Business Law Text and Cases Legal, Ethical Global and Corporate Environment 12th Edition by Kenneth W. Clarkson – Test Bank (2024)

Complete Test Bank With Answers

Sample Questions Posted Below

Chapter 5

Ethics and Business

Decision Making

true/false questions

A1. Ethics is the branch of philosophy that focuses on what constitutes right and wrong behavior.

ANSWER: T PAGE: 93 TYPE: =

NAT: AACSB Ethics AICPA Critical Thinking

A2. Business ethics focuses on ethical behavior in the business world.

ANSWER: T PAGE: 93 TYPE: =

NAT: AACSB Ethics AICPA Risk Analysis

A3. An action may be legal and ethical.

ANSWER: T PAGE: 94 TYPE: N

NAT: AACSB Analytic AICPA Critical Thinking

A4. The legality of an action is always clear.

ANSWER: F PAGE: 94 TYPE: =

NAT: AACSB Analytic AICPA Legal

A5. Corporations can be perceived as owing ethical duties to groups other than their shareholders.

ANSWER: T PAGE: 94 TYPE: =

NAT: AACSB Ethics AICPA Critical Thinking

A6. The minimal acceptable standard for ethical behavior is compliance with the law.

answer: T PAGE: 94 TYPE: =

NAT: AACSB Analytic AICPA Critical Thinking

A7. Business ethics is consistent only with short-run profit maximization.

ANSWER: F PAGE: 94 TYPE: =

NAT: AACSB Ethics AICPA Critical Thinking

A8. Focusing on a firm’s short-term profits without considering the company’s long-term needs may be acting unethically.

ANSWER: T PAGE: 94 TYPE: N

NAT: AACSB Ethics AICPA Critical Thinking

A9. Ethical codes of conduct can set the ethi­cal tone of a firm.

answer: T PAGE: 96 TYPE: =

NAT: AACSB Ethics AICPA Risk Analysis

A10. Setting realistic workplace goals can reduce the probability that employ­ees will act unethically.

ANSWER: T PAGE: 96 TYPE: =

NAT: AACSB Ethics AICPA Risk Analysis

A11. Some companies have set up confidential systems for employees to “raise red flags” about suspected unethical practices.

ANSWER: T PAGE: 98 TYPE: N

NAT: AACSB Ethics AICPA Risk Analysis

A12. Restricting the bonuses that are paid to executives is unethical.

answer: F PAGE: 99 TYPE: N

NAT: AACSB Ethics AICPA Critical Thinking

A13. Ethical reasoning is the process through which an individual rationalizes whatever action he or she chooses to take.

ANSWER: F PAGE: 100 TYPE: =

NAT: AACSB Ethics AICPA Critical Thinking

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

answer: T PAGE: 101 TYPE: =

NAT: AACSB Analytic AICPA Risk Analysis

A15. According to utilitarianism, an action that affects the majority adversely is morally wrong.

answer: T PAGE: 101 TYPE: =

NAT: AACSB Ethics AICPA Critical Thinking

A16. It may be unethical for a company with a product that is outlawed in one country to look elsewhere for a market.

answer: T PAGE: 101 TYPE: N

NAT: AACSB Ethics AICPA Critical Thinking

A17. A business firm’s profits may suffer if the firm is not a “good corporate citizen.”

ANSWER: T PAGE: 103 TYPE: N

NAT: AACSB Ethics AICPA Critical Thinking

A18. Businesspersons who would choose to act unethically may be deterred from doing so because of public opinion.

ANSWER: T PAGE: 104 TYPE: =

NAT: AACSB Ethics AICPA Critical Thinking

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

answer: T PAGE: 104 TYPE: =

NAT: AACSB Analytic AICPA Risk Analysis

A20. Bribery of foreign government officials is both an ethical and a legal issue.

ANSWER: T PAGE: 106 TYPE: =

NAT: AACSB Analytic AICPA Critical Thinking

MULTIPLE-CHOICE questions

A1. John is sales manager for Kleen ‘N Brite Products, Inc. Compared to John’s personal activities, his business activities most likely involve

1. more complex ethical issues.
2. no ethical issues.
3. simpler ethical issues.
4. the same ethical issues.

ANSWER: A PAGE: 93 TYPE: =

NAT: AACSB Reflective AICPA Critical Thinking

A2. Mariah works in the public relations department of New Trends Sales Company. Her job includes portraying New Trends’s activities in their best light. In this context, ethics consist of

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

answer: B PAGE: 93 TYPE: =

NAT: AACSB Reflective AICPA Critical Thinking

A3. Any decision by the management of Fast-Food Franchise Corporation may significantly affect its

1. operators only.
2. operators, owners, suppliers, the community, or society as a whole.
3. owners only.
4. suppliers, the community, or society as a whole only.

ANSWER: B PAGE: 93 TYPE: =

NAT: AACSB Reflective AICPA Risk Analysis

A4. Peak & Vale Accountants provides other firms with accounting services. Questions of what is ethical involve the extent to which Peak & Vale has

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

answer: B PAGE: 94 TYPE: =

NAT: AACSB Reflective AICPA Critical Thinking

A5. Housemate, Inc., makes and sells a variety of household products. With a fair amount of certainty, Housemate’s decision makers can predict whether a given business action would be legal in

1. all situations.
2. many situations.
3. no situations.
4. practically no situations.

ANSWER: B PAGE: 94 TYPE: =

NAT: AACSB Reflective AICPA Legal

A6. Kennedy Capital Corporation provides other firms with funds to expand op­erations. If Kenney strictly complies with existing laws, the firm will

1. fulfill all business ethics obligations.
2. fulfill no business ethics obligations.
3. fulfill some business ethics obligations.
4. not need to fulfill any business ethics obligations.

answer: C PAGE: 94 TYPE: =

NAT: AACSB Reflective AICPA Critical Thinking

A7. Flexo Trucking Company transports hazard­ous waste. Garn is a Flexo driver, whom the company knows drives longer hours than federal regulations permit. One night, Garn exceeds the limit and has an accident. Spilled chemicals contaminate Hill City’s water source, forcing the residents to move away. Flexo acted unethically because

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

answer: A PAGE: 96 TYPE: N

NAT: AACSB Reflective AICPA Critical Thinking

A8. Ergonomic Corporation convenes its employees for its managers to announce (1) a new company-wide ethical code of conduct, (2) an ad campaign to publicize the new code, and (3) the discharge of employees who do not adhere to the code. One of the most effective ways to set a tone of ethical behavior within a business organization is

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

ANSWER: A PAGE: 98 TYPE: N

NAT: AACSB Reflective AICPA Critical Thinking

A9. Lyle, vice-president of sales for Mi-T Electric, Inc., adheres to Judeo-Christian relig­ious ethical standards. With respect to their application, these standards are

1. absolute.
2. analytical.
3. discretionary.
4. utilitarian.

ANSWER: A PAGE: 100 TYPE: N

NAT: AACSB Reflective AICPA Critical Thinking

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

1. a religious rule.
2. the categorical imperative.
3. the principle of rights.
4. utilitarianism.

ANSWER: C PAGE: 101 TYPE: N

NAT: AACSB Reflective AICPA Critical Thinking

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

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

answer: D PAGE: 101 TYPE: =

NAT: AACSB Reflective AICPA Critical Thinking

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

1. moral values.
2. religious beliefs.
3. the consequences of an action.
4. the nature of an action.

answer: C PAGE: 101 TYPE: =

NAT: AACSB Ethics AICPA Critical Thinking

A13. In making decisions for United Merchandising Company, Vance uses a cost-benefit analysis. This is part of

1. duty-based ethics.
2. Kantian ethics.
3. the principle of rights.
4. utilitarianism.

answer: D PAGE: 101 TYPE: =

NAT: AACSB Ethics AICPA Critical Thinking

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

1. gives business profits priority over production costs.
2. ignores the practical costs of a given set of circ*mstances.
3. requires complex cost-benefit analyses of simple situations.
4. tends to justify human costs that many find unacceptable.

ANSWER: D PAGE: 101 TYPE: =

NAT: AACSB Reflective AICPA Critical Thinking

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

1. one group as opposed to another.
2. the firm’s competitors.
3. the government.
4. the U.S. Chamber of Commerce.

ANSWER: A PAGE: 101 TYPE: +

NAT: AACSB Reflective AICPA Critical Thinking

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

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

answer: C PAGE: 104 TYPE: N

NAT: AACSB Reflective AICPA Critical Thinking

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

1. absolution.
2. decision.
3. inquiry.
4. justification.

ANSWER: A PAGE: 105 TYPE: N

NAT: AACSB Reflective AICPA Critical Thinking

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

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

ANSWER: C PAGE: 106 TYPE: N

NAT: AACSB Reflective AICPA Critical Thinking

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

1. illegal and unethical.
2. illegal but not unethical.
3. unethical but not illegal.
4. legal and ethical.

ANSWER: A PAGE: 107 TYPE: =

NAT: AACSB Reflective AICPA Critical Thinking

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

1. conceal financial records that reveal past bribes.
2. keep records that “accurately and fairly” reflect financial activities.
3. make bribes through third parties rather than directly to officials.
4. permit payments to foreign officials that are unlawful in that country.

ANSWER: B PAGE: 107 TYPE: N

NAT: AACSB Analytic AICPA Legal

ESSAY questions

A1. Ophelia, an executive with Pharma Drug Distribution, Inc., has to decide whether to market a product that might have undesirable side effects for a small per­centage of users. How should Ophelia de­cide whether to sell the product? How does the standard of ethics that is applied affect this answer?

ANSWER: When a corporate executive has to decide whether to market a product that might have unde­sirable side ef­fects for a small percentage of users but that would be beneficial for most users, the decision turns on the benefit to the many versus the harm to the few. Of course, all pos­sible precautions should be taken to protect the few. A more specific answer depends on which sys­tem of ethics is applied.

From a religious duty-based perspective, the answer might be absolute: do not sell the product because some would be harmed, sell the product only to those who would not be harmed, or sell the product with clear warnings of the possible harm. Similar conclusions might be reached through a philosophical, “categorical imperative,” duty-based approach, which would consider the result if every corporation chose to sell the product. A principle-of-rights duty-based approach might likewise come to the same conclusions, reasoning that all persons have a right to life, for example, and that the corporation has an ethical duty to respect that right and act accordingly. From a utilitarian perspective, under a cost-benefit analysis, if the product were sold, it could benefit the greatest number of persons—future and cur­rent employees, as well as shareholders, and most consumers. If there was “bad” publicity, and it was adverse enough to reduce sales, however, more persons could benefit from the decision not to market the product. Under any of the different corporate social responsibility theories, the decision whether to market the product would acknowledge the firm’s duty to act ethically and be accountable to society. There might be a balancing of the interests of competing stakeholder groups or a shouldering of the responsibility to behave in a socially beneficial way as a good corporate citizen. Of course, the firm would likely have to accept any legal liability that would arise from its sale of the product.

To apply any of these approaches, the executive might evaluate the situation according to the six guidelines for making ethical business decision. Is the action legal? Is it in line with the company’s rules? If so, is it in accord with the “spirit” of the law, those policies, and one’s conscience? Could it withstand the glare of publicity and satisfy promises made to others? It seems probable that sales of the product would violate the company’s rules—at the least because in the long run the sales could negatively impact corporate profits when some are harmed by the product’s use—and that, thus, the sales could not withstand publicity, promises to others, or any individual’s conscience. Under the five-step procedure to review the ethical conflicts, the first step is to specify the facts, the problem, and the ethical principles at issue. The second step is to discuss potential actions and their effects. The third step is to come to a consensus as to what to do. This consensus should withstand moral scrutiny (the fourth step) and fulfill corporate, community, and individual values (the fifth step). It seems unlikely that a proposed sale of the product would survive the fourth step, under either a duty-based or an outcome-based ethical standard.

PAGEs: 94–96 & 100–106 type: N

NAT: AACSB Reflective AICPA Decision Modeling

A2. Matchless Clothing Company buys clothing assembled by Nantra, Ltd., a for­eign firm that employs young children for long hours and low pay. Nantra’s na­tion does not enforce its child labor laws. Human International Politics (HIP), a political activist organization, discovers Matchless’s connection to Nantra and plans to reveal this information. Before HIP does so, however, Matchless publicly releases the informa­tion itself and announces that it is severing its relationship with Nantra. Matchless publicizes its action in its advertising, and the company’s sales and profits increase, apparently as a direct result. Has Matchless acted unethically in any way? From an ethical perspective, is Matchless’s conduct in this situation more important than whatever its mo­tive might be?

ANSWER: Matchless has not acted unethically in publicly releasing the information itself or in severing its relationship with Nantra. Ethical behavior can sometimes generate sufficient good will to warrant practic­ing it out of a desire for increased profits. By the same to­ken, unethical behav­ior can sometimes generate enough bad publicity to warrant avoid­ing it out of the same desire. A business firm’s activities that are per­ceived as ethical and receive wide publicity can benefit the firm’s owners in the short run-and even in the long run if the firm’s en­hanced public image continues to attract more consumers to its products. There is noth­ing unethical about making a profit. It is the be­havior that generates the profit that can be questionable. Business eth­ics thus has a practical ele­ment. A business firm should act in its best interest. A firm inter­ested in profits should also be interested in the public’s opinion. As for a motive beyond the incentive to make money, it can be difficult to deter­mine, especially in the complicated world of busi­ness ethics. Thus, con­duct is probably the more effective measure of ethical behavior, and con­sequently more important than motive.

PAGES: 101–104 type: =

NAT: AACSB Reflective AICPA Decision Modeling

Chapter 26

Liability, Defenses, and Discharge

true/false questions

A1. A signature can be made by use of any device or machine.

answer: t PAGE: 498 TYPE: N

NAT: AACSB Reflective AICPA Legal

A2. A maker is secondarily liable on an instrument.

answer: F PAGE: 498 TYPE: =

NAT: AACSB Analytic AICPA Legal

A3. Signature liability is contingent liability.

answer: t PAGE: 499 TYPE: N

NAT: AACSB Analytic AICPA Legal

A4. A drawer’s liability does not arise until presentment and notice of dishonor.

answer: t PAGE: 499 TYPE: =

NAT: AACSB Analytic AICPA Legal

A5. To properly present a draft for payment, the holder must present it to the drawer.

answer: F PAGE: 499 TYPE: +

NAT: AACSB Analytic AICPA Legal

A6. Dishonor occurs if payment of an instrument is refused with the prescribed time.

answer: T PAGE: 500 TYPE: +

NAT: AACSB Analytic AICPA Legal

A7. Failure to present an instrument on time is not improper presentment.

answer: F PAGE: 500 TYPE: N

NAT: AACSB Reflective AICPA Legal

A8. An authorized agent binds a principal on an instrument if the agent clearly names the principal in the signature.

answer: t PAGE: 501 TYPE: N

NAT: AACSB Analytic AICPA Legal

A9. An authorized agent is never personally liable on a negotiable instrument.

answer: F PAGE: 501 TYPE: N

NAT: AACSB Analytic AICPA Legal

A10. An unauthorized signature binds the person whose name is signed.

answer: F PAGE: 503 TYPE: =

NAT: AACSB Analytic AICPA Legal

A11. An imposter’s indorsem*nt on an instrument can be effective against its drawer or maker.

answer: T PAGE: 504 TYPE: N

NAT: AACSB Analytic AICPA Legal

A12. Warranty liability is subject to the conditions of proper presentment, dishonor, and notice of dishonor.

answer: F PAGE: 505 TYPE: N

NAT: AACSB Analytic AICPA Legal

A13. Transfer of an order instrument by indorsem*nt and delivery extends warranty liability to any subsequent holder who takes the instrument in good faith.

answer: T PAGE: 506 TYPE: N

NAT: AACSB Analytic AICPA Legal

A14. Presentment war­ranties protect the person to whom an instrument is presented for payment.

answer: T PAGE: 507 TYPE: =

NAT: AACSB Reflective AICPA Legal

A15. A person whose name is forged on an instrument is liable to pay only a holder in due course the value of the forged instrument.

answer: f PAGE: 508 TYPE: =

NAT: AACSB Reflective AICPA Legal

A16. An ordinary holder can recover nothing on an instrument that has been materially altered.

answer: T PAGE: 509 TYPE: N

NAT: AACSB Analytic AICPA Legal

A17. Personal defenses are used to avoid payment to an ordinary holder of a negotiable instrument, but not to an HDC or a holder through an HDC.

answer: T PAGE: 511 TYPE: N

NAT: AACSB Analytic AICPA Legal

A18. Discharge in bankruptcy is no defense on any instrument regardless of the status of the holder.

answer: F PAGE: 511 TYPE: N

NAT: AACSB Analytic AICPA Legal

A19. All parties to a negotiable instrument will be discharged when the party primarily liable on it pays to a holder the full amount due.

answer: t PAGE: 513 TYPE: +

NAT: AACSB Reflective AICPA Legal

A20. Destruction or mutilation of a negotiable instrument by accident discharges it.

answer: f PAGE: 513 TYPE: +

NAT: AACSB Reflective AICPA Legal

multiple choice questions

A1. Ethel signs a note “payable to the order of Fidelity Bank.” Fidelity indorses the note in blank and negotiates it to Ghani, who sells it to Huck. Liability associated with the transfer of the note from Ghani to Huck is

1. fitness.
2. quality.
3. signature.
4. warranty.

ANSWER: D PAGE: 498 TYPE: =

NAT: AACSB Reflective AICPA Legal

A2. Puck signs a check “pay to the order of Quik Mart” drawn on Puck’s account in Regional Bank. Puck shows the check to Silky, who agrees that the signature is Puck’s and that Quik Mart is owed the amount that the check represents. Quik Mart signs the back of the check. Liability on this check extends to

1. Puck, Quik Mart, and Regional Bank.
2. Puck and Quik Mart only.
3. Puck and Silky only.
4. Silky only.

ANSWER: B PAGE: 498 TYPE: =

NAT: AACSB Reflective AICPA Legal

A3. Toby signs a note “payable to the order of United Credit Union.” Unless Toby has a valid defense against payment, Toby’s liability on this note is

1. immediate.
2. imposed only after payment is demanded.
3. postponed until the note is dishonored by United Credit Union.
4. suspended until payment is due.

ANSWER: A PAGE: 498 TYPE: =

NAT: AACSB Reflective AICPA Legal

A4. Derby Stables writes a check to Extendo Credit, Inc., that is drawn on Derby’s account at Farm & Ranch Bank. If the bank does not accept the check, liability for its amount is on

1. Derby.
2. Extendo.
3. Farm & Ranch.
4. the holder of the check.

answer: A PAGE: 499 TYPE: N

NAT: AACSB Reflective AICPA Legal

A5. Nero signs a check “pay to the order of Olive” drawn on Nero’s account in Peachtree Bank. Olive signs the back of the check. Secondary liability on this check extends to

1. Nero and Olive only.
2. Nero and Peachtree Bank only.
3. Nero only.
4. Peachtree Bank only.

ANSWER: A PAGE: 499 TYPE: =

NAT: AACSB Reflective AICPA Legal

A6. Dirk is the maker of a note, on which Erv is secondarily liable. Friendly Credit Company is the current holder of the note. Erv will be obli­gated to pay the note if

1. Dirk defaults on the note.
2. Friendly Credit breaches a transfer warranty.
3. Friendly Credit negotiates the note to a third party.
4. Friendly Credit presents the note for payment.

answer: A PAGE: 499 TYPE: =

NAT: AACSB Reflective AICPA Legal

Fact Pattern 26-1A (Questions A7–A8 apply)

Seymour writes a check on his account at Platinum Bank to Teri to pay a debt. Teri negotiates the check by indorsem*nt to Rosanna, who presents it for payment to Onyx Bank.

A7. Refer to Fact Pattern 26-1A. Teri is

1. not liable for payment under any circ*mstances.
2. primarily liable.
3. secondarily liable.
4. simultaneously liable.

answer: C PAGE: 499 TYPE: =

NAT: AACSB Reflective AICPA Legal

A8. Refer to Fact Pattern 26-1A. If Onyx Bank dishonors the check, Rosanna can obtain payment from Teri

1. if Rosanna timely notifies Teri.
2. only if Seymour refuses to pay the check.
3. under any circ*mstances.
4. under no circ*mstances.

answer: A PAGE: 500 TYPE: =

NAT: AACSB Reflective AICPA Legal

A9. To borrow the money to buy a car, Klaus signs a note “payable to the order of Lake City Auto Financing.” Minnie cosigns the note to guarantee the repayment of the loan. Minnie’s liability on this note is

1. lateral.
2. primary.
3. secondary.
4. tertiary.

ANSWER: B PAGE: 500 TYPE: =

NAT: AACSB Reflective AICPA Legal

A10. Audio Science Company’s agent Bailey is authorized to draw checks on Audio Science’s account in Citizen Bank. The checks are preprinted with the company name. Bailey writes a check “pay to the order of Darlene [signed] Bailey.” Darlene presents the check for payment. If Citizen Bank dishonors it, liability extends to

1. no one.
2. Audio Science and Bailey.
3. Audio Science only.
4. Bailey only.

ANSWER: C PAGE: 502 TYPE: N

NAT: AACSB Reflective AICPA Legal

A11. Celia, an employee of Delite Dairy Company, forges the signa­ture of Elin, Delite’s president, on a Delite check and cashes it at First Federal Bank. Elin would ratify Celia’s actions by

1. asking First Federal to prosecute Celia for forgery.
2. discharging Celia from Delite ‘s employment.
3. entering into a repayment agreement with Celia.
4. filing criminal charges against Celia herself.

answer: C PAGE: 503 TYPE: =

NAT: AACSB Reflective AICPA Legal

A12. Birdie, an accountant for Country Custom Furniture, Inc., issues company checks payable to nonexistent persons drawn on Country’s ac­count at Debit Bank. Birdie indorses the checks and deposits them in her account. Country discovers the theft and demands that Debit recredit its account. Debit’s best defense is that

1. Birdie was not authorized to issue the checks.
2. Country was in a better position than Debit to prevent the theft.
3. Debit did not know that the checks were not to be paid.
4. the checks were the property of Country, not Debit.

answer: B PAGE: 504 TYPE: =

NAT: AACSB Reflective AICPA Legal

A13. Rodeo Ranch’s agent Slim is authorized to write checks on Rodeo Ranch’s account in Town Bank. Upper Range Corporation is a Rodeo Ranch supplier. Slim writes a check on Rodeo Ranch’s account “pay to the order of Upper Range [signed] Slim,” indorses it in Upper Range’s name, and deposits it in his own account in Verity Bank. If Verity Bank collects payment, the ultimate party most likely to suffer the loss is

1. no one.
2. Rodeo Ranch.
3. Town Bank.
4. Upper Range.

ANSWER: B PAGE: 505 TYPE: =

NAT: AACSB Reflective AICPA Legal

A14. Cash National Bank is an HDC of a note for $1,000 on which there is the forged signature of “Dudley.” If sued on the note by Cash

1. Dudley must pay the note.
2. Dudley’s best defense would be fraud in the execution.
3. Dudley’s best defense would be material alteration.
4. Dudley’s best defense would be forgery.

ANSWER: D PAGE: 508 TYPE: N

NAT: AACSB Reflective AICPA Legal

A15. Opalina asks Paolo, who does not understand English, to sign what Opalina says is an application to open a bank account. In fact, the “application” is a note. If sued on the note by an HDC

1. Paolo must pay the note.
2. Paolo’s best defense would be fraud in the execution.
3. Paolo’s best defense would be fraud in the inducement.
4. Paolo’s best defense would be mistake.

ANSWER: B PAGE: 509 TYPE: +

NAT: AACSB Reflective AICPA Legal

A16. Chris convinces Dion, who does not understand English, to sign a $1,000 note that Dion believes is an application for a credit card. Chris negotiates the note to EZ Finance Company. Dion

1. can avoid payment on the note even if EZ is an HDC.
2. can avoid payment on the note only if EZ is a holder.
3. must pay EZ the amount that it paid for the note.
4. must pay the note in full.

answer: A PAGE: 509 TYPE: =

NAT: AACSB Reflective AICPA Legal

A17. Dandy Lyin’ Furniture Store borrows $100,000 at 6 percent interest from Easy Loan Company and signs a promissory note for that amount. Easy changes the amount of the note to $120,000 and increases the rate to 8 per­cent. Easy materially altered the note when it changed

1. neither the amount nor the interest rate
2. the amount and the interest rate.
3. the amount only.
4. the interest rate only.

answer: B PAGE: 509 TYPE: =

NAT: AACSB Reflective AICPA Legal

A18. Quincy signs a check payable to Richland Investors, Inc., and gives it to Richland, leaving the amount blank but authorizing Richland to fill in the check for $1,000. Richland fills in $1,500 and negotiates the check to Silverado Bank, to whom Richland owes $1,500. Silverado Bank, an HDC, can enforce the check for

1. $0.
2. $500.
3. $1,000.
4. $1,500.

answer: D PAGE: 510 TYPE: =

NAT: AACSB Reflective AICPA Legal

A19. Laptop Assembly Company gives a $3,000 promissory note to My-T-Fast Delivery Service to de­liver a load of computer chips to Laptop’s plant. The chips are contami­nated during transit, and are useless to Laptop on delivery. If My-T-Fast presents the note for payment

1. Laptop’s best defense would be breach of warranty.
2. Laptop must pay the note.
3. Laptop’s best defense would be nondelivery of an instrument.
4. Laptop’s best defense would be failure of consideration.

answer: a PAGE: 511 TYPE: +

NAT: AACSB Reflective AICPA Legal

A20. Bing signs a note payable to the order of Cameron. Cameron indorses the note and gives it to Daphne as payment for a debt. Daphne presents it to Bing, who pays it. Bing’s payment discharges

1. all of the parties.
2. only Bing.
3. only Cameron.
4. only Daphne.

answer: A PAGE: 513 TYPE: N

NAT: AACSB Reflective AICPA Legal

Essay Questions

A1. Dale issues a check for $4,000, dated June 1, to Evelyn. The check is drawn on First Federal Bank. Evelyn indorses the check and transfers it to Gene. What will trigger the liability of Dale and Evelyn on the check?

ANSWER: In this question, Dale and Evelyn are secondarily liable par­ties. A party who is secondarily liable on an instrument promises to pay it only if the following events occur: (1) the in­stru­ment is properly and timely pre­sented; (2) the in­strument is dishon­ored; and (3) notice of dis­honor is given in a timely manner to the party. Thus, to trigger Dale and Evelyn’s liability, Gene will need to properly and timely present the check for payment to First Federal, which would have to dishonor the instru­ment, and Gene would then have to give timely notice to Dale and Evelyn.

PAGES: 499–500 type: =

NAT: AACSB Reflective AICPA Decision Modeling

A2. Ian transfers a note, for consideration, to Jock by blank indorsem*nt and delivery. Jock transfers the note to Kelly, who takes it in good faith. What does Ian warrant to Kelly?

ANSWER: Any person who transfers an instrument for consideration makes certain warranties to the transferee and, if the transfer is by in­dorsem*nt, to all later trans­ferees and holders who take the instrument in good faith. These are referred to as transfer warranties. In this prob­lem, Ian warrants to Kelly that he is entitled to enforce the note, all sig­na­tures are authentic and authorized, the note has not been altered, the note is not subject to a defense or claim that can be as­serted against him, and he has no knowledge of any insolvency proceed­ings against the maker.

PAGES: 505–507 type: =

NAT: AACSB Reflective AICPA Decision Modeling

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