax sophistication of the client.
C. The likelihood that current tax litigation will impact the advice.
D. The client’s business acumen.
A
B. The tax sophistication of the client.
14
Q
Melba is a tax client of CPA Buck. Melba is not a great record keeper, and Buck would like to save Melba some money by using estimates, rather than by incurring great expense in recovering or reconstructing original records. Which of the following is not true?
A. Buck will violate SSTS No. 4 if he fails to disclose that he has used estimates.
B. Buck will violate SSTS No. 4 if he lists Melba’s estimated business expenses as $987.32.
C. Buck will violate SSTS No. 4 if he uses estimates in situations where a simple phone call to a bank could give him exact numbers.
D. Buck will violate SSTS No. 4 if he uses estimates provided by Melba that appear on their face to be materially inaccurate.
A
A. Buck will violate SSTS No. 4 if he fails to disclose that he has used estimates.
15
Q
CPA Nickerson is preparing a tax return for client Bonnie. Which of the following is true regarding SSTS No. 2?
A. It is appropriate for Nickerson to remove an item on grounds that the answer would be disadvantageous to Bonnie.
B. If Nickerson does have reasonable grounds for omitting an answer, he need not disclose them.
C. A and B.
D. None of the above.
A
B. If Nickerson does have reasonable grounds for omitting an answer, he need not disclose them.
16
Q
Which of the following will not get CPA Sandy in trouble with the IRS?
A. Failing to furnish copies of returns to her clients.
B. Failing to sign returns she prepares and files.
C. Failure to furnish her preparer’s identifying number to her clients.
D. Failure to keep copies of the returns she prepares.
A
C. Failure to furnish her preparer’s identifying number to her clients.
Under current rules, Sandy must furnish the preparer’s identifying number to the IRS but not to her clients.
17
Q
Louis, the volunteer treasurer of a nonprofit organization and a member of its board of directors, compiles the data and fills out its annual Form 990, Return of Organization Exempt from Income Tax. Under the Internal Revenue Code, Louis is not considered a tax return preparer because:
A. He is a member of the board of directors.
B. The return does not contain a claim for a tax refund.
C. He is not compensated.
D. Returns for nonprofit organizations are exempt from the preparer rules.
A
C. He is not compensated.
People are TRPs if (a) they are paid, (b) to prepare or retain employees to prepare, (c) a substantial portion, (d) of any federal tax return. Because Louis was not paid specifically to prepare the return, he does not satisfy the first requirement to be a TRP.
18
Q
Tax return preparers can be subject to penalties under the Internal Revenue Code for failure to do any of the following except
A. Sign a tax return as a preparer.
B. Disclose a conflict of interest.
C. Provide a client with a copy of the tax return.
D. Keep a record of Returns prepared.
A
B. Disclose a conflict of interest.
The I.R.C. contains no penalty for failing to disclose a conflict of interest when preparing a tax return.
19
Q
Which of the following bodies ordinarily would have the authority to suspend or revoke a CPA's license to practice public accounting? A. The SEC. B. The AICPA. C. A state CPA society. D. A state board of accountancy.
A
D. A state board of accountancy.
20
Q
When an auditor’s recklessness is manifested in repeated defective audits, what might happen?
A. The SEC might discipline the auditor under Rule 102(e).
B. The state board of accountancy might suspend the auditor’s CPA license.
C. The state society of CPAs might punish the auditor.
D. All of the listed choices.
A
D. All of the listed choices.
21
Q
CPA Smithers has had some professional difficulties. Which of the following is true?
A. If the state board of accountancy revokes Smithers’ CPA license, s/he will be automatically expulsed from the AICPA.
B. If the state society of CPAs expulses Smithers, the state board of accountancy will automatically revoke his/her CPA license.
C. Both of the listed choices.
Because choice B is wrong, this answer is necessarily wrong.
D. Neither of the listed choices.
A
A. If the state board of accountancy revokes Smithers’ CPA license, s/he will be automatically expulsed from the AICPA.
But not the other way around.
22
Q
Pittsburg does not have a CPA license. Which of the following activities may he properly perform?
A. Auditing.
B. Preparing tax returns.
C. Examining prospective financial information in accordance with SSAE.
D. All of the listed choices.
A
B. Preparing tax returns.
No CPA license is needed to prepare a tax return.
23
Q
CPA Talmac’s engagement letter with his tax client contained a provision that the client probably did not notice when he signed the engagement letter. It absolved Talmac of any liability should s/he breach the contract with the client. This proved a fortuitous provision for Talmac, who did breach the contract by providing substantially defective tax advice that cost the client more than $10,000 in penalties and interest. Which of the following is true?
A. The liability disclaimer will protect Talmac from liability.
B. The liability disclaimer will probably be ignored by a court.
C. A and B.
D. None of the above.
A
B. The liability disclaimer will probably be ignored by a court.
Most courts do not allow professionals such as doctors, lawyers, and accountants to avoid liability for their malpractice via such disclaimers. Courts usually hold that such disclaimers violate public policy and are, therefore, unenforceable.
24
Q
Which of the following statements is generally correct regarding the liability of a CPA who negligently gives an opinion on an audit of a client’s financial statements?
A. The CPA is only liable to those third parties who are in privity of contract with the CPA.
B. The CPA is only liable to the client.
C. The CPA is liable to anyone in a class of third parties who the CPA knows will rely on the opinion.
D. The CPA is liable to all possible foreseeable users of the CPA’s opinion.
A
C. The CPA is liable to anyone in a class of third parties who the CPA knows will rely on the opinion.
25
Which of the following is the best defense a CPA firm can assert in a suit for common law fraud based on its unqualified opinion on materially false financial statements?
A. Contributory negligence on the part of the client.
B. A disclaimer contained in the engagement letter.
C. Lack of privity.
D. Lack of scienter.
D. Lack of scienter.
26
While conducting an audit, Larson Associates, CPAs, failed to detect material misstatements included in its client's financial statements.
Larson's unqualified opinion was included with the financial statements in a registration statement and prospectus for a public offering of securities made by the client. Larson knew that its opinion and the financial statements would be used for this purpose.
In a suit by a purchaser against Larson for common law fraud, Larson's best defense would be that
A. Larson did not have actual or constructive knowledge of the misstatements.
B. Larson's client knew or should have known of the misstatements.
C. Larson did not have actual knowledge that the purchaser was an intended beneficiary of the audit.
D. Larson was not in privity of contract with its client.
A. Larson did not have actual or constructive knowledge of the misstatements.
27
Cable Corp. orally engaged Drake & Co., CPAs, to audit its financial statements.
Cable's management informed Drake that it suspected the accounts receivable were materially overstated. Though the financial statements Drake audited included a materially overstated accounts receivable balance, Drake issued an unqualified opinion. Cable used the financial statements to obtain a loan to expand its operations.
Cable defaulted on the loan and incurred a substantial loss.
If Cable sues Drake for negligence in failing to discover the overstatement, Drake's best defense would be that Drake did not
A. Have privity of contract with Cable.
B. Sign an engagement letter.
C. Perform the audit recklessly or with an intent to deceive.
D. Violate generally accepted auditing standards in performing the audit.
D. Violate generally accepted auditing standards in performing the audit.
28
The intent, or scienter, element necessary to establish a cause of action for fraud will be met if the plaintiff can show that the
A. Defendant made a misrepresentation with a reckless disregard for the truth.
B. Defendant made a false representation of fact.
C. Plaintiff actually relied on the defendant's misrepresentation.
D. Plaintiff justifiably relied on the defendant's misrepresentation.
A. Defendant made a misrepresentation with a reckless disregard for the truth.
29
A CPA who fraudulently performs an audit of a corporation's financial statements will
A. Probably be liable to any person who suffered a loss as a result of the fraud.
B. Be liable only to the corporation and to third parties who are members of a class of intended users of the financial statements.
C. Probably be liable to the corporation even though its management was aware of the fraud and did not rely on the financial statements.
D. Be liable only to third parties in privity of contract with the CPA.
A. Probably be liable to any person who suffered a loss as a result of the fraud.
In most jurisdictions, the CPA will be liable if foreseeable users rely on the fraudulently prepared statements and suffer a loss. This is true whomever the plaintiffs may be, so long as they can prove reliance and loss and that they are foreseeable users.
30
Under the "Ultramares" rule, to which of the following parties will an accountant be liable for negligence?
Parties in privity Foreseen parties
Yes Yes
Yes No
No Yes
No No
Parties in privity: Yes Foreseen parties: No
31
Bosco Corporation had a very complicated tax situation. It hired CPA Arnold to prepare its corporate income tax return. Arnold made an error that caused Bosco to overpay its taxes by $3,000. The payment could have been avoided had Arnold advised Bosco to structure a particular transaction in a slightly different way. Bosco paid $233,000 rather than the $230,000 that it might have paid. Upset with Arnold's error, Bosco refused to pay the $20,000 fee specified in the engagement letter on grounds that Arnold had breached the contract by giving inaccurate advice. Which of the following is true regarding Arnold's fee?
A. Because he breached the contract by giving defective advice, Arnold cannot recover his fee.
B. Because he substantially performed the contract, Arnold will recover his fee minus the damages his breach caused Bosco ($20,000 - $3,000 = $17,000).
C. A and B.
D. None of the above.
B. Because he substantially performed the contract, Arnold will recover his fee minus the damages his breach caused Bosco ($20,000 - $3,000 = $17,000).
Arnold must pay for the damage that his error caused. He should recover $17,000 for his fee.
32
Hark CPA, failed to follow generally accepted auditing standards in auditing Long Corp.'s financial statements. Long's management had told Hark that the audited statements would be submitted to several banks to obtain financing. Relying on the statements, Third Bank gave Long a loan.
Long defaulted on the loan.
In a jurisdiction applying the Ultramares decision, if Third sues Hark, Hark will
A. Win because there was no privity of contract between Hark and Third.
B. Lose because Hark knew that banks would be relying on the financial statements.
C. Win because Third was contributorily negligent in granting the loan.
D. Lose because Hark was negligent in performing the audit.
A. Win because there was no privity of contract between Hark and Third.
33
In responding to the Enron-era frauds, SOX did not do which of the following?
A. Strengthen criminal penalties for securities fraud.
B. Restrict provision by auditors of public companies of nonaudit services.
C. Require rotation of audit firms every seven years.
D. Create the PCAOB.
C. Require rotation of audit firms every seven years.
SOX did not require rotation of audit firms, only of the audit engagement partner and the reviewing partner and some other key partners. So this answer states the one thing SOX did not do and is therefore the correct answer.
34
A business manager (D) for an accounting firm was in charge of, among other things, purchasing equipment, procuring office supplies, and overseeing the day-to-day operation of the office. By using a company credit card to pay for various personal expenses, including property taxes, jewelry, clothing, and a wine cellar; accepting reimbursement for business-related expenses that D had paid for with a company credit card but said were out of pocket; and creating false invoices for nonexistent purchases for which she received reimbursement, D stole half a million dollars from the accounting firm. Several of the false invoices were e-mailed by D for purposes of seeking reimbursement. Which of the following is true?
A. D is guilty of theft but not wire fraud.
B. D is guilty of wire fraud.
C. A and B.
D. None of the above.
B. D is guilty of wire fraud.
Because electronic transmission of the false invoices was essential to the execution of the fraudulent scheme, D was guilty of wire fraud.
35
Which is critical to a conviction under the mail fraud statute?
A. That defendant be involved in a fraudulent scheme for which sending a letter through the mail is an essential part.
B. The defendant mails the letter himself.
C. A and B.
D. None of the above.
A. That defendant be involved in a fraudulent scheme for which sending a letter through the mail is an essential part.
36
Plaintiff (P) came into a huge sum of money. An accounting firm (D) advised P on two tax-planning strategies, opining that they were "more likely than not" to be upheld by the IRS, and helped him implement them. They were known as FLIPs and BLIPs, and involved buying and exchanging warrants, options, and shares of various Swiss and Cayman Islands companies. Ultimately, the IRS audited three years worth of P's tax returns because these were aggressive tax shelters that the IRS had targeted for prosecution. P sued D and others under RICO for a violation of Sec. 1962(c). Which of the following is true?
A. Because D has not yet been found criminally liable for securities fraud, P cannot pursue its RICO claim.
B. D is probably liable for a 1962(c) violation.
C. A and B.
D. None of the above.
B. D is probably liable for a 1962(c) violation.
Because securities fraud cannot serve as a "predicate act" under RICO 1962(c) absent a prior criminal conviction (of which we have no indication here), defendant will not be liable under RICO.
37
Waxo, Inc., is a small, privately held corporation that was caught paying bribes to foreign heads of state in order to secure government contracts. Waxo hid these transactions, in part, by falsifying its accounting records. Which of the following is true?
A. Waxo violated the antibribery provisions of the FCPA.
B. Waxo violated the accounting provisions of the FCPA.
C. A and B.
D. None of the above.
A. Waxo violated the antibribery provisions of the FCPA.
By paying these bribes, Waxo violated the antibribery provisions of the FCPA. These provisions apply to almost all American companies.
Because Albany is not an SEC-registered firm, the FCPA's accounting provisions do not apply to it, so B is not an accurate choice.
38
Under which of the following circumstances would it be permissible for Trego to share confidential client information?
A. He has been hospitalized on April 14 and needs to share information with his partner, Tandy, who will complete a client's tax return before the April 15 deadline.
B. A client has filed a complaint with the State Board of Accountancy about Trego's work, and he needs to show the Board confidential information to prove that he acted professionally throughout the engagement.
C. None of the above.
D. A and B.
D. A and B.
Two recognized exceptions to the confidentiality requirement are disclosure to other firm members on a need-to-know basis and disclosure during an ethics examination.
39
Colby is the managing partner of a small accounting firm. He has heard of the Generally Accepted Privacy Principles (GAPP) and wants to know what his responsibilities are regarding client information. Among others, Colby's firm must:
A. Provide its clients notice of its privacy policies and procedures.
B. Collect information only in compliance with its policies and procedures.
C. Provide clients with access to their personal information for review and update.
D. All of the above.
D. All of the above.
40
Lakin is a CPA whose client, Sublette, is being sued by a state government in state court for evasion of state income taxes. Sublette does not want Lakin to testify against him regarding information that Sublette communicated to Lakin. Which of the following is true in a state with a statutory version of the accountant-client testimonial privilege?
A. Only Lakin can invoke the testimonial privilege.
B. Sublette can invoke the privilege as to parts of the communications he had with Lakin, while asking Lakin to testify as to other parts.
Waiver of the privilege as to part of a communication is waiver as to all.
C. If the suit was in federal court, the state privilege would not apply even though the communication took place in the state.
D. A and B.
C. If the suit was in federal court, the state privilege would not apply even though the communication took place in the state.
State privilege statutes apply only in the state courts in the particular state, not in federal court.
41
Girard gave tax advice to Frontenac Corporation. The Department of Justice and IRS are now investigating certain tax shelter transactions that Frontenac Corp. entered into. Girard is resisting their requests for information by citing the tax practitioner's privilege of §7525 of the I.R.C. To which of the following would that privilege be inapplicable?
A. Criminal proceedings.
B. Written advice in connection with promotion of a tax shelter.
C. A and B.
D. None of the above.
C. A and B.
42
Salina wants to know which of the following recognizes an accountant-client testimonial privilege:
A. Federal courts creating procedural rules.
B. Congress for very limited purposes when tax practitioners are involved.
This choice is accurate, because Congress in §7525 of the I.R.C. recognized such a privilege in limited fashion, but it is not the best choice because another choice is accurate also.
C. Approximately 15 state legislatures.
Salina wants to know which of the following recognizes an accountant-client testimonial privilege:
A. Federal courts creating procedural rules.
B. Congress for very limited purposes when tax practitioners are involved.
C. Approximately 15 state legislatures.
D. B and C.
D. B and C.
43
Which of the following is a correct statement about the circumstances under which a CPA firm may or may not disclose the names of its clients without the clients' express permission?
A. A CPA firm may disclose this information if the practice is limited to bankruptcy matters, so that prospective clients with similar concerns will be able to contact current clients.
B. A CPA firm may disclose this information if the practice is limited to performing asset valuations in anticipation of mergers and acquisitions.
C. A CPA firm may disclose this information unless disclosure would suggest that the client may be experiencing financial difficulties.
D. A CPA firm may not disclose this information because the identity of its clients is confidential information.
C. A CPA firm may disclose this information unless disclosure would suggest that the client may be experiencing financial difficulties.
44
In which of the following situations is there a violation of client confidentiality under the AICPA Code of Professional Conduct?
A. A member discloses confidential client information to a court in connection with arbitration proceedings relating to the client.
B. A member discloses confidential client information to a professional liability insurance carrier after learning of a potential claim against the member.
C. A member whose practice is primarily bankruptcy discloses a client's name.
D. A member uses a records retention agency to store clients' records that contain confidential client information.
C. A member whose practice is primarily bankruptcy discloses a client's name.
45
Mary offers to buy Hal's desktop computer for $400. Hal sends Mary an e-mail of acceptance. The $400 is to be paid upon Hal's delivery of the computer. Which of the following properly classifies this contract?
A. This is a bilateral, valid, executory contract.
B. This is a bilateral, valid, executed contract.
C. This is a unilateral, express, executory contract.
D. This is a unilateral, implied-in-fact, executed contract.
A. This is a bilateral, valid, executory contract.
An executory contract is one not fully performed. Neither party has performed their part of the contract. Thus, this contract is classified as bilateral, valid, and executory.
46
Susan Worth has a lease for two years at the Bedford Arms apartment complex. Susan has the opportunity to study at Oxford for one year and has agreed to sublease her apartment to Karen Knight. Karen is to take over the lease on August 1, 2010, and finish the term of the lease, which ends May 31, 2011. Susan and Karen execute an agreement for the lease takeover. In January 2011, Karen misses her rent payment and then moves out of the apartment. The Bedford Arms owner wants to recover from Susan. This contract:
A. Is governed by common law.
B. Is governed by the UCC.
C. Is governed by neither because it is not a lease.
D. Any contract under the UCC.
A. Is governed by common law.
Real property interests, including leases, are under common law.
47
Opal offered, in writing, to sell Larkin a parcel of land for $300,000. If Opal dies, the offer will
A. Terminate prior to Larkin's acceptance only if Larkin received notice of Opal's death.
B. Remain open for a reasonable period of time after Opal's death.
C. Automatically terminate despite Larkin's prior acceptance.
D. Automatically terminate prior to Larkin's acceptance.
D. Automatically terminate prior to Larkin's acceptance.
If there had been a valid acceptance first, a contract would have been formed. If there is a CONTRACT, then death does not always terminate contract obligations.
48
On day 1, Jackson, a merchant, mailed Sands a signed letter that contained an offer to sell Sands 500 electric fans at $10 per fan. The letter was received by Sands on day 3. The letter contained a promise not to revoke the offer but no expiration date. On day 4, Jackson mailed Sands a revocation of the offer to sell the fans. Sands received the revocation on day 6. On day 7, Sands mailed Jackson an acceptance of the offer. Jackson received the acceptance on day 9. Under the Sales Article of the UCC, was a contract formed?
A. No contract was formed because the offer failed to state an expiration date.
B. No contract was formed because Sands received the revocation of the offer before Sands accepted the offer.
C. A contract was formed on the day Jackson received Sands' acceptance.
D. A contract was formed on the day Sands mailed the acceptance to Jackson.
D. A contract was formed on the day Sands mailed the acceptance to Jackson.
The offer was accepted using the same means of communication and so is valid when sent on day 7.
49
On February 12, Harris sent Fresno a written offer to purchase Fresno's land.
The offer included the following provision: "Acceptance of this offer must be by registered or certified mail, received by Harris no later than February 18 by 5:00 p.m. CST."
On February 18, Fresno sent Harris a letter accepting the offer by private overnight delivery service. Harris received the letter on February 19.
Which of the following statements is correct?
A. A contract was formed on February 19.
B. Fresno's letter constituted a counteroffer.
C. Fresno's use of the overnight delivery service was an effective form of acceptance.
D. A contract was formed on February 18 regardless of when Harris actually received Fresno's letter.
B. Fresno's letter constituted a counteroffer.
Normally, under the mailbox rule acceptances are valid as soon as they are mailed. However, in this case we have an exception, because the offeror specified the method of acceptance (registered or certified mail) AND a time by which offeror had to actually receive the acceptance. By the terms of the offer, the acceptance was not sent as authorized and arrived late. Therefore, it is a counteroffer, which Harris may now accept or reject.
50
On April 1, Fine Corp. faxed Moss an offer to purchase Moss' warehouse for $500,000. The offer stated that it would remain open only until April 4 and that acceptance must be received to be effective. Moss sent an acceptance on April 4 by overnight mail and Fine received it on April 5.
Which of the following statements is correct?
A. No contract was formed because Moss sent the acceptance by an unauthorized method.
B. No contract was formed because Fine received Moss' acceptance after April 4.
C. A contract was formed when Moss sent the acceptance.
D. A contract was formed when Fine received Moss' acceptance.
B. No contract was formed because Fine received Moss' acceptance after April 4.
Although most acceptances of bilateral offers are sent by an authorized medium and effective when sent by the authorized medium, the offeror can condition acceptance to not be effective until received. Therefore, regardless of the medium used, the acceptance must be received before the offer terminates by lapse of time. This offer terminated at midnight on April 4, and the acceptance was not received until April 5, after the offer was terminated.
51
Carson Corp., a retail chain, asked Alto Construction to fix a broken window at one of Carson's stores. Alto offered to make the repairs within three days at a price to be agreed on after the work was completed.
A contract based on Alto's offer would fail because of indefiniteness as to the
A. Price involved.
B. Nature of the subject matter.
C. Parties to the contract.
D. Time for performance.
A. Price involved.
52
Dunne and Cook signed a contract requiring Cook to rebind 500 of Dunne's books at $3.00 per book. Later, Dunne requested, in good faith, that the price be reduced to $2.70 per book. Cook agreed orally to reduce the price to $2.70.
Under the circumstances, the oral agreement is
A. Enforceable, but proof of it is inadmissible into evidence.
B. Enforceable, and proof of it is admissible into evidence.
C. Unenforceable, because Dunne failed to give consideration, but proof of it is otherwise admissible into evidence.
D. Unenforceable, due to the statute of frauds, and proof of it is inadmissible into evidence.
C. Unenforceable, because Dunne failed to give consideration, but proof of it is otherwise admissible into evidence.
53
Grove is seeking to avoid performing a promise to pay Brook $1,500. Grove is relying on lack of consideration on Brook's part.
Grove will prevail if Grove can establish that
A. Prior to Grove's promise, Brook had already performed the requested act.
B. Brook's only claim of consideration was the relinquishment of a legal right.
C. Brook's asserted consideration is only worth $400.
D. The consideration to be performed by Brook will be performed by a third party.
A. Prior to Grove's promise, Brook had already performed the requested act.
Past actions cannot
count as consideration for current promises. For consideration to exist, a contract must be a bargained for exchange. If, for example, you took me to work yesterday, and I say today, "Because you gave me a ride yesterday, I promise to pay you $20," you cannot hold me to the promise. There is no consideration.
54
In determining whether the consideration requirement to form a contract has been satisfied, the consideration exchanged by the parties to the contract must be
A. Of approximately equal value.
B. Legally sufficient.
C. Exchanged simultaneously by the parties.
D. Fair and reasonable under the circumstances
B. Legally sufficient.
Consideration must be sufficient. However, the general rule is that any obligation of legal value and bargained-for is sufficient consideration.
55
In which of the following situations does the first promise serve as valid consideration for the second promise?
A. A police officer's promise to catch a thief for a victim's promise to pay a reward.
B. A builder's promise to complete a contract for a purchaser's promise to extend the time for completion.
C. A debtor's promise to pay $500 for a creditor's promise to forgive the balance of a $600 liquidated debt.
D. A debtor's promise to pay $500 for a creditor's promise to forgive the balance of a $600 disputed debt
D. A debtor's promise to pay $500 for a creditor's promise to forgive the balance of a $600 disputed debt.
56
Sand orally promised Frost a $10,000 bonus, in addition to a monthly salary, if Frost would work two years for Sand.
If Frost works for the two years, will the Statute of Frauds prevent Frost from collecting the bonus?
A. No, because Frost fully performed.
B. No, because the contract did not involve an interest in real estate.
C. Yes, because the contract could not be performed within one year.
D. Yes, because the monthly salary was the consideration for the contract
A. No, because Frost fully performed.
57
Where the parties have entered into a written contract intended as the final expression of their agreement, which of the following agreements will be admitted into evidence because they are not prohibited by the parol evidence rule?
Subsequent oral agreements Prior written agreements
Yes Yes
Yes No
No Yes
No No
Subsequent oral agreements Yes
Prior written agreements No
The parol evidence rule will not allow evidence of prior agreements to be admitted as evidence.
58
Rogers and Lennon entered into a written computer consulting agreement that required Lennon to provide certain weekly reports to Rogers. The agreement also stated that Lennon would provide the computer equipment necessary to perform the services and that Rogers' computer would not be used. As the parties were executing the agreement, they orally agreed that Lennon could use Rogers' computer. After executing the agreement, Rogers and Lennon orally agreed that Lennon would report on a monthly, rather than weekly, basis. The parties now disagree on Lennon's right to use Rogers' computer and how often Lennon must report to Rogers. In the event of a lawsuit between the parties, the parol evidence rule will
A. Not apply to any of the parties' agreements because the consulting agreement did not have to be in writing.
B. Not prevent Lennon from proving the parties' oral agreement that Lennon could use Rogers' computer.
C. Not prevent the admission into evidence of testimony regarding Lennon's right to report on a monthly basis.
D. Not apply to the parties' agreement to allow Lennon to use Rogers' computer because it was contemporaneous with the written agreement
C. Not prevent the admission into evidence of testimony regarding Lennon's right to report on a monthly basis.
This answer is correct because an exception to the parol evidence rule allows evidence of "subsequent agreements" to be admitted into evidence. The parol evidence rule applies to complete and unambiguous written contracts and prohibits any evidence that would modify or alter the contract. This rule would apply to oral agreements made "prior" to the formation of the written contract but does not apply to "subsequent" agreements.
59
Under the parol evidence rule, oral evidence will be excluded if it relates to
A. A contemporaneous oral agreement relating to a term in the contract.
B. Failure of a condition precedent.
C. Lack of contractual capacity.
D. A modification made several days after the contract was executed
A. A contemporaneous oral agreement relating to a term in the contract.
60
To which of the following transactions does the common law Statute of Frauds not apply?
A. Contracts for the sale of real estate.
B. Agreements made in consideration of marriage.
C. Promises to pay the debt of another.
D. Contracts that can be performed within one year
D. Contracts that can be performed within one year.
Only contracts that CANNOT be performed within a year must be in writing.
61
On June 1, 20x5, 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, 20x5, Baker wrote Decker confirming Decker's guaranty. Decker did not object to the confirmation. On August 23, 20x5, Decker's cousin defaulted on the note and Baker demanded that Decker honor the guaranty. Decker refused. Which of the following statements is correct?
A. Decker is liable under the oral guaranty because Decker did not object to Baker's June 3 letter.
B. Decker is not liable under the oral guaranty because it expired more than one year after June 1.
C. Decker is liable under the oral guaranty because Baker demanded payment within one year of the date the guaranty was given.
D. Decker is not liable under the oral guaranty because Decker's promise was not in writing
D. Decker is not liable under the oral guaranty because Decker's promise was not in writing.
This answer is correct because a guaranty contract under the Statute of Frauds to be enforceable against the guarantor must be in a writing signed by the guarantor, or a signed memorandum (written evidence of oral guaranty). Here, Decker signed neither, and Decker is not liable under the oral guaranty.
62
Which of the following statements is true with regard to the Statute of Frauds?
A. All contracts involving consideration of more than $500 must be in writing.
B. The written contract must be signed by all parties.
C. The Statute of Frauds applies to contracts that can be fully performed within one year from the date they are made.
D. The contract terms may be stated in more than one document
D. The contract terms may be stated in more than one document.
63
```
Carson agreed orally to repair Ives' rare book for $450. Before the work was started, Ives asked Carson to perform additional repairs to the book and agreed to increase the contract price to $650. After Carson completed the work, Ives refused to pay and Carson sued. Ives' defense was based on the Statute of Frauds. What total amount will Carson recover?
A. $0
B. $200
C. $450
D. $650
```
D. $650
64
Bond and Spear orally agreed that Bond would buy a car from Spear for $475. Bond paid Spear a $100 deposit. The next day, Spear received an offer of $575, the car's fair market value.
Spear immediately notified Bond that Spear would not sell the car to Bond and returned Bond's $100.
If Bond sues Spear and Spear defends on the basis of the Statute of Frauds, Bond will probably
A. Lose, because the agreement was for less than the fair market value of the car.
B. Win, because the agreement was for less than $500.
C. Lose, because the agreement was not in writing and signed by Spear.
D. Win, because Bond paid a deposit
B. Win, because the agreement was for less than $500.
This is correct because for the sale of goods under the Statute of Frauds, contracts for goods priced at $ 500 or more require a writing to be enforceable. This oral contract for a good (car) is $475, under $500, and thus enforceable.
65
Nolan agreed orally with Train to sell Train a house for $100,000. Train sent Nolan a signed agreement and a down payment of $10,000. Nolan did not sign the agreement but allowed Train to move into the house. Before closing, Nolan refused to go through with the sale. Train sued Nolan to compel specific performance. Under the provisions of the Statute of Frauds,
A. Train will win because Train signed the agreement and Nolan did not object.
B. Train will win because Train made a down payment and took possession.
C. Nolan will win because Nolan did not sign the agreement.
D. Nolan will win because the house was worth more than $500.
B. Train will win because Train made a down payment and took possession.
The Statute of Frauds applies to real property transactions like this one and generally requires that they be in writing to be enforceable. However, there is an exception to this part of the Statute if the buyer, by taking possession of the property and making a down payment cannot be returned to the status quo. In such a case, the oral agreement is perfectly valid and enforceable.
66
A building subcontractor submitted a bid for construction of a portion of a high-rise office building.
The bid contained material computational errors. The general contractor accepted the bid with knowledge of the errors.
Which of the following statements best represents the subcontractor's liability?
A. Not liable because the contractor knew of the errors.
B. Not liable because the errors were a result of gross negligence.
C. Liable because the errors were unilateral.
D. Liable because the errors were material.
A. Not liable because the contractor knew of the errors.
Usually, a unilateral mistake is not a defense to contractual liability. However, when the error is computational and the other party knew or should have known of the error, it may be used as a defense.
67
To prevail in a common law action for fraud in the inducement, a plaintiff must prove that the
A. Defendant was an expert with regard to the misrepresentations.
B. Defendant made the misrepresentations with knowledge of their falsity and with an intention to deceive.
C. Misrepresentations were in writing.
D. Plaintiff was in a fiduciary relationship with the defendant.
B. Defendant made the misrepresentations with knowledge of their falsity and with an intention to deceive.
A common law fraud action requires four proofs: a false statement of fact or misrepresentation by the defendant, knowledge of the false statement by the defendant, reliance by the plaintiff, and a loss suffered by the plaintiff. If these elements are present, the plaintiff is a winner.
68
Long purchased a life insurance policy with Tempo Life Insurance Co.
The policy named Long's daughter as beneficiary. Six months after the policy was issued, Long died of a heart attack.
Long had failed to disclose on the insurance application a known preexisting heart condition that caused the heart attack.
Tempo refused to pay the death benefit to Long's daughter.
If Long's daughter sues, Tempo will
A. Win, because Long's daughter is an incidental beneficiary.
B. Win, because of Long's failure to disclose the preexisting heart condition.
C. Lose, because Long's death was from natural causes.
D. Lose, because Long's daughter is a third-party donee beneficiary.
B. Win, because of Long's failure to disclose the preexisting heart condition.
69
On May 25, Fresno sold Bronson, a minor, a used computer. On June 1, Bronson reached the age of majority. On June 10, Fresno wanted to rescind the sale. Fresno offered to return Bronson's money and demanded that Bronson return the computer. Bronson refused, claiming that a binding contract existed. Bronson's refusal is:
A. Not justified because Fresno is not bound by the contract unless Bronson specifically ratifies the contract after reaching the age of majority.
B. Not justified, because Fresno does not have to perform under the contract if Bronson has a right to disaffirm the contract.
C. Justified, because Bronson and Fresno are bound by the contract as of the date Bronson reached the age of majority.
D. Justified, because Fresno must perform under the contract regardless of Bronson's minority.
D. Justified, because Fresno must perform under the contract regardless of Bronson's minority.
70
If a buyer accepts an offer containing an immaterial unilateral mistake, the resulting contract will be
A. Void as a matter of law.
B. Void at the election of the buyer.
C. Valid as to both parties.
D. Voidable at the election of the seller.
C. Valid as to both parties.
This answer is correct because the mistake is immaterial and has no effect on an otherwise valid contract. Therefore, the contract is enforceable by either party.
71
```
Which of the following, if intentionally misstated by a seller to a buyer, would be considered a fraudulent inducement to make a contract?
A. Nonexpert opinion.
B. Appraised value.
C. Prediction.
D. Immaterial fact.
```
B. Appraised value.
72
On reaching majority, a minor may ratify a contract in any of the following ways except by
A. Failing to disaffirm within a reasonable time after reaching majority.
B. Orally ratifying the entire contract.
C. Acting in a manner that amounts to ratification.
D. Affirming, in writing, some of the terms of the contract.
D. Affirming, in writing, some of the terms of the contract.
73
For a purchaser of land to avoid a contract with the seller based on duress, it must be shown that the seller's improper threats
A. Constituted a crime or tort.
B. Would have induced a reasonably prudent person to assent to the contract.
C. Actually induced the purchaser to assent to the contract.
D. Were made with the intent to influence the purchaser.
C. Actually induced the purchaser to assent to the contract.
74
What type of conduct generally will make a contract voidable?
A. Fraud in the execution.
B. Fraud in the inducement.
C. Physical coercion.
D. Contracting with a person under guardianship.
B. Fraud in the inducement.
75
Johns leased an apartment from Olsen.
Shortly before the lease expired, Olsen threatened Johns with eviction and physical harm if Johns did not sign a new lease for twice the old rent. Johns, unable to afford the expense to fight eviction and in fear of physical harm, signed the new lease. Three months later, Johns moved and sued to void the lease claiming duress.
The lease will be held
A. Void because of the unreasonable increase in rent.
B. Voidable because of Olsen's threat to bring eviction proceedings.
C. Void because of Johns' financial condition.
D. Voidable because of Olsen's threat of physical harm.
D. Voidable because of Olsen's threat of physical harm.
76
When there has been no performance by either party, which of the following events generally will result in the discharge of a party's obligation to perform as required under the original contract?
Accord and satisfaction Mutual rescission
Yes Yes
Yes No
No Yes
No No
Accord and satisfaction Yes
Mutual rescission Yes
A is correct because two methods of discharge of the original contract are by accord (agreement to accept a different performance) and satisfaction whereby the substituted performance is performed, and mutual rescission, whereby both parties agree to the discharge of their obligations (mutual rescission).
77
```
Ordinarily, in an action for breach of a construction contract, the statute of limitations time period would be computed from the date the
A. Contract is negotiated.
B. Contract is breached.
C. Construction is begun.
D. Contract is signed.
```
B. Contract is breached.
78
Kaye contracted to sell Hodges a building for $310,000. The contract required Hodges to pay the entire amount at closing. Kaye refused to close the sale of the building. Hodges sued Kaye.
To what relief is Hodges entitled?
A. Punitive damages and compensatory damages.
B. Specific performance and compensatory damages.
C. Consequential damages or punitive damages.
D. Compensatory damages or specific performance.
D. Compensatory damages or specific performance.
An aggrieved party, upon breach of contract, cannot have both specific performance (requiring Kaye to deed the property to Hodges), and compensatory damages for failure to deliver the deed. To allow both would result in an unjust enrichment for Hodges.
79
Ames Construction Co. contracted to build a warehouse for White Corp. The construction specifications required Ames to use Ace lighting fixtures. Inadvertently, Ames installed Perfection lighting fixtures, which are of slightly lesser quality than Ace fixtures, but in all other respects meet White's needs. Which of the following statements is correct?
A. White's recovery will be limited to monetary damages because Ames' breach of the construction contract was not material.
B. White will not be able to recover any damages from Ames because the breach was inadvertent.
C. Ames did not breach the construction contract because the Perfection fixtures were substantially as good as the Ace fixtures.
D. Ames must install Ace fixtures or White will not be obligated to accept the warehouse.
A. White's recovery will be limited to monetary damages because Ames' breach of the construction contract was not material.
80
On June 15, 2004, Alpha, Inc., contracted with Delta Manufacturing, Inc., to buy a vacant parcel of land Delta owned. Alpha intended to build a distribution warehouse on the land because of its location near a major highway. The contract stated that: "Alpha's obligations hereunder are subject to the vacant parcel being rezoned to a commercial zoning classification by July 31, 2005." Which of the following statements is correct?
A. If the parcel is not rezoned by July 31, and Alpha refuses to purchase it, Alpha would not be in breach of contract.
B. If the parcel is rezoned by July 31, and Alpha refuses to purchase it, Delta would be able to successfully sue Alpha for specific performance.
C. The contract is not binding on either party because Alpha's performance is conditional.
D. If the parcel is rezoned by July 31, and Delta refuses to sell it, Delta's breach would not discharge Alpha's obligation to tender payment.
A. If the parcel is not rezoned by July 31, and Alpha refuses to purchase it, Alpha would not be in breach of contract.
The rezoning clause is a condition precedent. Alpha has no duty to perform under the contract until and unless the parcel is rezoned by July 31. Essentially, the condition must be met before there are any contractual obligations.
81
The statute of limitations for an alleged breach of contract
A. Does not apply if the contract was oral.
B. Requires that a lawsuit is commenced and a judgment rendered within a prescribed period of time.
C. Is determined on a case by case basis.
D. Generally commences on the date of the breach.
D. Generally commences on the date of the breach.
82
```
To cancel a contract and to restore the parties to their original positions before the contract, the parties should execute a
A. Novation
B. Release
C. Rescission
D. Revocation
```
C. Rescission
A rescission is the undoing of a contract. Both sides are returned to their original positions, and the contractual obligations on both sides are discharged.
83
One of the criteria for a valid assignment of a sales contract to a third party is that the assignment must
A. Not materially increase the other party's risk or duty.
B. Not be revocable by the assignor.
C. Be supported by adequate consideration from the assignee.
D. Be in writing and signed by the assignor.
A. Not materially increase the other party's risk or duty.
Only changes that require a minor adjustment, like sending a check to a different address, may be assigned.
84
Graham contracted with the City of Harris to train and employ high school dropouts residing in Harris. Graham breached the contract. Long, a resident of Harris and a high school dropout, sued Graham for damages.
Under the circumstances, Long will
A. Win, because Long is a third-party beneficiary entitled to enforce the contract.
B. Win, because the intent of the contract was to confer a benefit on all high school dropouts residing in Harris.
C. Lose, because Long is merely an incidental beneficiary of the contract.
D. Lose, because Harris did not assign its contract rights to Long.
C. Lose, because Long is merely an incidental beneficiary of the contract.
Long is a third-party beneficiary, because although he or she did not sign the contract, Long will benefit from it. More specifically, Long is an incidental beneficiary, because Long was not intended to be the primary beneficiary of the contract. As an incidental beneficiary, Long will not be able to enforce the contract. Only intended beneficiaries can sue. An example of such a person is a named beneficiary in a life insurance contract.
85
Union Bank lent $200,000 to Wagner. Union required Wagner to obtain a life insurance policy naming Union as beneficiary. While the loan was outstanding, Wagner stopped paying the premiums on the policy. Union paid the premiums, adding the amounts paid to Wagner's loan. Wagner died and the insurance company refused to pay the policy proceeds to Union. Union may
A. Recover the policy proceeds because it is a creditor beneficiary.
B. Recover the policy proceeds because it is a donee beneficiary.
C. Not recover the policy proceeds because it is not in privity of contract with the insurance company.
D. Not recover the policy proceeds because it is only an incidental beneficiary.
A. Recover the policy proceeds because it is a creditor beneficiary.
A person is a creditor beneficiary if two things are in place: one party to a contract in question owed the creditor money, and the contract in question was made specifically to satisfy that debt.
86
```
West, Inc., and Barton entered into a contract. After receiving valuable consideration from Egan, West assigned its rights under the Barton contract to Egan. In which of the following circumstances would West not be liable to Egan?
A. West released Barton.
B. West breached the contract.
C. Egan released Barton.
D. Barton paid West.
```
C. Egan released Barton.
Egan has all the rights of West based on the assignment. Thus, Egan can release Barton, discharging the Barton contract, and West has no further liability to Egan.
87
Wilcox Co. contracted with Ace Painters, Inc. for Ace to paint Wilcox's warehouse. Ace, without advising Wilcox, assigned the contract to Pure Painting Corp. Pure failed to paint Wilcox's warehouse in accordance with the contract specifications. The contract between Ace and Wilcox was silent with regard to a party's right to assign it. Which of the following statements is correct?
A. Ace remained liable to Wilcox despite the fact that Ace assigned the contract to Pure.
B. Ace would not be liable to Wilcox if Ace had notified Wilcox of the assignment.
C. Ace's duty to paint Wilcox's warehouse was nondelegable.
D. Ace's delegation of the duty to paint Wilcox's warehouse was a breach of the contract.
A. Ace remained liable to Wilcox despite the fact that Ace assigned the contract to Pure.
This answer is correct because even if the assignment-delegation of the paint contract from Ace Painters to Pure Painting is valid, the delegator or assignor-obligor, unless released by Wilcox, remains liable for the satisfactory performance of the contract terms.
88
Yost contracted with Egan for Yost to buy certain real property. If the contract is otherwise silent, Yost's rights under the contract are
A. Assignable only with Egan's consent.
B. Nonassignable because they are personal to Yost.
C. Nonassignable as a matter of law.
D. Generally assignable.
D. Generally assignable.
Unless the contract terms prohibit assignment, or the rights are personable to the person rendering them, or the assignment will materially increase or alter the risk or duties of the obligor, contract rights are generally assignable.
89
Which of the following statements would not apply to a written contract governed by the provisions of the UCC Sales Article?
A. The contract may involve the sale of personal property.
B. The obligations of a nonmerchant may be different from those of a merchant.
C. The obligations of the parties must be performed in good faith.
D. The contract must involve the sale of goods for a price of $500 or more.
D. The contract must involve the sale of goods for a price of $500 or more.
The UCC governs ANY SALE OF GOODS, whatever the value. The sale of a gumball is governed by the UCC. It is the Statute of Frauds that governs only sales contracts of at least $500.
90
```
Under the UCC Sales Article, which of the following conditions will prevent the formation of an enforceable sale of goods contract?
A. Open price.
B. Open delivery.
C. Open quantity.
D. Open acceptance.
```
D. Open acceptance.
91
Under the UCC Sales Article, which of the following statements is correct concerning a contract involving a merchant seller and a non-merchant buyer?
A. Whether the UCC Sales Article is applicable does not depend on the price of the goods involved.
B. Only the seller is obligated to perform the contract in good faith.
C. The contract will be either a sale and return or sale on approval contract.
D. The contract may not involve the sale of personal property with a price of more than $500.
A. Whether the UCC Sales Article is applicable does not depend on the price of the goods involved.
92
Under the Sales Article of the UCC, which of the following requirements must be met for a writing to be an enforceable contract for the sale of goods?
A. The writing must contain a term specifying the price of the goods.
B. The writing must contain a term specifying the quantity of the goods.
C. The writing must contain the signatures of all parties to the writing.
D. The writing must contain the signature of the party seeking to enforce the writing.
B. The writing must contain a term specifying the quantity of the goods.
93
Webstar Corp. orally agreed to sell Northco, Inc. a computer for $20,000. Northco sent a signed purchase order to Webstar confirming the agreement. Webstar received the purchase order and did not respond. Webstar refused to deliver the computer to Northco, claiming that the purchase order did not satisfy the UCC Statute of Frauds because it was not signed by Webstar. Northco sells computers to the general public, and Webstar is a computer wholesaler.
Under the UCC Sales Article, Webstar's position is
A. Incorrect because it failed to object to Northco's purchaser order.
B. Incorrect because only the buyer in a sale-of-goods transaction must sign the contract.
C. Correct because it was the party against whom enforcement of the contract is being sought.
D. Correct because the purchase price of the computer exceeded $500.
A. Incorrect because it failed to object to Northco's purchaser order.
The Statute of Frauds generally requires contracts for a sale of goods of $500 or more to be in writing and signed by the person refusing performance. However, there are several exceptions, and this scenario illustrates one of them. If between merchants a confirmatory memorandum is sent and is not objected to in writing within 10 days by the merchant receiving it, then the Statute of Frauds is satisfied. Webstar must, therefore, honor this valid oral contract.
94
Under the Sales Article of the UCC, when a contract for the sale of goods stipulates that the seller ship the goods by common carrier "F.O.B. purchaser's loading dock," which of the parties bears the risk of loss during shipment?
A. The purchaser, because risk of loss passes when the goods are delivered to the carrier.
B. The purchaser, because risk of loss passes with the title.
C. The seller, because risk of loss passes only when the goods reach the purchaser's loading dock.
D. The seller, because risk of loss remains with the seller until the goods are accepted by the purchaser.
C. The seller, because risk of loss passes only when the goods reach the purchaser's loading dock.
95
West purchased a painting from Noll, who is not in the business of selling art. West is picking up the painting from Noll. Noll tendered delivery of the painting after receiving payment in full from West. West informed Noll that West would be unable to take possession of the painting until later that day. Thieves stole the painting before West returned.
The risk of loss
A. Remained with Noll, because West had not yet received the painting.
B. Remained with Noll, because the parties agreed on a later time of delivery.
C. Passed to West at the time the contract was formed and payment was made.
D. Passed to West on Noll's tender of delivery.
D. Passed to West on Noll's tender of delivery.
Since Noll is a nonmerchant, risk of loss passes to West upon Noll's tender of delivery.
96
Quick Corp. agreed to purchase 200 typewriters from Union Suppliers, Inc. Union is a wholesaler of appliances and Quick is an appliance retailer. The contract required Union to ship the typewriters to Quick by common carrier, "F.O.B. Union Suppliers, Inc. Loading Dock."
Which of the parties bears the risk of loss during shipment?
A. Union, because the risk of loss passes only when Quick receives the typewriters.
B. Union, because both parties are merchants.
C. Quick, because title to the typewriters passed to Quick at the time of shipment.
D. Quick, because the risk of loss passes when the typewriters are delivered to the carrier.
D. Quick, because the risk of loss passes when the typewriters are delivered to the carrier.
In an F.O.B. place of shipment contract, the risk passes from seller to buyer when the goods are placed in the possession of the carrier. From that point on, Quick bears risk of loss.
97
On September 10, Bell Corp. entered into a contract to purchase 50 lamps from Glow Manufacturing to be used in Bell Corp's executive company offices. Bell prepaid 40% of the purchase price. Glow became insolvent on September 19 before segregating, in its inventory, the lamps to be delivered to Bell. Bell will not be able to recover the lamps because
A. Bell is regarded as a merchant.
B. The lamps were not identified to the contract.
C. Glow became insolvent fewer than 10 days after receipt of Bell's prepayment.
D. Bell did not pay the full price at the time of purchase.
B. The lamps were not identified to the contract.
The seller is the one who must identify goods by segregating them from general inventory and associating them with a specific contract before title would pass to the buyer. Since this has not yet been done, the buyer will have no rights in the goods under the contract.
98
Under the Sales Article of the UCC, the warranty of title
A. Provides that the seller cannot disclaim the warranty if the sale is made to a bona fide purchaser for value.
B. Provides that the seller deliver the goods free from any lien of which the buyer lacked knowledge when the contract was made.
C. Applies only if it is in writing and signed by the seller.
D. Applies only if the seller is a merchant.
B. Provides that the seller deliver the goods free from any lien of which the buyer lacked knowledge when the contract was made.
99
Under the Sales Article of the UCC, which of the following circumstances best describes how the implied warranty of fitness for a particular purpose arises in a sale of goods transaction?
A. The buyer is purchasing the goods for a particular purpose and is relying on the seller's skill or judgment to select suitable goods.
B. The buyer is purchasing the goods for a particular purpose and the seller is a merchant in such goods.
C. The seller knows the particular purpose for which the buyer will use the goods and knows the buyer is relying on the seller's skill or judgment to select suitable goods.
D. The seller knows the particular purpose for which the buyer will use the goods and the seller is a merchant in such goods.
C. The seller knows the particular purpose for which the buyer will use the goods and knows the buyer is relying on the seller's skill or judgment to select suitable goods.
It is the awareness of the seller that is the key.
100
Under the Sales Article of the UCC, which of the following statements is correct regarding the creation of express warranties?
A. Express warranties must contain formal words such as warranty or guarantee.
B. Express warranties must be part of the basis of the bargain between buyer and seller.
C. Express warranties are not enforceable if made orally.
D. Express warranties cannot be based on statements made in the seller's promotional materials.
B. Express warranties must be part of the basis of the bargain between buyer and seller.
In addition to being statements of fact or promises of performance, whatever is stated or written must be important to the buyer in making the decision to buy.
101
Under the UCC Sales Article, the warranty of title may be excluded by
A. Merchants or non-merchants provided the exclusion is in writing.
B. Non-merchant sellers only.
C. The seller's statement that it is selling only such right or title that it has.
D. Use of an "as is" disclaimer.
C. The seller's statement that it is selling only such right or title that it has.
A specific disclaimer that the seller is only passing what right or title seller has disclaims the implied warranty of title.
102
On May 2, Handy Hardware sent Ram Industries a signed purchase order that stated, in part, as follows:
"Ship for May 8 delivery 300 Model A-X socket sets at current dealer price. Terms 2/10/net 30."
Ram received Handy's purchase order on May 4. On May 5, Ram discovered that it had only 200 Model A-X socket sets and 100 Model W-Z socket sets in stock. Ram shipped the Model A-X and Model W-Z sets to Handy without any explanation concerning the shipment. The socket sets were received by Handy on May 8.
Assuming a contract exists between Handy and Ram, which of the following implied warranties would result?
I. Implied warranty of merchantability.
II. Implied warranty of fitness for a particular purpose.
III. Implied warranty of title.
A. I only.
B. III only.
C. I and III only.
D. I, II and III.
C. I and III only.
103
Which of the following factors result(s) in an express warranty with respect to a sale of goods?
I. The seller's description of the goods as part of the basis of the bargain.
II. The seller selects goods knowing the buyer's intended use.
A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II.
I. The seller's description of the goods as part of the basis of the bargain.
Express warranties arise when the seller as part of the bargain sells goods by description. When the seller selects goods knowing of the buyer's intended use, it is an implied warranty (of fitness for a particular purpose) that arises and not an express warranty.
104
Under a contract governed by the UCC Sales Article, which of the following statements is correct?
(Note: This is a comprehensive Article 2 question)
A. Unless both the seller and the buyer are merchants, neither party is obligated to perform the contract in good faith.
B. The contract will not be enforceable if it fails to expressly specify a time and a place for delivery of the goods.
C. The seller may be excused from performance if the goods are accidentally destroyed before the risk of loss passes to the buyer.
D. If the price of the goods is less than $500, the goods need not be identified to the contract for title to pass to the buyer.
C. The seller may be excused from performance if the goods are accidentally destroyed before the risk of loss passes to the buyer.
If the goods were identified to the contract at the time of contract formation, and the goods are destroyed before risk of loss has passed to the buyer, if the loss is total the seller is excused form liability due to nonperformance.
105
Maco Corp. contracted to sell 1,500 bushels of potatoes to LBC Chips. The contract did not refer to any specific supply source for the potatoes. Maco intended to deliver potatoes grown on its farms. An insect infestation ruined Maco's crop but not the crops of other growers in the area. Maco failed to deliver the potatoes to LBC. LBC sued Maco for breach of contract. Under the circumstances, Maco will
A. Lose, because it could have purchased potatoes from other growers to deliver to LBC.
B. Lose, unless it can show that the purchase of substitute potatoes for delivery to LBC would make the contract unprofitable.
C. Win, because the infestation was an act of nature that could not have been anticipated by Maco.
D. Win, because both Maco and LBC are assumed to accept the risk of a crop failure.
A. Lose, because it could have purchased potatoes from other growers to deliver to LBC.
The potatoes were not specifically identified goods at the time of contract formation and risk of loss had not passed to LBC. Thus, their destruction does not discharge Maco from its obligations. They still have a duty to provide substitute potatoes since some are available. If the goods had been specifically identified to come from Maco's farms in the contract, then they could escape their obligations.
106
Under the Sales Article of the UCC, which of the following rights is(are) available to the buyer when a seller commits an anticipatory breach of contract?
Demand assurance of performance Cancel the contract Collect punitive damages
Yes Yes Yes
Yes Yes No
Yes No Yes
No Yes Yes
Demand assurance of performance Yes
Cancel the contract Yes Collect punitive damages No
A party who has reasonable grounds to believe the other party will not perform as contracted may request, in writing, assurance of performance or as a remedy cancel the contract immediately. Punitive damages are not awarded in actions based on breach of contract.
107
Under the Sales Article of the UCC, which of the following circumstances will relieve a buyer from the obligation of accepting a tender or delivery of goods?
I. If the goods do not meet the buyer's needs at the time of the tender or delivery.
II. If the goods at the time of the tender or delivery do not exactly conform to the requirements of the contract.
A. I only.
B. II only
C. Both I and II
D. Neither I or II
B. II only
Generally, a buyer has a right to reject goods tendered that do not conform to the contract. This rejection can be for any goods that fail in any respect (quantity, quality, color, etc.) to conform to the contract.
A buyer, however, does not have a right of rejection if the goods conform to the contract and it is immaterial whether, at the time of tender, the buyer either needs the goods or the goods do not meet the buyer's needs.
108
Eagle Corporation solicited bids for various parts it uses in the manufacture of jet engines. Eagle received six offers and selected the offer of Sky Corporation. The written contract specified a price for 100,000 units, delivery on June 1 at Sky's plant, with payment on July 1.
On June 1, Sky had completed a 200,000 unit run of parts similar to those under contract for Eagle and various other customers. Sky had not identified the parts to specific contracts. When Eagle's truck arrived to pick up the parts on June 1, Sky refused to deliver claiming the contract price was too low. Eagle was unable to cover in a reasonable time. Its production lines were in danger of shutdown because the parts were not delivered.
Eagle would probably
A. Have as its only remedy the right of replevin.
B. Have the right of replevin only if Eagle tendered the purchase price on June 1.
C. Have as its only remedy the right to recover dollar damages.
D. Have the right to obtain specific performance.
C. Have as its only remedy the right to recover dollar damages.
109
Under the Sales Article of the UCC, which of the following statements regarding liquidated damages is(are) correct?
I. The injured party may collect any amount of liquidated damages provided for in the contract.
II. The seller may retain a deposit of up to $500 when a buyer defaults even if there is no liquidated damages provision in the contract.
A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II.
B. II only.
Where the seller justifiably withholds delivery of goods and the buyer has made a deposit or payment and there is no liquidated damage clause, the seller may keep $500 or 20% of the purchase price, whichever is less.
110
On February 15, Mazur Corp. contracted to sell 1,000 bushels of wheat to Good Bread, Inc., at $6.00 per bushel with delivery to be made on June 23. On June 1, Good advised Mazur that it would not accept or pay for the wheat. On June 2, Mazur sold the wheat to another customer at the market price of $5.00 per bushel. Mazur had advised Good that it intended to resell the wheat.
Which of the following statements is correct?
A. Mazur can successfully sue Good for the difference between the resale price and the contract price.
Once a buyer notifies the seller that it intends to breach the contract, an anticipatory breach takes place. The seller may immediately by notice pursue remedies. One such remedy is the right of the seller with notice to resell the goods. The seller is then entitled to seek the difference in price between the resale and contract price so that it will receive the benefit of the bargain. Here, Mazur could win $1,000 plus any incidental damages incurred in finding another buyer.
B. Mazur can resell the wheat only after June 23.
C. Good can retract its anticipatory breach at any time before June 23.
Once a buyer notifies the seller that it intends to breach the contract, the seller may treat the breach as final with notice and immediately elect to find another buyer. The buyer may retract the anticipatory breach after it is made, but only until the seller finds another buyer. After that time, it is too late.
D. Good can successfully sue Mazur for specific performance.
A. Mazur can successfully sue Good for the difference between the resale price and the contract price.
Once a buyer notifies the seller that it intends to breach the contract, an anticipatory breach takes place. The seller may immediately by notice pursue remedies. One such remedy is the right of the seller with notice to resell the goods. The seller is then entitled to seek the difference in price between the resale and contract price so that it will receive the benefit of the bargain. Here, Mazur could win $1,000 plus any incidental damages incurred in finding another buyer.
111
Gray Fabricating Co. and Pine Corp. agreed orally that Pine would custom manufacture a processor for Gray at a price of $80,000.
After Pine completed the work at a cost of $60,000, Gray notified Pine that the processor was no longer needed. Pine is holding the processor and has requested payment from Gray. Pine has been unable to resell the processor for any price. Pine incurred storage fees of $1,000.
If Gray refuses to pay Pine and Pine sues Gray, the most Pine will be entitled to recover is
A. $60,000
B. $61,000
C. $80,000
D. $81,000
D. $81,000
The point of contractual damages is to give the wronged party the "benefit of the bargain." In this case, Gray expected $80,000 as that benefit in exchange for the processor. It did not get any of that expectation, and incurred an extra $1000 in expenses. To make it realize its expected benefit of $80,000, Gray must give Pine $81,000, as it is currently out $1000 after paying the storage. It will get $81,000.
112
Which of the following conditions, if present on an otherwise negotiable instrument, would affect the instrument's negotiability?
A. The instrument is payable six months after the death of the maker.
B. The instrument is payable at a definite time subject to an accelerated clause in the event of a default.
C. The instrument is postdated.
D. The instrument contains a promise to provide additional collateral if there is a decrease in value of the existing collateral.
A. The instrument is payable six months after the death of the maker.
To be negotiable, an instrument must be payable at a definite time. This time may be at some future date, so long as that date can be determined with certainty.
113
```
Under the Negotiable Instruments Article of the UCC, the proper party to whom a check is presented for payment is
A. The drawer.
B. The maker.
C. The holder.
D. The drawee.
```
D. The drawee.
A check is a draft drawn on a bank, making the bank the drawee. We go first to the drawee for payment on a draft/check.
114
Under the Negotiable Instruments Article of the UCC, which of the following instruments is classified as a promise to pay?
A. A check.
B. A draft.
C. A trade acceptance.
D. A certificate of deposit.
D. A certificate of deposit.
Drafts and checks are "order to pay" instruments.
Notes and certificates of deposits are "promises" to pay instruments.
115
Which of the following negotiable instruments is subject to the provisions of the UCC Negotiable Instruments Article?
A. Installment note payable on the first day of each month.
B. Warehouse receipt.
C. Bill of lading payable to order.
D. Corporate bearer bond with a maturity date of January 1, 2009.
A. Installment note payable on the first day of each month.
Article 3 of the UCC governs commercial paper, or negotiable instruments. A negotiable instrument is a writing signed by the maker or drawer giving an unconditional promise or order to pay a sum certain in money on demand or at a definite time payable to order or bearer. A note payable on the first of every month is a negotiable instrument in that it is payable at a definite time.
116
Under the Negotiable Instruments Article of the UCC, an instrument will be precluded from being negotiable if the instrument
A. Fails to state the place of payment.
B. Is made subject to another agreement.
C. Fails to state the underlying consideration.
D. Is undated
B. Is made subject to another agreement.
This is correct because payment made subject to another agreement renders payment of the instrument conditional on the terms of the other agreement.
117
Horton wrote a check for $50,000 to Wallace who in turn endorsed it to Halbert. When Halbert presented the check to the bank it was dishonored because of insufficient funds. Which of the following statements is correct?
A. Halbert is not entitled to payment because of dishonor.
B. Halbert must present the dishonored check to Horton for payment.
C. Wallace is discharged from liability.
D. Halbert has 30 days to notify Wallace of the dishonor.
D. Halbert has 30 days to notify Wallace of the dishonor.
Non-bank parties have 30 days to turn to secondary parties after primary party refuses to pay.
118
Janice owes Jake $120,000. Jake cashes the check 45 days after receiving it. Janice's bank fails. The FDIC will cover $100,000. Janice
A. Must pay the $20,000 difference.
B. Is not liable for the $20,000 difference.
C. Is liable for the $20,000 difference but can recover it from the FDIC.
D. Must split the difference with Jake and pay $10,000 if he is an HDC.
B. Is not liable for the $20,000 difference.
If the holder/HDC does not present the check within 30 days and there is a bank failure, the drawer is discharged from liability for the difference.
119
```
Ashley needs to endorse a check that had been endorsed by two other individuals prior to Ashley's receipt of the check. Ashley does not want to have surety liability, so Ashley endorses the check "without recourse." Under the Negotiable Instruments Article of the UCC, which of the following types of endorsement did Ashley make?
A. Blank.
B. Special.
C. Qualified.
D. Restrictive.
```
C. Qualified.
A qualified indorsement is one that limits the warranties that the transferor of the instrument gives. This is the "without recourse" indorsement, an indorsement that eliminates one of the five transferor warranties (contract liability).
120
Under the Negotiable Instruments Article of the UCC, which of the endorser's liabilities are disclaimed by a "without recourse" endorsement?
A. Contract liability only.
B. Warranty liability only.
C. Both contract and warranty liability.
D. Neither contract nor warranty liability.
A. Contract liability only.
An endorsement "without recourse" is a qualified endorsement. A qualified endorsement does not contractually guaranty payment (disclaims contract liability). The qualified endorsement only makes warranties as to good title, signatures are genuine, etc. to subsequent holders of the instrument.
121
```
Under the Negotiable Instruments Article of the UCC, an endorsement of an instrument "for deposit only" is an example of what type of endorsement?
A. Blank.
B. Qualified.
C. Restrictive
D. Special
```
C. Restrictive
There are four types of endorsements. Any endorsement that purports to condition, limit, or prohibit further negotiation of the instrument is called a restrictive endorsement.
The "for deposit only" endorsement seeks to restrict any further transfer and makes the bank a collector agent of the endorser.
122
Under the Negotiable Instruments Article of the UCC, when an instrument is indorsed "Pay to John Doe" and signed "Faye Smith," which of the following statements is(are) correct?
Payment of the instrument is guaranteed The instrument can be further negotiated
Yes Yes
Yes No
No Yes
No No
Payment of the instrument is guaranteed Yes
| The instrument can be further negotiated Yes
123
Under the Negotiable Instruments Article of the UCC, what kind of indorsement is made by the use of the words "Lee Louis"?
A. Blank, nonrestrictive, and unqualified.
B. Blank, nonrestrictive, and qualified.
C. Special, nonrestrictive, and unqualified.
D. Special, nonrestrictive, and qualified.
A. Blank, nonrestrictive, and unqualified.
Signing your name only as an indorsement turns order paper into bearer paper and can be transferred by anyone at anytime by delivery only without restrictions and without limitations on liability.
124
A $5,000 promissory note payable to the order of Neptune is discounted to Bane by blank endorsement for $4,000. King steals the note from Bane and sells it to Ott who promises to pay King $4,500.
After paying King $3,000, Ott learns that King stole the note. Ott makes no further payment to King.
Ott is
A. A holder in due course to the extent of $5,000.
B. An ordinary holder to the extent of $4,500.
C. A holder in due course to the extent of $3,000.
D. An ordinary holder to the extent of $0.
C. A holder in due course to the extent of $3,000.
Bane was a holder in due course, because Bane took the note for value in good faith and without notice of the note being overdue, previously dishonored, or of claim or defense.
Under the shelter principle, Ott has the rights of a holder in due course, because Ott can trace the note back to a holder in due course. However, since Ott did not pay the full value promised, Ott is only a holder in due course to the extent of $3,000, which is the amount actually paid.
125
Which of the following statements concerning a letter of credit is correct?
A. A letter of credit is a form of a negotiable instrument issued by a bank.
B. Unless stated in the letter of credit, generally letters of credit are not transferable to third parties.
C. In an international sales transaction, the seller is the applicant for the issue of a letter of credit.
D. Since warranties under a sale of goods is governed by other laws such as the Uniform Commercial Code or the Convention on International Sales of Goods, the seller of goods under a letter of credit makes no additional warranties to the issue of the letter.
B. Unless stated in the letter of credit, generally letters of credit are not transferable to third parties.
126
A seller and buyer enter into an international contract for the sale of goods involving a large amount of money. They agree to finance the sale by a letter of credit. Which of the following is correct?
A. Consideration will be required by the buyer for the issuance of the letter of credit.
Consideration is not required for the issuance of a letter of credit.
B. A letter of credit can only be issued on a tangible form because a signature is required.
C. Domestic letters of credit are revocable, but, unless agreed, international letters of credit are irrevocable.
D. Letters of credit must have an expiration date and cannot be stated to be "perpetual."
C. Domestic letters of credit are revocable, but, unless agreed, international letters of credit are irrevocable.
Domestic letters of credit are revocable and international letters of credit are irrevocable unless otherwise stated or agreed.
127
Which of the following statements is correct concerning a common carrier that issues a bill of lading stating that the goods are to be delivered "to the order of Ajax"?
A. The carrier's lien on the goods covered by the bill of lading for storage or transportation expenses is ineffective against the bill of lading's purchaser.
B. The carrier may not, as a matter of public policy, limit its liability for the goods by the terms of the bill.
C. The carrier must deliver the goods only to Ajax or to a person who presents the bill of lading properly endorsed by Ajax.
D. The carrier would have liability only to Ajax because the bill of lading is nonnegotiable.
C. The carrier must deliver the goods only to Ajax or to a person who presents the bill of lading properly endorsed by Ajax.
This bill of lading is a negotiable order instrument, because it is made out to a particular person or that person's order.
When a document is of this type, only the person to whose order the instrument is made may use it, unless the original holder has properly endorsed it to someone else. If the bill of lading had been made payable to "bearer" or to no one in particular, then anyone could use it to take delivery of the goods.
128
Kent stole several negotiable warehouse receipts from Baxter Sales Co. The receipts were deliverable to Baxter's order.
Kent endorsed Baxter's name and sold the warehouse receipts to United Wholesalers, a bona fide purchaser. In an action by United against Baxter,
A. United will prevail because the warehouse receipts were converted to bearer instruments by Kent's endorsement.
B. United will prevail because it took the negotiable warehouse receipts as a bona fide purchaser for value.
C. Baxter will prevail because the warehouseman must be notified before any valid negotiation of a warehouse receipt is effective.
D. Baxter will prevail because Kent cannot validly negotiate the warehouse receipts.
B. United will prevail because it took the negotiable warehouse receipts as a bona fide purchaser for value.
When an instrument is forged, it is nonnegotiable. United will have no claim, because Baxter has the universal defense of forgery that may be asserted against anyone.
129
Under the Secured Transactions Article of the UCC, which of the following requirements is necessary to have a security interest attach?
Debtor has rights in the collateral Proper filing of a security agreement Value given by the creditor
Yes Yes Yes
Yes Yes No
Yes No Yes
No Yes Yes
Debtor has rights in the collateral Yes
Proper filing of a security agreement No
Value given by the creditor Yes
To create a security interest the creditor must give value, the debtor must have rights in the collateral, and the creditor must take possession of the collateral or obtain the agreement in a signed or authenticated writing by the debtor. Filing is not necessary to create an interest, it is only necessary to perfect an interest that has already been created.
130
Under the UCC Secured Transactions Article, when collateral is in a secured party's possession, which of the following conditions must also be satisfied to have attachment?
A. There must be a written security agreement.
B. The public must be notified.
C. The secured party must receive consideration.
D. The debtor must have rights to the collateral.
D. The debtor must have rights to the collateral.
A security interest gives the creditor a right to the debtor's interest in the collateral if the debtor does not repay the debt. The collateral is security for debt. If the debtor has no rights in the collateral, the creditor has no security interest.
131
Creditor A agreed to loan Debtor D the money for the purchase of inventory. Debtor D signed a security agreement on October 1. Creditor A filed a financing statement on the goods on October 2. The inventory was shipped FOB place of shipment on October 5. When did the security interest attach?
A. October 1.
The debtor must have an interest in the collateral.
B. October 2.
C. October 5.
D. The interest has not attached until tender of the goods to D.
C. October 5.
The debtor must have an interest in the collateral in order for the security interest to attach, even when the paperwork is done in advance. The debtor here has an interest when the goods are shipped because in FOB place of shipment contracts title passes when the goods are placed in the hands of the carrier.
132
Under the Secured Transactions Article of the UCC, which of the following statements is correct regarding a security interest that has not attached?
A. It is effective against the debtor, but not against third parties.
B. It is effective against both the debtor and third parties.
C. It is effective against third parties with unsecured claims.
D. It is not effective against either the debtor or third parties.
D. It is not effective against either the debtor or third parties.
133
Under the Secured Transactions Article of the UCC, which of the following security agreements does NOT need to be in writing to be enforceable?
A. A security agreement collateralizing a debt of LESS than $500.
B. A security agreement where the collateral is highly perishable or subject to wide price fluctuations.
C. A security agreement where the collateral is in the possession of the secured party.
D. A security agreement involving a purchase money security interest.
C. A security agreement where the collateral is in the possession of the secured party.
Possession is nine tenths of the law, and under Article 9, possession is the security interest as well as perfection.
134
Which of the following requires a filing for perfection?
A. A purchase money security interest in consumer goods.
B. A purchase money security interest in equipment.
C. A security interest in negotiable promissory notes.
D. None of the above.
B. A purchase money security interest in equipment.
Here, possession as a method of perfection is not practical, and, although it is a purchase money security interest, the collateral equipment is not covered by the automatic perfection rule. Thus, a filing is required.
135
Jones lives in Oklahoma and is the owner of a large number of valuable antiques. Treasures Delight, located in Arkansas, is a seller of antiques. Treasures Delight is owned by Sally Delight. Delight offers to purchase all of the antiques owned by Jones paying 60% of the agreed price and, by agreement, signs a security agreement for the balance putting up her entire inventory as security. The security agreement provides for monthly payments. Which of the following is correct?
A. Since this is a purchase money security interest, Jones is automatically perfected without a filing.
B. Although this is a purchase money security interest, Jones must file to have a perfected security interest.
C. There is not a purchase money security interest because being antiques for resell classifies the collateral as inventory.
D. If Jones decides to file for perfection of his security interest, Jones would file a financing statement in Oklahoma.
B. Although this is a purchase money security interest, Jones must file to have a perfected security interest.
The antiques are classified as inventory (collateral to be held for resell). Thus, although a purchase money security interest was created, being inventory, a filing is required for perfection.
136
On July 8, Ace, a refrigerator wholesaler, purchased 50 refrigerators. This comprised Ace's entire inventory and was financed under an agreement with Rome Bank that gave Rome a security interest in all refrigerators on Ace's premises, all future acquired refrigerators, and the proceeds of sales. On July 12, Rome filed a financing statement that adequately identified the collateral. On August 15, Ace sold one refrigerator to Cray for personal use and four refrigerators to Zone Co. for its business.
Which of the following statements is correct?
A. The refrigerators sold to Zone will be subject to Rome's security interest.
B. The refrigerator sold to Cray will not be subject to Rome's security interest.
C. The security interest does not include the proceeds from the sale of the refrigerators to Zone.
D. The security interest may not cover after-acquired property even if the parties agree.
B. The refrigerator sold to Cray will not be subject to Rome's security interest.
Even though the interest is perfected, Cray still gets to keep the refrigerator. A buyer in the ordinary course of business takes goods free from a security interest, even if the buyer has knowledge of the security agreement.
137
Under the UCC Secured Transactions Article, what is the order of priority for the following security interests in store equipment?
I. Security interest perfected by filing on April 15, 2004.
II. Security interest attached on April 1, 2004.
III. Purchase money security interest attached April 11, 2004, and perfected by filing on April 20, 2004.
A. I, III, II.
B. II, I, III.
C. III, I, II.
D. III, II, I.
C. III, I, II.
All perfected interests take priority over unperfected interests, regardless of when they arose, so II will be last. If more than one perfected interest exists, then the first to be perfected takes priority. Interests I and III are both perfected. The first is obviously perfected on April 15, 2004, and the third is not perfected by filing until April 20, 2004. An exception to the first in time is first in priority rule is when you have a PMSI in collateral other than livestock or inventory (here the collateral is store equipment) where a second in time of perfection takes place before or within twenty (20) days after the debtor takes possession of the collateral.
138
```
Under the UCC Secured Transactions Article, which of the following after-acquired property may be attached to a security agreement given to a secured lender?
Inventory Equipment
Yes Yes
Yes No
No Yes
No No
```
Inventory Equipment
Yes Yes
The debtor may give a security interest in either inventory or equipment that the debtor has rights to and the security agreement can also provide that this security interest applies to any inventory or equipment the debtor acquires in the future.
139
A debtor is in default. The collateral consists of 100 cows described in the security agreement. Thirty cows were stolen through no fault of the debtor. Which of the following statements is correct concerning the secured party's rights due to the debtor's default?
A. The secured party must take the peaceful possession of the 70 remaining cows before s/he can pursue any remedies.
B. If the secured party takes possession, the secured party cannot keep the cows in full satisfaction of the debt, if the debtor has paid 60% or more of the debt.
C. If the secured party takes possession and sells the 70 cows. Proceeds will be applied to expenses incurred in the keeping of the cows. The costs of sale, and any balance, will be applied to the debt. The debt will then be discharged, even if the proceeds are insufficient to cover the costs and the debt.
D. Upon default, the secured party can proceed to recover under the Uniform Commercial Code or proceed with any judicial remedy (such as get a judgment and levy on the debtor's non-exempt property).
D. Upon default, the secured party can proceed to recover under the Uniform Commercial Code or proceed with any judicial remedy (such as get a judgment and levy on the debtor's non-exempt property).
140
A debtor purchased an LCD television from Best Buy for $1,000. BestBuy financed the transaction. With finance charges, the total cost of the financing is $1,200. After the debtor has paid $600, he defaults on the payment and BestBuy repossesses the TV. BestBuy has decided to keep the TV as a floor display model. The debtor believes it would be best if BestBuy sold the TV.
A. Under Article 9, BestBuy must sell the TV.
B. Under Article 9, BestBuy is not required to sell the TV.
If the debtor must pay 60% of the purchase price, the creditor must sell the goods. The measurement is the purchase price not the total cost of financing.
C. Under Article 9, the debtor has no control over the creditor's actions once there has been a default.
D. Under Article 9, the decision to sell or retain is always within the discretion of the creditor.
A. Under Article 9, BestBuy must sell the TV.
The debtor has paid 60% of the PURCHASE PRICE, so BestBuy must sell the TV.
141
Sorus and Ace have agreed, in writing, to act as guarantors of collection on a debt owed by Pepper to Towns, Inc. The debt is evidenced by a promissory note.
If Pepper defaults, Towns will be entitled to recover from Sorus and Ace unless
A. Sorus and Ace are in the process of exercising their rights against Pepper.
B. Sorus and Ace prove that Pepper was insolvent at the time the note was signed.
C. Pepper dies before the note is due.
D. Towns has not attempted to enforce the promissory note against Pepper.
D. Towns has not attempted to enforce the promissory note against Pepper.
142
Nash, Owen, and Polk are co-sureties with maximum liabilities of $40,000, $60,000, and $80,000, respectively. The amount of the loan on which they have agreed to act as co-sureties is $180,000.
The debtor defaulted at a time when the loan balance was $180,000. Nash paid the lender $36,000 in full settlement of all claims against Nash, Owen, and Polk.
The total amount that Nash may recover from Owen and Polk is
A. $0
B. $24,000
C. $28,000
D. $140,000
C. $28,000
When there are co-sureties, each has a right to a proportionate contribution from the others if a co-surety pays an unfair share of the debt. In this case, Nash's liability is 2/9 of the total liability among all co-sureties ($40,000 out of a total $180,000). She therefore should not pay more than 2/9 of any total settlement. She has a right to recover 7/9 * $36,000 from the others, or $28,000. More specifically, she will get $12,000 from Owen and $16,000 from Polk.
143
Mane Bank lent Eller $120,000 and received securities valued at $30,000 as collateral. At Mane's request, Salem and Rey agreed to act as uncompensated co-securities on the loan. The agreement provided that Salem's and Rey's maximum liability would be $120,000 each. Mane released Rey without Salem's consent. Eller later defaulted when the collateral held by Mane was worthless and the loan balance was $90,000.
Salem's maximum liability is
A. $30,000
B. $45,000
C. $60,000
D. $90,000
B. $45,000
Salem is 50% liable on the debt. Before the release, Salem could have been forced to pay 100% to Mane and would then have had to recover by right of contribution half of that amount from Rey. In that case, Salem could get 50% from Rey, because Rey held 50% of the total maximum liability ($120,000/$240,000). However, when Mane released Rey, Mane destroyed Salem's right to seek a contribution from Rey. Therefore, Salem is now only directly liable for only the percentage share of the original maximum liability ($120,000/$240,000 = 50%). Since the total debt is $90,000, Salem will have to pay 50% of $90,000, $45,000.
144
Lane promised to lend Turner $240,000 if Turner obtained sureties to secure the loan.
Turner agreed with Rivers, Clark, and Zane for them to act as co-sureties on the loan from Lane. The agreement between Turner and the co-sureties provided that compensation be paid to each of the co-sureties. It further indicated that the maximum liability of each co-surety would be as follows: Rivers $240,000, Clark $80,000, and Zane $160,000.
Lane accepted the commitments of the sureties and made the loan to Turner. After paying ten installments totaling $100,000, Turner defaulted. Clark's debts, including the surety obligation to Lane on the Turner loan, were discharged in bankruptcy. Later, Rivers properly paid the entire outstanding debt of $140,000.
What amount may Rivers recover from Zane?
A. $0
B. $56,000
C. $70,000
D. $84,000
B. $56,000
Since Clark's debts have been discharged in bankruptcy, Clark has no liability. Also discharged in bankruptcy is his maximum liability of $80,000. The remaining co-sureties are liable for up to $400,000 between them: $240,000 for Rivers and $160,000 for Zane. Rivers paid more than her proportionate share of the liability. Her right of contribution from Zane is based on the percentage of the total maximum liability of $400,000.
Zane will pay 40%, because his maximum liability is $160,000/$400,000 = 40%. 40% of $140,000 is $56,000 (not $70,000), the amount Zane owes Rivers.
145
```
Which of the following rights does one cosurety generally have against another cosurety?
A. Exoneration.
B. Subrogation.
C. Reimbursement.
D. Contribution.
```
D. Contribution.
146
Ivor borrowed $420,000 from Lear Bank. At Lear's request, Ivor entered into an agreement with Ash, Kane, and Queen for them to act as co-sureties on the loan. The agreement between Ivor and the co-sureties provided that the maximum liability of each co-surety was: Ash, $84,000; Kane, $126,000; and Queen, $210,000. After making several payments, Ivor defaulted on the loan. The balance was $280,000.
If Queen pays $210,000 and Ivor subsequently pays $70,000, what amounts may Queen recover from Ash and Kane?
A. $0 from Ash and $0 from Kane.
B. $42,000 from Ash and $63,000 from Kane.
C. $70,000 from Ash and $70,000 from Kane.
D. $56,000 from Ash and $84,000 from Kane.
B. $42,000 from Ash and $63,000 from Kane.
The total maximum amount that the sureties stand to lose is $84,000 + $126,000 + $210,000 = $420,000. If the loss is below the maximums, each co-surety is ultimately liable for a proportionate share of the total debt based on their maximum liability. For example, Queen will bear 50% of any loss because Queen is liable for $210,000 of the $420,000 total maximum, or 50%.
Here, after Ivor has paid in $70,000 towards his loan balance of $280,000, the loan balance stands at $210,000. The exact order of payments is not important; what is important is that at the end of the day all co-sureties pay their fair share. Since the debt balance is $210,000, and the maximum total the sureties stand to lose is $420,000, each surety will pay exactly 1/2 of their personal maximum liability.
Since Queen paid the entire debt to begin with, Queen is able to recover half of Ash's maximum, or $42,000, and half of Kane's maximum, or $63,000.
147
Which of the following rights does a surety have?
Right to compel the creditor to collect from the principal debtor Right to compel the creditor to proceed against the principal debtor's collateral
Yes Yes
Yes No
No Yes
No No
Right to compel the creditor to collect from the principal debtor Right to compel the creditor to proceed against the principal debtor's collateral
No No
A surety is primarily liable on a debt upon debtor's default. If the creditor wishes to collect from the surety, the creditor may do so. The surety may not compel the creditor to take either of these actions.
148
Which of the following acts will always result in the total release of a compensated surety?
A. The creditor changes the manner of the principal debtor's payment.
B. The creditor extends the principal debtor's time to pay.
C. The principal debtor's obligation is partially released.
D. The principal debtor's performance is tendered.
D. The principal debtor's performance is tendered.
Tender of full performance will totally release the surety, as in such a case there is no longer a debt to be repaid by anyone.
149
Green was unable to repay a loan from State Bank when due.
State refused to renew the loan unless Green provided an acceptable surety. Green asked Royal, a friend, to act as surety on the loan. To induce Royal to agree to become a surety, Green fraudulently represented Green's financial condition and promised Royal discounts on merchandise sold at Green's store. Royal agreed to act as surety and the loan was renewed. Later, Green's obligation to State was discharged in Green's bankruptcy. State wants to hold Royal liable.
Royal may avoid liability
A. If Royal can show that State was aware of the fraudulent representations.
B. If Royal was an uncompensated surety.
C. Because the discharge in bankruptcy will prevent Royal from having a right of reimbursement.
D. Because the arrangement was void at the inception.
A. If Royal can show that State was aware of the fraudulent representations.
A creditor is required to disclose any known material facts to a surety before the surety signs a loan agreement, if such facts will substantially increase the surety's risks. When a creditor does not make such disclosures, the creditor has committed presumed fraud, and the surety may use this as a defense to repayment.
150
Frost's accountant and business manager has the authority to
A. Mortgage Frost's business property.
B. Obtain bank loans for Frost.
C. Insure Frost's property against fire loss.
D. Sell Frost's business.
C. Insure Frost's property against fire loss.
An agent, such as a business manager, has implied authority to carry on the normal, day-to-day business activities of the firm. He may do things that are REASONABLY necessary to RUN THE BUSINESS, but may not take extraordinary steps without express authority.
151
How is apparent authority created?
A. By perceptions of third parties that have been created or allowed by the principal.
Apparent authority comes from how the agent is viewed by third parties when the principal does nothing to correct the appearance of authority.
B. By agreement.
C. By implication.
D. By either agreement or implication.
A. By perceptions of third parties that have been created or allowed by the principal.
Apparent authority comes from how the agent is viewed by third parties when the principal does nothing to correct the appearance of authority.
152
```
Which of the following would not have capacity to create an agency relationship?
A. An unincorporated association.
B. A corporation.
C. An individual.
D. A government agency.
```
A. An unincorporated association.
An unincorporated association does not have capacity, because it is not an individual or an entity and therefore has no contractual capacity.
153
Under agency law, which of the following statements best describes ratification?
A. A principal's affirmation of an agent's authorized act.
B. A principal's affirmation of an agent's unauthorized act.
C. A principal's approval in advance of an agent's acts.
D. A principal's disavowal of an agent's unauthorized act.
B. A principal's affirmation of an agent's unauthorized act.
Ratification is required where the agent has acted without authority, either express or implied.
154
Orr gives North power of attorney. In general, the power of attorney
A. Will be valid only if North is a licensed attorney at law.
B. May continue in existence after Orr's death.
C. May limit North's authority to specific transactions.
D. Must be signed by both Orr and North.
C. May limit North's authority to specific transactions.
In general, power of attorney is the power to handle some or all of a person's affairs, depending on what a person wishes to grant. One may grant to another the power to do a few things, or the power to do everything.
155
Thorp is a purchasing agent for Ogden, a sole proprietor, and has the express authority to place purchase orders with Ogden's suppliers.
Thorp places 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?
A. Ogden will be liable, because Datz was not informed of Ogden's incapacity.
Datz need not be informed, as incapacity of a principal terminates the agency relationship as a matter of law. The public is "on notice" of a person's incapacity if he is adjudicated incompetent.
B. Ogden will be liable because Thorp acted with express authority.
C. Ogden will not be liable, because Thorp's agency ended when Ogden was declared incompetent.
D. Ogden will not be liable because Ogden was a non-disclosed principal.
C. Ogden will not be liable, because Thorp's agency ended when Ogden was declared incompetent.
An agency relationship terminates as a matter of law as soon as one is adjudicated incompetent. Note that a person simply acting irrationally or "crazy" does not automatically end the relationship; it is the court proceeding that is important.
156
Generally, an agency relationship is terminated by operation of law in all of the following situations, except the
A. Principal's death.
B. Principal's incapacity.
C. Agent's renunciation of the agency.
D. Agent's failure to acquire a necessary business license.
C. Agent's renunciation of the agency.
Except for an agency for a specific term and an agency coupled with an interest, either side may terminate the agency arrangement at will. Therefore, no operation of law is needed when an agent desires to renounce his authority.
157
Which of the following statements represent(s) a principal's duty to an agent who works on a commission basis?
I. The principal is required to maintain pertinent records, account to the agent, and pay the agent according to the terms of their agreement.
II. The principal is required to reimburse the agent for all authorized expenses incurred, unless the agreement calls for the agent to pay expenses out of the commission.
A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II.
C. Both I and II.
Agents owe many duties to principals. Principals owe only a few duties to their agents, but they are important. A principal must pay an agent whatever has been contracted. Paying according to the terms of an agreement necessarily encompasses maintaining pertinent records, so that the principal can properly account to the agent.
Also, a principal must reimburse an agent for all authorized expenses, unless the agreement calls for the agent to pay them. The presumption is that the principal will pay an agent's expenses incurred within the scope of authority, absent agreement to the contrary.
158
When a valid contract is entered into by an agent on the principal's behalf, in a non-disclosed principal situation, which of the following statements concerning the principal's liability is correct?
The principal may be held liable once disclosed The principal must ratify the contract to be held liable
Yes Yes
Yes No
No Yes
No No
The principal may be held liable once disclosed- Yes
The principal must ratify the contract to be held liable- No
The principal need not ratify the contract. If the agent acted with authority, the principal is bound to the agreement.
159
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,
A. The broker will have the same actual authority as if Easy's identity had been disclosed.
B. Easy will be bound by the contract because of the broker's apparent authority
C. Easy will not be liable for any negligent acts committed by the broker while acting on Easy's behalf.
D. The broker will not be personally bound by the contract, because the broker has express authority to act.
A. The broker will have the same actual authority as if Easy's identity had been disclosed.
160
Which of the following rights will a third party be entitled to after validly contracting with an agent representing an undisclosed principal?
A. Disclosure of the principal by the agent.
B. Ratification of the contract by the principal.
C. Performance of the contract by the agent.
D. Election to void the contract after disclosure of the principal.
C. Performance of the contract by the agent.
161
When an agent acts for an undisclosed principal, the principal will not be liable to third parties if the
A. Principal ratifies a contract entered into by the agent.
B. Agent acts within an implied grant of authority.
C. Agent acts outside the grant of actual authority.
D. Principal seeks to conceal the agency relationship.
C. Agent acts outside the grant of actual authority.
162
Able, as agent for Baker, an undisclosed principal, contracts with Safe to purchase an antique car. In payment, Able issues a personal check to Safe. Able cannot cover the check, but expects Baker to give him cash to deposit before the check is presented for payment.
Baker did not do so and the check was dishonored.
Baker's identity became known to Safe.
Safe may not recover from
A. Baker, individually, on the contract.
B. Able, individually, on the contract.
C. Baker, individually, on the check.
D. Able, individually, on the check.
C. Baker, individually, on the check.
The relationship between a drawer of a check and a payee is unrelated to that between an agent and principal. A principal is not responsible for the payment of an agent's personal checks.
163
Kent, without authority, contracts to buy computer equipment from Fox Corp. for Ace Corp. Kent tells Fox that Kent was acting on Ace's behalf.
For Ace to ratify the contract with Fox,
A. Kent must be a general agent for Ace.
B. Ace must know all material facts relating to the contract at the time it is ratified.
C. Ace must notify Fox that Ace intends to ratify the contract.
D. Kent must have acted reasonably and in Ace's best interest.
B. Ace must know all material facts relating to the contract at the time it is ratified.
To ratify such a contract, the principal must know all material facts, affirm the entire contract, have capacity to ratify the contract, act within certain time constraints, and follow the same formalities (as far as a writing requirement) that the original contract had to follow.
164
```
Under the Securities Exchange Act of 1934, which of the following types of instruments is excluded from the definition of "securities"?
A. Investment contracts.
B. Convertible debentures.
C. Non-convertible debentures.
D. Certificates of deposit.
```
D. Certificates of deposit.
The 1934 Act governs securities. Securities represent either a right to assets or a corporation's indebtedness, while a certificate of deposit acknowledges that monies have been received and sets out terms for repayment in the future. A holder of a CD is not a creditor, because (s)he has not "loaned" money; (s)he has merely deposited it. Therefore, certificates of deposit do not fall within the scope of the 1934 Act.
165
Which of the following transactions is subject to registration requirements of the Securities Act of 1933?
A. The public sale of stock of a trucking company regulated by the Interstate Commerce Commission.
B. A public sale of municipal bonds issued by a city government.
C. The issuance of stock by a publicly traded corporation to its existing shareholders because of a stock split.
D. The public sale by a corporation of its negotiable ten-year notes.
D. The public sale by a corporation of its negotiable ten-year notes.
The 1933 Act applies to sales of securities, including stocks, bonds and notes that are issued for periods over nine months.
166
A tombstone advertisement
A. May be substituted for the prospectus under certain circumstances.
B. May contain an offer to sell securities.
C. Notifies prospective investors that a previously offered security has been withdrawn from the market and is therefore effectively "dead."
D. Makes known the availability of a prospectus.
D. Makes known the availability of a prospectus.
During the waiting period of 20 days immediately after registering with the SEC, tombstone ads may be placed. Tombstone ads are heavily restricted and may contain only limited information, such as the type of security and where a potential investor would acquire a now-available prospectus.
167
Which of the following statements concerning the prospectus required by the Securities Act of 1933 is correct?
A. The prospectus is a part of the registration statement.
B. The prospectus should enable the SEC to pass on the merits of the securities.
C. The prospectus must be filed after an offer to sell.
The filing must be done before any public offering is made if the security is not exempt under the Act.
D. The prospectus is prohibited from being distributed to the public until the SEC approves the accuracy of the facts embodied therein.
A. The prospectus is a part of the registration statement.
168
Under the Securities Act of 1933, which of the following statements is (are) correct regarding the purpose of registration?
I. The purpose of registration is to allow the detection of management fraud and prevent a public offering of securities when management fraud is suspected.
II. The purpose of registration is to adequately and accurately disclose financial and other information upon which investors may determine the merits of securities.
A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II.
B. II only.
B is the best answer, because the primary purpose of registration is to enable investors to make an informed decision as to whether to invest in a public offering.
169
Among the ways that the Dodd-Frank Act impacts accountants are:
A. It created the Consumer Financial Protection Bureau (CFPB) to minimize accountants' abuses of their clients.
B. It authorizes the PCAOB to regulate accountants who audit non-public broker-dealers.
C. It designates the "Big Four" accounting firms as "too big to fail."
D. All of the above.
B. It authorizes the PCAOB to regulate accountants who audit non-public broker-dealers.
The Bernie Madoff ponzi scheme prompted Congress to extend the PCAOB's authority to cover non-public broker-dealers.
170
The Dodd-Frank Act created:
A. The Public Company Accounting Oversight Board (PCAOB).
B. The Financial Stability Oversight Council (FSOC).
C. The Consumer Financial Protection Bureau (CFPB).
D. B and C.
D. B and C.
Dodd-Frank created the FSOC and the CFPB, but not the PCAOB.
171
Which of the following does the Dodd-Frank Act attempt to do?
A. Limit risk posed by existing financial institutions.
B. Limit proprietary trading by financial institutions.
C. Increase transparency in the OTC market for derivative securities.
D. All of the above.
D. All of the above.
172
Which of the following factors help determine whether an item of personal property has become a fixture?
Manner of affixation Value of the item Intent of the annexor
Yes Yes Yes
Yes Yes No
Yes No Yes
No Yes Yes
Manner of affixation Yes Value of the item No
| Intent of the annexor Yes
173
On August 15, 1994, Tower, Nolan, and Oak were deeded a piece of land as tenants in common. The deed provided that Tower owned 1/2 the property and Nolan and Oak owned 1/4 each. If Oak dies, the property will be owned as follows:
A. Tower 1/2, Nolan 1/4, Oak's heirs 1/4.
B. Tower 1/3, Nolan 1/3, Oak's heirs 1/3.
C. Tower 5/8, Nolan 3/8.
D. Tower 1/2, Nolan 1/2.
A. Tower 1/2, Nolan 1/4, Oak's heirs 1/4.
In a tenancy in common, the owners have the right to pass their interests to their heirs through their estate.
174
Which of the following elements must be contained in a valid deed?
Purchase Price Description of the Land
Yes Yes
Yes No
No Yes
No No
No Yes
The purchase price is not necessary, but the description is necessary for a valid deed.
175
Which of the following is a defect in marketable title to real property?
A. Recorded zoning restrictions.
B. Recorded easements referred to in the contract of sale.
C. Unrecorded lawsuit for negligence against the seller.
D. Unrecorded easement.
D. Unrecorded easement.
176
A purchaser who obtains real estate title insurance will
A. Have coverage for the title exceptions listed in the policy.
B. Be insured against all defects of record other than those excepted in the policy.
C. Have coverage for title defects that result from events that happen after the effective date of policy.
D. Be entitled to transfer the policy to subsequent owners.
B. Be insured against all defects of record other than those excepted in the policy.
The title policy protects against these types of defects unless specifically excluded.
177
Rich purchased property from Sklar for $200,000. Rich obtained a $150,000 loan from Marsh Bank to finance the purchase, executing a promissory note and a mortgage. By recording the mortgage, Marsh protects its
A. Rights against Rich under the promissory note.
B. Rights against the claims of subsequent bona fide purchasers for value.
C. Priority against a previously filed real estate tax lien on the property.
D. Priority against all parties having earlier claims to the property.
The purpose of recording is to keep the rights of the original parties intact and protect against future transfers or recorded rights.
178
Sam is a multimillionaire. He invested $100,000 in Company A's crowdfunded venture. Later that year, he wanted to invest in Company B's crowdfunded venture. What is the largest amount Sam can invest in B's offering?
A. $0
B. $10,000
C. $100,000
D. $1,000
A. $0
$100,000 is the most someone can invest in crowdfunded ventures during the course of a single year.
179
Turtle was audit partner on ABC Accounting's audit of Jemison Corporation. Turtle knew that the audit was ineptly performed, although he hoped (without much reason) that the financial statements were accurate. He certified them as such. Which of the following is true?
A. If a court decided that Turtle had acted willfully, he could be held criminally liable under the federal securities laws.
B. If a court decided that Turtle had acted negligently, he could be held criminally liable under the federal securities laws.
C. Both A and B.
Because B is wrong, this answer is necessarily wrong.
D. None of the above.
A. If a court decided that Turtle had acted willfully, he could be held criminally liable under the federal securities laws.
The federal securities laws' criminal provisions punish "willful" violations of the 1933 and 1934 securities acts.
180
Seimone, an auditor for the ABC accounting firm, learns that her audit client, Bupkis Co., is about to announce a record profit. She buys Bupkis shares in a fake name and profits upon the public announcement. Which of the following is true?
A. The SEC may bring civil charges against Seimone.
B. The SEC may bring criminal charges against Seimone.
C. A and B.
D. None of the above.
A. The SEC may bring civil charges against Seimone.
181
Jay Associates, CPAs, gives an unqualified opinion on Nast Power Co.'s financial statements. Larkin bought Nast bonds in a public offering subject to the Securities Act of 1933. The registration statement filed with the SEC includes Nast's financial statements.
Larkin sues Jay for misstatements contained in the financial statements under the provisions of Section 11 of the Securities Act of 1933.
To prevail, Larkin must prove
```
Scienter Reliance
Yes No
Yes Yes
No No
No Yes
```
Scienter No Reliance No
The 1933 Act makes a plaintiff's job relatively easy. Plaintiffs need not establish either reliance or negligence to win a Section 11 case. The burden in both of these issues is on the defendants to prove that the plaintiff did not rely and that they acted with due diligence. Indeed, an issuing company cannot escape liability, even by showing due diligence - it is strictly liable for material misstatements in the registration statement that caused the plaintiff's losses.
182
Under Section 11 of the Securities Act of 1933, which of the following standards may a CPA use as a defense?
Generally accepted accounting principles. Generally accepted detection standards.
Yes Yes
Yes No
No Yes
No No
Generally accepted accounting principles. Yes Generally accepted detection standards. No
183
Which of the following forms of business generally provides all owners with limited liability, while avoiding federal taxation of income at the entity level?
A. A Subchapter C corporation.
B. A Subchapter S corporation.
C. Partnership.
D. Limited partnership.
B. A Subchapter S corporation.
If the requirements of a Subchapter S corporation are met, the corporate entity pays no federal income tax. All income is passed through to the shareholders. Although the shareholders enjoy limited liability, they do pay personal income tax on dividends received.
184
Tim and Sarah wish to form an accounting firm. They are not confident in their own abilities and wish to choose a form of organization that will shield them from personal liability for their own malpractice.
Which of the following would succeed for them?
A. LLP
B. LLC
C. Both of the above.
D. Neither of the above.
D. Neither of the above.
With either an LLC or an LLP, Tim and Sarah would remain liable for their own malpractice (although not for each other's, unless they supervised or controlled one another).
No form of business organization excuses an accountant from liability for his or her own malpractice.
185
Consuelo is a limited partner who has become ensnared in various activities of her limited partnership. She is worried that her activities may cause her to be liable as a general partner. Which of the following activities may subject her to personal liability?
A. Working for the partnership as a file clerk.
B. Attending meetings of the partners.
C. Guaranteeing a partnership loan.
D. None of the above.
A. Working for the partnership as a file clerk.
Working for a partnership, especially as a file clerk, is not taking part in control of the firm.
186
Under the Revised Uniform Limited Partnership Act, which of the following statements is correct regarding limited partnerships?
A. Limited partners may lose limited liability if they participate in management activities.
B. Limited partnerships may legally exist without filing a certificate of limited partnership.
C. Limited partners have the same rights, responsibilities, and authority as general partners.
D. Limited partners may contribute cash only and may not contribute services as their capital contributions.
A. Limited partners may lose limited liability if they participate in management activities.
187
Which of the following statements is correct concerning the similarities between a limited partnership and a corporation?
A. Each is created under a statute and must file a copy of its certificate with the proper state authorities.
B. All corporate stockholders and all partners in a limited partnership have limited liability.
C. Both are recognized for federal income-tax purposes as taxable entities.
D. Both are statutorily permitted to exist in perpetuity.
A. Each is created under a statute and must file a copy of its certificate with the proper state authorities.
Both of these organizations require special steps in their creation. One of these steps is the filing of a certificate, usually with the Secretary of State.
188
```
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?
A. Assignment.
B. Novation.
C. Delegation.
D. Accord and satisfaction.
```
B. Novation.
B is the best answer. The general rule is that promoters are liable on pre-incorporation contracts that they negotiate on the corporation's behalf.
When the corporation comes into existence and adopts the contracts, the general rule is that both the promoter and the corporation are now liable under them.
However, if the other party agrees to release the agent from liability and to look only to the corporation for satisfaction, then a novation has taken place.
189
Under the Revised Model Business Corporation Act (RMBCA), which of the following items of information must be included in a corporation's articles of incorporation (charter)?
A. Name and address of each incorporator.
B. Nature and purpose of the corporation's business.
C. Name and address of the corporation's promoter.
D. Election of either C corporation or S corporation status.
A. Name and address of each incorporator.
The articles of incorporation must include (1) the name of the corporation; (2) the number of shares it is authorized to issue; (3) the street address of its registered office and the name of its agent at that address; and (4) the name and address of each incorporator.
190
The limited liability of a stockholder in a closely held corporation may be challenged successfully if the stockholder
A. Undercapitalized the corporation when it was formed.
B. Formed the corporation solely to have limited personal liability.
C. Sold property to the corporation.
D. Was a corporate officer, director, or employee.
A. Undercapitalized the corporation when it was formed.
191
Which of the following statements is correct regarding a limited liability company's operating agreement?
A. It must be filed with a central state agency.
B. It must be in writing.
C. It is designed to forestall and resolve disputes among the owners.
D. It is necessary for a limited liability company to exist.
C. It is designed to forestall and resolve disputes among the owners.
This is the purpose of an LLC operating agreement, which is why it is a good idea that these be in writing and filed with the state (although this is not required).
192
Elmo forms a corporation to run a retail store. He buys $100,000 worth of its stock, as does his mother. They are the only two shareholders. The store's location was not favorable and the business does not take off. Over the course of five years, Elmo slowly burns through the $200,000 in capital, as the store posts losses every year. Near the end of the sixth year, the corporation takes bankruptcy, leaving creditors on the hook for $40,000; they had delivered inventory to the store for which the corporation had been unable to pay. The creditors sue Elmo and his mother personally. Given the facts presented, what should happen?
A. The court should pierce the corporate veil, because the store was obviously undercapitalized.
B. The court should pierce the corporate veil, because the creditors failed to have Elmo or his mother personally guarantee their extensions of credit.
C. The court should not pierce the corporate veil.
D. A and B.
C. The court should not pierce the corporate veil.
There is no evidence of commingling of funds, diversion of corporate assets, failure to maintain formalities, or any of the other factors that can induce a court to pierce the corporate veil. The mere fact that a business fails does not indicate that it was originally undercapitalized.
193
Under the Revised Model Business Corporation Act (RMBCA), a merger of two public corporations usually requires all of the following, except
A. A formal plan of merger.
B. An affirmative vote by the holders of a majority of each corporation's voting shares.
C. Receipt of voting stock by all stockholders of the original corporations.
D. Approval by the Board of Directors of each corporation.
C. Receipt of voting stock by all stockholders of the original corporations.
Shareholders must be given only the exchange rights provided in the articles of share exchange. They are not automatically entitled to voting shares in the new corporation.
194
The partners of College Assoc., a general partnership, decide to dissolve the partnership and agree that none of the partners will continue to use the partnership name.
Under the Uniform Partnership Act, which of the following events will occur on dissolution of the partnership?
```
Each partner's existing liability will be discharged. Each partner's apparent authority will continue.
Yes Yes
Yes No
No Yes
No No
```
Each partner's existing liability will be discharged. No
Each partner's apparent authority will continue. Yes
Simply deciding to dissolve a partnership does not dissolve liability. If money is owed on contracts, tort judgments, or otherwise, the partners are still responsible for them. Apparent authority does continue after partners have decided to dissolve the partnership. Notice must be given to others (by contact for those with which the partnership has actually done business and by publication for everyone else) before apparent authority stops.
195
Which of the following actions may be taken by a corporation's Board of Directors without stockholder approval?
A. Purchasing substantially all of the assets of another corporation.
B. Selling substantially all of the corporation's assets.
C. Dissolving the corporation.
D. Amending the articles of incorporation.
A. Purchasing substantially all of the assets of another corporation.
Shareholders have the right to vote on many important corporate changes, including amendments to the articles of incorporation, dissolution, sale of all or substantially all of the corporation's assets, and mergers & consolidations. Choices B, C, and D are all on this list. Choice A is, therefore, the correct answer. Often, one corporation can buy all or substantially all of the assets of another company without there being any large qualitative change in the life of the purchasing corporation. Therefore, when a large corporation gobbles up the assets of a smaller corporation, the shareholders of the large buyer do not have the right to vote on the transaction. There would be a much greater impact on the life of the selling corporation and its shareholders would therefore have the right to vote on the transaction.
196
An owner of common stock will not have any liability beyond actual investment unless the owner
A. Paid less than par value for stock purchased in connection with an original issue of shares.
A shareholder who buys watered stock is liable to the corporation for the difference between the price actually paid and the par value of the shares purchased.
B. Agreed to perform future services for the corporation in exchange for original-issue par-value shares.
C. Purchased treasury shares for less than par value.
D. Failed to pay the full amount owed on a subscription contract for no-par shares.
A. Paid less than par value for stock purchased in connection with an original issue of shares.
When stock has a par value, it must be sold for at least that par value in an original issue. If it is sold for less, it is "watered stock."
197
Dart Corp. engages Jay Associates, CPAs, to assist in a public stock offering. Jay audits Dart's financial statements and gives an unqualified opinion, despite knowing that the financial statements contain misstatements.
Jay's opinion is included in Dart's registration statement. Larson purchases shares in the offering and suffers a loss when the stock declines in value after the misstatements became known.
In a suit against Jay, under the anti-fraud provisions of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, Larson must prove all of the following, except
A. Larson was an intended user of the false registration statement.
B. Larson relied on the false registration statement.
C. The transaction involved some form of interstate commerce.
D. Jay acted with intentional disregard of the truth.
C. The transaction involved some form of interstate commerce.
The entire 1934 Act is based on Congress' power to regulate interstate commerce, derived from the commerce clause of the Constitution.
If the transaction does not affect interstate commerce in some way, the federal government has no authority to regulate the transaction.
198
What is the standard that must be established to prove a violation of the anti-fraud provisions of Rule 10b-5 of the Securities Exchange Act of 1934?
A. Negligence.
B. Intentional misconduct.
C. Criminal intent.
D. Strict liability.
B. Intentional misconduct.
To be liable under Rule 10b-5 of the 1934 Act, a defendant must act intentionally. Courts hold that a defendant must act with scienter (intent) or "extreme recklessness" (which is similar to scienter) to be liable under 10b-5.
199
Under the anti-fraud provisions of Section 10(b) of the Securities Exchange Act of 1934, a CPA may be liable if the CPA acts
A. Negligently.
This provision requires an untrue statement and an intent to defraud. Mere negligence means only that the CPA acted carelessly and not intentionally.
B. With independence.
C. Without due diligence.
D. Without good faith.
D. Without good faith.
This provision requires an untrue statement and an intent to defraud. Defenses include lack of knowledge that the statement was false and acting in good faith.
200
An accountant will be liable for damages under Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 only if the plaintiff proves that
A. The accountant was negligent.
B. There was a material omission.
C. The security involved was registered.
D. The security was part of an original issuance.
B. There was a material omission.
A plaintiff must generally show several things to win a Section 10(b) case. A CPA must have (1) intentionally or recklessly (2) made a misstatement of material fact or omitted a material fact (3) that was relied upon by the defendant.
201
Kamp is offering $10mn of its securities. Under Rule 506 of Regulation D of the Securities Act of 1933
A. The securities may be debentures.
B. Kamp must be a corporation.
C. There must be more than 35 purchasers.
D. Kamp may make a general solicitation in connection with the offering.
A. The securities may be debentures.
Rule 506 merely requires that the securities not be advertised to the general public and not be sold to more than 35 non-accredited investors. Any type of security may qualify for this exemption, including stocks and debentures. There is no limit on the dollar value of the issue, so long as the other restrictions are complied with.
202
Zack Limited Partnership intends to sell $6mn of its limited-partnership interests. Zack conducts all of its business activities in the state in which it was organized. Zack intends to use the offering proceeds to acquire municipal bonds.
Which of the following statements is correct concerning the offering and the registration exemptions that might be available to Zack under the Securities Act of 1933?
A. The offering is exempt from registration, because of the intended use of the offering proceeds.
B. Under Rule 147 (regarding intrastate offerings), Zack may make up to five offers to non-residents without jeopardizing the Rule 147 exemption.
C. If Zack complies with the requirements of Regulation D, any subsequent resale of a limited-partnership interest by a purchaser is automatically exempt from registration.
D. If Zack complies with the requirements of Regulation D, Zack may make an unlimited number of offers to sell the limited-partnership interests.
D. If Zack complies with the requirements of Regulation D, Zack may make an unlimited number of offers to sell the limited-partnership interests.
Under Rule 506, Zack can make an unlimited number of offers, but can sell to no more than 35 non-accredited investors (and an unlimited number of accredited investors), and those 35 must each be either sophisticated or acting through a purchaser representative.
203
Jason is president of his union and is determined to take a hard line with his employer, Braxton Co. Which of the following would be "unfair labor practices?"
A. Jason threatened Braxton's management that the union would go out on strike if its workers did not get a big raise when the current contract expired.
B. Jason had his co-workers picket the offices of one of Braxton's biggest customers.
C. A and B.
D. None of the above.
B. Jason had his co-workers picket the offices of one of Braxton's biggest customers.
This would be an illegal secondary boycott, which is an unfair labor practice.
204
Which of the following is (are) true?
A. Vertical mergers are more likely than horizontal mergers to decrease competition and draw anti-trust scrutiny.
B. Attempts to monopolize are illegal, even if the defendant has no realistic hope of success.
C. Resale price maintenance is judged by a "rule-of-reason" standard.
D. All of the above.
C. Resale price maintenance is judged by a "rule-of-reason" standard.
Like most other anti-competitive practices these days, RPM is judged now by a "rule-of-reason" standard. The idea of finding practices "illegal per se" is more and more rare.
205
Which of the following positions best describes the nature of relationship of the Board of Directors of XYZ Co to the company as a whole?
A. Agent.
B. Executive.
C. Fiduciary.
D. Representative.
C. Fiduciary.
The core of the directors' relationship to the company is that they owe it a fiduciary duty - the duty of highest loyalty.
206
Toggle owns a controlling interest in the LMN Partnership. The partnership agreement allows sale of all, or substantially all, of the partnership's assets upon majority vote. Toggle votes his controlling interest in favor of selling an important LMN asset to a corporation that he controls at a price to be set by an independent third-party appraiser. There is notice to all partners of the proposed transaction and a partnership vote. Toggle votes using his controlling interest, in favor of the sale. Minority partners sue, alleging that Toggle has violated his obligation of good faith and fair dealing. Which of the following is true?
A. Toggle has violated his obligation of good faith and fair dealing.
B. Toggle has also violated his duty to avoid conflicts of interest.
C. A and B.
D. None of the above.
D. None of the above.
207
Mary buys an interest in the ABC accounting firm and thereby joins Adam, Betty, and Chen as an equal one-fourth partner. Mary thinks the firm's prices are a little high. When an acquaintance consults Mary about having the firm do her personal income tax return, Mary tells her: "Just come over to my house this weekend. I'll do the return for you and charge you only half of what my firm would charge." Which partnership duty, if any, has Mary breached?
A. Duty of care.
B. Duty of loyalty in the form of no competition
C. Duty of loyalty in the form of no disclosure of confidential information.
D. All of the above.
B. Duty of loyalty in the form of no competition
By taking this potential client away from the business, Mary has breached the duty of loyalty by competing with the firm.
208
```
A corporate stockholder is entitled to which of the following rights?
A. To elect officers.
B. Receive annual dividends.
C. Approve dissolution.
D. Prevent corporate borrowing.
```
C. Approve dissolution.
A shareholder does have this right. Unless there is a court order bringing about involuntary dissolution, shareholders will vote on the proposal.
209
For what purpose will a stockholder of a publicly held corporation be permitted to file a stockholder's derivative suit in the name of the corporation?
A. To compel payment of a properly declared dividend.
B. To enforce a right to inspect corporate records.
C. To compel dissolution of the corporation.
D. To recover damages from corporate management for an ultra vires management act.
D. To recover damages from corporate management for an ultra vires management act.
210
Sam is a member of a member-managed LLC. The other partners have agreed to make Sam the sole manager of the firm. Sam is worried about his liability, should he make any mistakes. Which protections would not be proper for Sam to ask the other members to approve?
A. A provision in the operating agreement that specifies that it is permissible for Sam to contract to buy paper products from his wife's stationery store, so long as he does so at the same price paid by other customers.
B. A provision in the operating agreement providing that Sam cannot be liable to the firm or to other members for his carelessness, unless it rises to the level of, at least, recklessness.
C. A provision in the operating agreement indicating that Sam is not liable to the firm for money damages resulting from his knowing violation of the law.
D. All of the above (would not be proper).
C. A provision in the operating agreement indicating that Sam is not liable to the firm for money damages resulting from his knowing violation of the law.
This provision would be improper, because it is manifestly unreasonable to eliminate a manager's liability for intentional violation of criminal law, intentional infliction of harm on the firm, or intentional violation of criminal law.
211
Under the Uniform Partnership Act, which of the following statements is (are) correct regarding the effect of the assignment of an interest in a general partnership?
I. The assignee is personally responsible for the assigning partner's share of past and future partnership debts.
II. The assignee is entitled to the assigning partner's interest in partnership profits and surplus on dissolution of the partnership.
A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II.
B. II only.
The assignee of a partnership interest gains the rights to the assigning partner's share of profits upon distribution and assets upon dissolution.
The assignee does not gain any other rights, such as the right to vote or the right to use partnership property for partnership purposes.
212
On behalf of a general partnership that operates an appliance store, a partner, Locke, contracts to buy 15 stoves from Gage. Unknown to Gage, Locke was not authorized by the partnership agreement to make such contracts. Another partner, Vorst, refuses to allow the partnership to accept delivery of the stoves and Gage seeks to enforce the contract.
Gage will
A. Lose, because Locke's action was not authorized by the partnership agreement.
B. Lose, because Locke was not an agent of the partnership.
C. Win, because Locke had express authority to bind the partnership.
D. Win, because Locke had apparent authority to bind the partnership.
D. Win, because Locke had apparent authority to bind the partnership.
213
Under the Revised Model Business Corporation Act (RMBCA), which of the following statements is correct regarding corporate officers of a public corporation?
A. An officer may not simultaneously serve as a director.
B. A corporation may be authorized to indemnify its officers for liability incurred in a suit by stockholders.
C. Stockholders always have the right to elect a corporation's officers.
D. An officer of a corporation is required to own at least one share of the corporation's stock.
B. A corporation may be authorized to indemnify its officers for liability incurred in a suit by stockholders.
Under Subchapter E of the RMBCA, a corporation may indemnify officers in such suits, so long as the officers acted in good faith and followed the business-judgment rule.
214
Which of the following statements is (are) usually correct regarding general partners' liability?
I. All general partners are jointly and severally liable for partnership torts.
II. All general partners are liable only for those partnership obligations they actually authorized.
A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II.
A. I only.
General partners are jointly and severally liable, or potentially liable, for an entire tort judgment against their firm. Their liability extends beyond acts they authorized. Even unauthorized acts can create liability for the general partners.
215
Blake, a partner in QVM, a general partnership, wishes to withdraw from the partnership and sell her interest to Nolan. All of the other partners in QVM have agreed to admit Nolan as a partner and to hold Blake harmless for the past, present, and future liabilities of QVM.
As a result of Blake's withdrawal and Nolan's admission to the partnership, Nolan
A. Must contribute cash or property to QVM to be admitted with the same rights as the other partners.
B. Is personally liable for partnership liabilities arising before and after being admitted as a partner.
C. Has the right to participate in QVM's management.
D. Acquired only the right to receive Nolan's share of QVM's profits.
C. Has the right to participate in QVM's management.
In this case, the partners have voted to admit Nolan, and he is a full partner because of the acceptance by the other partners. He can do anything the other partners can do, such as manage the partnership.
