2013 AICPA Newly Released Questions

Question 1

Gulde’s tax basis in Chyme Partnership was $26,000 at the time Gulde received a liquidating distribution of $12,000 cash and land with an adjusted basis to Chyme of $10,000 and a fair market value of $30,000. Chyme did not have unrealized receivables, appreciated inventory, or properties that had been contributed by its partners. What was the amount of Gulde’s basis in the land?

a. $0
b. $10,000
c. $14,000
d. $30,000

Answer 1

Choice “c” is correct. In a liquidating distribution, we have to “zero out to get out.” Partnership basis starts at $26,000. The cash distribution of $12,000 reduces the partnership basis to $14,000. The land then is distributed with that basis of $14,000, as we zero out to get out.

Question 2

following in the current year:
Wages $22,000
Unemployment compensation 6,000
Pension distribution (100% taxable) 4,000
A state tax refund from the previous year 425
What is Randolph's gross income?
a. $22,000
b. $28,425
c. $32,000
d. $32,425

Answer 2

Choice “c” is correct. Each item listed here is included in gross income except for the state tax refund from a prior year. The taxpayer always claims the standard deduction. This means that the state tax was not deducted in the year it was paid. Under the tax benefit rule, the refund of that tax is not taxable.
Wages $22,000
Unemployment compensation 6,000
Pension distribution (100% taxable) 4,000
Total $32,000

Question 3

Johnson worked for ABC Co. and earned a salary of $100,000. Johnson also received, as a fringe benefit, group term-life insurance at twice Johnson’s salary. The annual IRS-established uniform cost of insurance is $2.76 per $1,000. What amount must Johnson include in gross income?

a. $100,000
b. $100,276
c. $100,414
d. $100,552

Answer 3

Choice “c” is correct. The first $50,000 of group term life insurance is a nontaxable fringe benefit. Amounts exceeding this are taxable based on IRS tables. The total group term life insurance here is $200,000 (twice the salary of $100,000). The amount exceeding $50,000 is $150,000. The cost given here is $2.76 per $1,000 of insurance. 150 x $2.76 = $414. So the total amount included in gross income is $100,414 ($100,000 + $414).

Question 4

In return for a 20% partnership interest, Skinner contributed $5,000 cash and land with a $12,000 basis and a $20,000 fair market value to the partnership. The land was subject to a $10,000 mortgage that the partnership assumed. In addition, the partnership had $20,000 in recourse liabilities that would be shared by partners according to their partnership interests. What amount represents Skinner’s basis in the partnership interest?

a. $27,000
b. $21,000
c. $19,000
d. $13,000

Answer 4

Choice “d” is correct. Skinner’s basis in partnership interest is calculated as follows:
Cash contributed $5,000
Basis of land contributed 12,000
Less mortgage on land assumed by other partners (80% of $10,000) (8,000)
Recourse liabilities assumed by Skinner (20% of $20,000) 4,000
Skinner’s basis $13,000

Question 5

Azure, a C corporation, reports the following:
• Pretax book income of $543,000.
• Depreciation on the tax return is $20,000 greater than depreciation on the financial statements.
• Rent income reportable on the tax return is $36,000 greater than rent income per the financial statements.
• Fines for pollution appear as a $10,000 expense in the financial statements.
• Interest earned on municipal bonds is $25,000.
What is Azure’s taxable income?
a. $528,000
b. $543,000
c. $544,000
d. $559,000

Answer 5

Choice “c” is correct. Azure’s taxable income is calculated as follows:
Pretax book income $543,000
Depreciation for tax purposes in excess of book depreciation (20,000)
Rent income for tax purposes in excess of book rent income 36,000
Fines expensed for book purposes but not deductible for tax purposes 10,000
Municipal bond interest not taxable for tax purposes (25,000)
Taxable income $544,000

Question 6

Which of the following cannot be amortized for tax purposes?

a. Incorporation costs.
b. Temporary directors’ fees.
c. Stock issuance costs.
d. Organizational meeting costs.

Answer 6

Choice “c” is correct. All costs of issuing stock are not eligible to be deducted or amortized as an organizational expenditure or start-up cost.

Question 7

PDK, LLC had three members with equal ownership percentages. PDK elected to be treated as a partnership. For the tax year ending December 31, Year 1, PDK had the following income and expense items:
Revenues $120,000
Interest income 6,000
Gain on sale of securities 8,000
Salaries 36,000
Guaranteed payments 10,000
Rent expense 21,000
Depreciation expense 18,000
Charitable contributions 3,000
What would PDK report as nonseparately stated income for Year 1 tax purposes?
a. $30,000
b. $35,000
c. $43,000
d. $51,000

Answer 7

Choice “b” is correct. Nonseparately stated income is calculated as follows:
Revenues $120,000
Salaries (36,000)
Guaranteed payments (10,000)
Rent expense (21,000)
Depreciation expense (18,000)
Total nonseparately stated income $35,000
Note: All other items listed in the question are separately stated.

Question 8

For an individual business owner, which of the following would typically be classified as a capital asset for federal income tax purposes?

a. Accounts receivable.
b. Marketable securities.
c. Machinery and equipment used in a business.
d. Inventory.

Answer 8

Choice “b” is correct. Capital assets include all marketable securities unless the taxpayer is a dealer.

Question 9

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.

Answer 9

Choice “a” is correct. A preparer is not required to obtain supporting documentation, unless the preparer has reason to suspect the accuracy of the information provided. However, the preparer must make reasonable inquiries if the information provided by the taxpayer appears incorrect or incomplete.

Question 10

What is the due date of a federal estate tax return (Form 706), for a taxpayer who died on May 15, Year 2, assuming that a request for an extension of time is not filed?

a. September 15, Year 2
b. December 31, Year 2
c. January 31, Year 3
d. February 15, Year 3

Answer 10

Choice “d” is correct. Unless an extension is filed, Form 706 is due exactly nine months after the decedent’s death, which is February 15, Year 3.

Question 11

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.

Answer 11

Choice “a” is correct. A CPA should not give written federal tax advice if the CPA takes into account the possibility that a tax return will not be audited.

Question 12

A CPA prepares income tax returns for a client. After the client signs and mails the returns, the CPA discovers an error. According to Treasury Circular 230, the CPA must:

a. Document the error in the workpapers.
b. Prepare an amended return within 30 days of the discovery of the error.
c. Promptly advise the client of the error.
d. Promptly resign from the engagement and cooperate with the successor accountant.

Answer 12

Choice “c” is correct. When a CPA discovers an error in a previously filed return, the CPA must promptly notify the client of the error.

Question 13

A corporate taxpayer plans to switch from the FIFO method to the LIFO method of valuing inventory. Which of the following statements is accurate regarding the use of the LIFO method?

a. In periods of rising prices, the LIFO method results in a lower cost of sales and higher taxable income, when compared to the FIFO method.
b. The taxpayer is required to receive permission each year from the Internal Revenue Service to continue the use of the LIFO method.
c. The LIFO method can be used for tax purposes even if the FIFO method is used for financial statement purposes.
d. Under the LIFO method, the inventory on hand at the end of the year is treated as being composed of the earliest acquired goods.

Answer 13

Choice “d” is correct. Under the LIFO method, the inventory on hand at the end of the year is treated as being composed of the earliest acquired goods.

Question 14

Which of the following statements regarding an individual’s suspended passive activity losses is correct?

a. $3,000 of suspended losses can be utilized each year against portfolio income.
b. Suspended losses can be carried forward, but not back, until utilized.
c. Suspended losses must be carried back three years and forward seven years.
d. A maximum of 50% of the suspended losses can be used each year when an election is made to forgo the carry-back period.

Answer 14

Choice “b” is correct. Tax rules allow suspended passive losses to be carried forward, but not back, until utilized.

Question 15

Simmons gives her child a gift of publicly-traded stock with a basis of $40,000 and a fair market value of $30,000. No gift tax is paid. The child subsequently sells the stock for $36,000. What is the child’s recognized gain or loss, if any?

a. $4,000 loss.
b. No gain or loss.
c. $6,000 gain.
d. $36,000 gain.

Answer 15

Choice “b” is correct. This situation falls into the exception of the gift tax basis rule because the FMV at date of gift is lower than the donor’s original basis. The donee then sold the stock at a price less than the donor’s rollover cost basis but higher than the FMV on date of gift. Therefore, there is no gain or loss on the sale.

Question 16

An individual entered into several exchanges during the current tax year. Which of the following exchanges is classified as like-kind?

a. Partnership interest for partnership interest.
b. Common stock for common stock.
c. Apartment building for unimproved land.
d. Manufacturing equipment for factory building.

Answer 16

Choice “c” is correct. Real property exchanged for other real property will be classified as a like-kind exchange (unless the property is in different countries).

Question 17

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.

Answer 17

Choice “d” is correct. Contracts which by their terms cannot be performed within a year are within the common law Statute of Frauds. The fact that a contract may be performed within a year does not bring the contract within the Statute of Frauds. A contract to perform weekly landscaping services for the next three years must be in writing. A contract to plant three trees within the next two years is not within the statute of frauds.

Question 18

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.

Answer 18

Choice “c” is correct. The implied warranty of fitness for particular purpose arises when the seller knows the particular purpose for which the buyer will use the goods and that the buyer is relying on the seller to choose suitable goods.

Question 19

Which of the following conditions must be met to form an agency?

a. An agency agreement must be in writing.
b. An agency agreement must be signed by both parties.
c. The principal must furnish legally adequate consideration for the agent’s services.
d. The principal must possess contractual capacity.

Answer 19

Choice “d” is correct. Formation of an agency relationship requires a principal who has contractual capacity.

Question 20

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.

Answer 20

Choice “a” is correct. The indorsement “Lee Louis” is blank because it does not name a new, specific indorsee, it is nonrestrictive because it does not have any words purporting to restrict further negotiation, and it is unqualified because it does not include the words, “without recourse.”

Question 21

When the AQR partnership was formed, partner Acre contributed land with a fair market value of $100,000 and a tax basis of $60,000 in exchange for a one-third interest in the partnership. The AQR partnership agreement specifies that each partner will share equally in the partnership’s profits and losses. During its first year of operation, AQR sold the land to an unrelated third party for $160,000. What is the proper tax treatment of the sale?

a. Each partner reports a capital gain of $33,333.
b. The entire gain of $100,000 must be specifically allocated to Acre.
c. The first $40,000 of gain is allocated to Acre, and the remaining gain of $60,000 is shared equally by the other two partners.
d. The first $40,000 of gain is allocated to Acre, and the remaining gain of $60,000 is shared equally by all the partners in the partnership.

Answer 21

Choice “d” is correct. The difference between the tax basis of $60,000 and FMV of $100,000 on the date the partnership was formed is a built-in gain to partner Acre. Accordingly, the first $40,000 of gain is allocated to Acre and the remaining gain of $60,000 is then shared equally by all of the partners.

Question 22

Summer, a single individual, had a net operating loss of $20,000 three years ago. A Code Section 1244 stock loss made up three-fourths of that loss. Summer had no taxable income from that year until the current year. In the current year, Summer has gross income of $80,000 and sustains another loss of $50,000 on Code Section 1244 stock. Assuming that Summer can carry the entire $20,000 net operating loss to the current year, what is the amount and character of the Code Section 1244 loss that Summer can deduct for the current year?

a. $35,000 ordinary loss.
b. $35,000 capital loss.
c. $50,000 ordinary loss.
d. $50,000 capital loss.

Answer 22

Choice “c” is correct. The maximum Section 1244 loss that can be deducted by a single taxpayer in any year is $50,000. All losses designated as Section 1244 losses are ordinary by definition. Note that most of the information in this question is not required to solve for the correct answer.

Question 23

The sole shareholder of an S corporation contributed equipment with a fair market value of $20,000 and a basis of $6,000 subject to $12,000 liability. What amount is the gain, if any, that the shareholder must recognize?

a. $0
b. $6,000
c. $8,000
d. $12,000

Answer 23

Choice “b” is correct. Generally, this is a nontaxable transaction. However, the liabilities assumed by the corporation of $12,000 are in excess of the basis of the property contributed of $6,000. The amount of the excess, which is $6,000 ($12,000 - $6,000) is a gain that must be recognized. Note that the fact that this is an S Corporation does not affect the answer. The rules for the formation of an S Corporation are the same as for a C Corporation.

Question 24

In Year 6, an IRS agent completed an examination of a corporation’s Year 5 tax return and proposed an adjustment that will result in an increase in taxable income for each of Years 1 through 5. All returns were filed on the original due date. The proposed adjustment relates to the disallowance of corporate jet usage for personal reasons. The agent does not find the error to be fraudulent or substantial in nature.
Which of the following statements regarding this adjustment is correct?
a. The adjustment is improper because an agent may only propose adjustments to the year under examination.
b. The adjustment is proper because there is no statute of limitations for improperly claiming personal expenses as business expenses.
c. The adjustment is proper because it relates to a change in accounting method, which can be made retroactively irrespective of the statute of limitations.
d. The adjustment is improper because the statute of limitations has expired for several years of the adjustment.

Answer 24

Choice “d” is correct. Unless there is a substantial 25% misstatement of income or fraud, the statue of limitations is generally three years from the later of the due date or filing date of a return. This adjustment is improper because there is no evidence of fraud or substantial misstatement and some of the years are old enough that the three year statute has expired.

Question 25

Carson owned 40% of the outstanding stock of a C corporation. During a tax year, the corporation reported $400,000 in taxable income and distributed a total of $70,000 in cash dividends to its shareholders. Carson accurately reported $28,000 in gross income on Carson’s individual tax return. If the corporation had been an S corporation and the distributions to the owners had been proportionate, how much income would Carson have reported on Carson’s individual return?

a. $28,000
b. $132,000
c. $160,000
d. $188,000

Answer 25

Choice “c” is correct. S Corporations work in a similar fashion to partnerships. The income is passed through to the shareholder and included in taxable income whether or not it is actually distributed. Therefore, Carson will report 40% of the $400,000 taxable income, or $160,000. The $28,000 distribution will not affect the taxable income, but will reduce Carson’s basis in the S Corporation stock.

Question 26

Which of the following may not be deducted in the computation of alternative minimum taxable income of an individual?

a. Traditional IRA account contribution.
b. One-half of the self-employment tax deduction.
c. Personal exemptions.
d. Charitable contributions.

Answer 26

Choice “c” is correct. Alternative minimum tax will add back various deductions to arrive at alternative minimum taxable income. If an item is not added back, then it is allowed to be deducted. Personal exemptions are added back. Therefore, they are not deducted to arrive at alternative minimum taxable income.

Question 27

The sale of which of the following types of business property should be reported as Section 1231 (Property Used in the Trade or Business and Involuntary Conversions) property?

a. Inventory held for resale.
b. Machinery held for six months.
c. Cattle held for 6 months.
d. Land held for 18 months.

Answer 27

Choice “d” is correct. 1231 Assets are depreciable personal property and real property used in a business and held for over 12 months. Land held for 18 months meets this definition.

Question 28

Smith has an adjusted gross income (AGI) of $120,000 without taking into consideration $40,000 of losses from rental real estate activities. Smith actively participates in the rental real estate activities. What amount of the rental losses may Smith deduct in determining taxable income?

a. $0
b. $15,000
c. $20,000
d. $40,000

Answer 28

Choice “b” is correct. Generally, none of the passive losses from real estate are deductible against nonpassive income. However, Smith actively participates, which means that the “mom and pop” exception of up to $25,000 will apply. This exception is phased out over AGI of $100,000 through $150,000. That is 50 cents on the dollar. Smith’s AGI is $120,000. That is $20,000 into the phaseout range. So $10,000 of the $25,000 is phased out and Smith may deduct $15,000 of the $40,000 passive loss.

Question 29

Pat created a trust, transferred property to this trust, and retained certain interests. For income tax purposes, Pat was treated as the owner of the trust. Pat has created which of the following types of trusts?

a. Simple.
b. Grantor.
c. Complex.
d. Pre-need funeral.

Answer 29

Choice “b” is correct. When the creator is treated as the owner of a trust, it is referred to as a grantor trust.

Question 30

Individual Lark's Year 2 brokerage account statement listed the following capital gains and losses from the sale of stock investments:
Short-term capital gain $6,000
Long-term capital gain 14,000
Short-term capital loss 4,000
Long-term capital loss 8,000
In addition, two stock investments became worthless in Year 2. Public Company X stock was purchased in December, Year 1, for $5,000, and formal notification was received by Lark on July, Year 2, that it was worthless. Private company Section 1244 stock was issued to Lark for $10,000 in January, Year 1, and was determined to be worthless in December, Year 2. What is Lark's Year 2 net capital gain or loss before any capital loss limitation?
a. $2,000 net capital loss.
b. $3,000 net capital gain.
c. $7,000 net capital loss.
d. $8,000 net capital gain.

Answer 30

Choice “b” is correct. First, the long-term capital gain of $14,000 is netted with the long-term capital loss of $8,000. This results in a net long-term capital gain of $6,000. Next, the short-term capital gain of $6,000 is netted with the short-term capital loss of $4,000. This results in a net short-term capital gain of $2,000. Now add the net long-term capital gain of $6,000 and the net short-term capital gain of $2,000 to arrive at a net capital gain of $8,000. This amount is reduced by the $5,000 worthless stock. So the final net capital gain is $3,000. Note that the Section 1244 loss of $10,000 does not affect this calculation because it is an ordinary loss and not a capital loss.

Question 31

The selection of an accounting method for tax purposes by a newly incorporated C corporation:

a. Is made on the initial tax return by using the chosen method.
b. Is made by filing a request for a private letter ruling from the IRS.
c. Must first be approved by the company’s board of directors.
d. Must be disclosed in the company’s organizing documents.

Answer 31

Choice “a” is correct. The selection of an accounting method for tax purposes is made on the initial tax return by using the chosen method.

Question 32

A review of Bearing’s Year 2 records disclosed the following tax information:
Wages $18,000
Taxable interest and qualifying dividends 4,000
Schedule C trucking business net income 32,000
Rental (loss) from residential property (35,000)
Limited partnership (loss) (5,000)
Bearing actively participated in the rental property and was a limited partner in the partnership. Bearing had sufficient amounts at risk for the rental property and the partnership. What is Bearing’s Year 2 adjusted gross income?
a. $14,000
b. $19,000
c. $29,000
d. $54,000

Answer 32

Choice “c” is correct. Passive activity losses (PALs) can only be deducted up to passive activity income. There is no passive activity income indicated. Therefore, the passive loss from the partnership is not deductible. $25,000 of the $35,000 rental real estate loss is deductible under the “mom and pop” exception because Bearing actively participates in the rental property and the AGI is below the phaseout amounts. The AGI is calculated as follows:
Wages $18,000
Taxable interest and qualifying dividends 4,000
Schedule C trucking business net income 32,000
Rental loss from residential property (25,000)
Adjusted gross income (AGI) $29,000

Question 33

Joe is the trustee of a trust set up for his father. Under the Internal Revenue Code, when Joe prepares the annual trust tax return, Form 1041, he:

a. Must obtain the written permission of the beneficiary prior to signing as a tax return preparer.
b. Is not considered a tax return preparer.
c. May not sign the return unless he receives additional compensation for the tax return.
d. Is considered a tax return preparer because his father is the grantor of the trust.

Answer 33

Choice “b” is correct. Joe is the trustee of the trust. He is not a tax return preparer because he is not preparing the return for compensation.

Question 34

A CPA prepared a tax return that involved a tax shelter transaction that was disclosed on the return. In which of the following situations would a tax return preparer penalty not be applicable?

a. There was substantial authority for the position.
b. It is reasonable to believe that the position would more likely than not be upheld.
c. There was a reasonable possibility of success for the position.
d. There was a reasonable basis for the position.

Answer 34

Choice “b” is correct. With regards to a tax shelter, a penalty for understatement of taxpayer liability could apply to a CPA unless it is reasonable to believe that the position would more likely than not be upheld on its merits. This is more stringent than a reasonable basis for the position, a reasonable possibility of success for the position, and substantial authority for the position.

Question 35

What is the tax treatment of net losses in excess of the at-risk amount for an activity?

a. Any loss in excess of the at-risk amount is suspended and is deductible in the year in which the activity is disposed of in full.
b. Any losses in excess of the at-risk amount are suspended and carried forward without expiration and are deductible against income in future years from that activity.
c. Any losses in excess of the at-risk amount are deducted currently against income from other activities; the remaining loss, if any, is carried forward without expiration.
d. Any losses in excess of the at-risk amount are carried back two years against activities with income and then carried forward for 20 years.

Answer 35

Choice “b” is correct. Any losses in excess of the at-risk amount are suspended and carried forward without expiration and are deductible against income in future years from that activity. The at-risk amount is also referred to as basis. Note that although we discuss this in the textbook for partnerships, the concept applies to all activities that have flow through income and losses.

Question 36

A trust has distributable net income of $14,000 and distributes $20,000 to the sole beneficiary. What amounts are taxable to the trust and to the beneficiary?
Trust Beneficiary
a. $14,000 $0
b. $0 $14,000
c. $14,000 $20,000
d. $0 $20,000

Answer 36

Choice “b” is correct. The income distribution deduction is the lesser of the actual distribution to beneficiary or distributable net income (DNI). If DNI is $14,000 and the distribution to the beneficiary is $20,000, the income distribution deduction is $14,000. This, in effect, shifts the taxation of $14,000 from the trust to the beneficiary.

Question 37

An individual paid taxes 27 months ago, but did not file a tax return for that year. Now the individual wants to file a claim for refund of federal income taxes that were paid at that time. The individual must file the claim for refund within which of the following time periods after those taxes were paid?

a. One year.
b. Two years.
c. Three years.
d. Four years.

Answer 37

Choice “b” is correct. When a tax return has not been filed, any claim for refund must be made within two years from the time the tax was paid.

Question 38

Which of the following types of conduct renders a contract void?

a. Mutual mistake as to facts forming the basis of the contract.
b. Undue influence by a dominant party in a confidential relationship.
c. Duress through physical compulsion.
d. Duress through improper threats.

Answer 38

Choice “c” is correct. Duress through physical harm or the threat of physical harm renders a contract void rather than merely voidable.

Question 39

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.

Answer 39

Choice “d” is correct. Formation of a contract requires acceptance of an offer before the offer is terminated. Jackson sent Sands an offer and then sent a revocation of the offer, and Sands accepted after receiving the revocation. However, the revocation was invalid because the offer was a merchant’s firm offer―an offer made by a merchant in writing giving assurances that it will be kept open. Such offers are irrevocable for the time stated, or if no time is stated for a reasonable time, but in no event longer than three months. Thus, Jackson’s offer was irrevocable for a reasonable time. It was accepted within a reasonable time (a few days after the offer was received). Moreover, the contract was accepted when Sands mailed the acceptance because of the mailbox rule–an acceptance is effective upon being dispatched.

Question 40

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.

Answer 40

Choice “b” is correct. If a person is defrauded into entering into a contract because its terms or the surrounding circumstances are not as represented (that is, fraud in the inducement), the contract is merely voidable.