6.1 Contracts Homework Questions

Question 1

Question CPA-01072

Green was adjudicated incompetent by a court having proper jurisdiction. Which of the following statements is correct regarding contracts subsequently entered into by Green?

1. All contracts are valid.
2. All contracts are enforceable.
3. All contracts are v0id.
4. All contracts are v0idable.

Answer 1

Explanation

Choice ‘‘c’’ is correct. Contracts entered into by one who has been adjudicated mentally incompetent are v0id rather than v0idable. Thus, choice ‘‘d’’ is incorrect. Note that choices ‘‘a’’ (all contracts are valid) and ‘‘b’’ (all contracts are enforceable) are the same answer. Since both cannot be correct, both must be wrong.

Question 2

Question CPA-01076

Which of the following actions if taken by one party to a contract generally will discharge the performance required of the other party to the contract?

1. Tender.
2. Assignment of rights.
3. Material breach of the contract.
4. Delay in performance.

Answer 2

Explanation

Choice ‘‘c’’ is correct. A material breach generally will discharge the nonbreaching party.

Choice ‘‘d’’ is not as good an answer as ‘‘c’’. While a delay in performance could cause a discharge, it will do so only in a UCC Sales contract, a contract stating that time is of the essence, or if the delay otherwise materially breaches the contract.

Choice ‘‘a’’ is incorrect. Generally if a party tenders performance, the other party will also have to perform. Tender of performance does not discharge the other party.

Choice ‘‘b’’ is incorrect. Generally, contracts are assignable, and an assignment of rights will not discharge the other party from performing.

Question 3

Question CPA-01079

If a person is induced to enter into a contract by another person because of the close relationship between the parties, the contract may be v0idable under which of the following defenses?

1. Undue influence.
2. Duress.
3. Unconscionability.
4. Fraud in the inducement.

Answer 3

Explanation

Choice ‘‘a’’ is correct. Undue influence is when a person in a position of trust or confidence takes unfair advantage of the relationship such that the other party’s free will to contract is overcome.

Question 4

Question CPA-01109

Under the Sales Article of the UCC, when a written offer has been made without specifying a means of acceptance but providing that the offer will only remain open for ten days, which of the following statements represent(s) a valid acceptance of the offer?

1. An acceptance sent by regular mail the day before the ten-day period expires that reaches the offerer on the eleventh day.
2. An acceptance faxed the day before the ten-day period expires that reaches the offerer on the eleventh day, due to a malfunction of the offerer’s printer.
3. II only.
4. I only.
5. Both I and II.
6. Neither I nor II.

Answer 4

Explanation

Choice ‘‘c’’ is correct. Under UCC 2-206, an offer that does not specify the means of acceptance may be accepted by any means reasonable under the circumstances; thus the attempt to accept by mail or fax was a proper means. Generally under the mailbox rule, an acceptance will be effective on dispatch (including sending a fax) unless the offer specifies that acceptance will be effective only upon receipt. Here, the offer merely says that it will remain open for 10 days; it does not require receipt of the acceptance within 10 days. Thus, the mailbox rule applies and both the letter and the fax are valid acceptances.

Question 5

Question CPA-01117

Which of the following facts must be proven for a plaintiff to prevail in a common law negligent misrepresentation action?

1. The misrepresentations were in writing.
2. The defendant made the misrepresentations with a reckless disregard for the truth.
3. The misrepresentations concerned opinion.
4. The plaintiff justifiably relied on the misrepresentations.

Answer 5

Explanation

Choice ‘‘d’’ is correct. To make out an action for negligent misrepresentation, the plaintiff must show both actual and justifiable reliance on the misrepresentation.

Choice ‘‘b’’ is incorrect. In negligent misrepresentation, the misrepresentation can arise out of conduct that is negligent (i.e., simple carelessness); reckless disregard for truth is considered the equivalent of fraud and is a much higher standard of misconduct.

Choice ‘‘a’’ is incorrect. Misrepresentations need not be in writing to give rise to a cause of action.

Choice ‘‘c’’ is incorrect. The misrepresentation must be of a material fact; misrepresentation of an opinion generally will not support a cause of action for negligent misrepresentation.

Question 6

Question CPA-01121

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?

1. Liable because the errors were material.
2. Not liable because the contractor knew of the errors.
3. Not liable because the errors were a result of gross negligence.
4. Liable because the errors were unilateral.

Answer 6

Explanation

Choice ‘‘b’’ is correct. Unilateral mistake is a defense to a contract if the nonmistaken party knew or should have known of the mistake. Here, the contractor knew of the error.

Choice ‘‘c’’ is incorrect. Whether the mistake was due to ordinary negligence or gross negligence is irrelevant in determining whether the mistake will constitute a contract defense.

Choice ‘‘d’’ is incorrect. Unilateral mistake is a defense to a contract if the nonmistaken party knew or should have known of the mistake.

Choice ‘‘a’’ is incorrect. While mistake is grounds for a defense only if the mistake is material, materiality is not all that is necessary. When the mistake is unilateral, as it is here, the nonmistaken party must also have known of the mistake (or had cause to know of the mistake).

Question 7

Question CPA-01130

Grove is seeking to av0id performing a promise to pay Brook $1,500. Grove is relying on lack of consideration on Brook’s part. Grove will prevail if he can establish that:

1. Brook’s asserted consideration is only worth $400.
2. Brook’s only claim of consideration was the relinquishment of a legal right.
3. The consideration to be performed by Brook will be performed by a third party.
4. Prior to Grove’s promise, Brook had already performed the requested act.

Answer 7

Explanation

Choice ‘‘d’’ is correct. A contract generally must be supported by valid consideration. Valid consideration will be present if there is a bargained for exchange of something of legal value. If the act promised has already been performed, the bargain element fails. Thus, it is said that past consideration is no consideration.

Choice ‘‘b’’ is incorrect. A contract generally must be supported by valid consideration. Relinquishment of a legal right constitutes something of legal value. Thus, this is not a good defense for Grove.

Choice ‘‘a’’ is incorrect. As long as the consideration is not a sham, the courts will not inquire into the adequacy of the consideration exchanged. $400 is not sham consideration; thus, the large disparity in value of the consideration exchanged here is not a defense.

Choice ‘‘c’’ is incorrect. The benefits of a contract need not flow to the parties to constitute consideration, the mere giving of a benefit or receipt of a detriment is sufficient.

Question 8

Question CPA-01144

One of the criteria for a valid assignment of a sales contract to a third party is that the assignment must:

1. Be supported by adequate consideration from the assignee.
2. Not be rev0cable by the assignor.
3. Not materially increase the other party’s risk or duty.
4. Be in writing and signed by the assignor.

Answer 8

Explanation

Choice ‘‘c’’ is correct. Generally, all contracts are assignable unless the assignment would result in a change in the obliger’s risk.

Choice ‘‘a’’ is incorrect. An assignment need not be supported by consideration; assignments may be gratuitous.

Choice ‘‘d’’ is incorrect. There is no requirement that an assignment of a contract for the sale of goods be in writing.

Choice ‘‘b’’ is incorrect. An assignment may be rev0cable or irrev0cable.

Question 9

Question CPA-01155

Under a personal services contract, which of the following circumstances will cause the discharge of a party’s duties?

1. Illegality of the services to be performed.
2. Bankruptcy of the party who is to receive the services.
3. Death of the party who is to receive the services.
4. Cost of performing the services has doubled.

Answer 9

Explanation

Choice ‘‘a’’ is correct. Illegality of the services to be performed always results in a discharge of duties. This assumes that the services were legal at the time the contract was formed. If the services had been illegal at the time of attempted formation, there would be no contract.

Choice ‘‘c’’ is incorrect. The death of the party who is to receive the services does not usually result in discharge of duties under a personal services contract. However, death might make performance impossible therefore causing a discharge (e.g., if doctor contracts to perform a bypass operation on patient and patient dies before the operation can be performed, doctor is discharged from performing).

Choice ‘‘d’’ is incorrect. A party can be discharged from a contract for impossibility or commercial impracticability, but a mere increase in costs does not make a performance impossible or impracticable.

Choice ‘‘b’’ is incorrect. Mere bankruptcy of the party to receive the services will not result in a discharge, although discharge is possible if the bankruptcy constitutes anticipatory repudiation, such as when it makes it very unlikely that the person receiving the services will be able to pay.

Question 10

Question CPA-01160

Ordinarily, in an action for breach of a construction contract, the statute of limitations time period would be computed from the date the:

1. Contract is negotiated.
2. Contract is breached.
3. Construction is begun.
4. Contract is signed.

Answer 10

Explanation

Choice ‘‘b’’ is correct. The statute of limitations for breach of contract usually begins to run on the occurrence of the breach.

Question 11

Question CPA-01208

Egan, a minor, contracted with Baker to purchase Baker’s used computer for $400. The computer was purchased for Egan’s personal use. The agreement provided that Egan \/1/0uld pay $200 down on delivery and $200 thirty days later. Egan took delivery and paid the $200 down payment. Twenty days later, the computer was damaged seriously as a result of Egan’s negligence. Five days after the damage occurred and one day after Egan reached the age of majority, Egan attempted to disaffirm the contract with Baker. Egan will:

1. Be able to disaffirm only if Egan does so in writing.
2. Be able to disaffirm despite the fact that Egan was not a minor at the time of disaffirmance.
3. Not be able to disaffirm because the computer was damaged as a result of Egan’s negligence.
4. Not be able to disaffirm because Egan had failed to pay the balance of the purchase price.

Answer 11

Explanation

Choice ‘‘b’’ is correct. A minor has a reasonable time after reaching the age of majority to disaffirm contracts. One day after reaching majority is within a reasonable time, and so Egan could disaffirm.

Choice ‘‘a’’ is incorrect. There is no requirement that a minor who wishes to disaffirm must do so in writing.

Choice ‘‘d’’ is incorrect. A minor may disaffirm a partially executed contract. The minor will only have a right to get back what he has paid.

Choice ‘‘c’’ is incorrect. A minor may disaffirm even if the subject matter of the contract has been destroyed; the minor’s only duty is to return whatever is left.

Question 12

Question CPA-01240

Teller brought a lawsuit against Kerr ten years after an oral contract was made and eight years after it was breached. Kerr raised the statute of limitations as a defense. Which of the following allegations \/1/0uld be most important to Kerr’s defense?

1. The action was not timely brought because the contract was entered into ten years prior to the commencement of the lawsuit.
2. The contract was oral.
3. The contract could not be performed within one year from the date made.
4. The action was not timely brought because the contract was allegedly breached eight years prior to the commencement of the lawsuit.

Answer 12

Explanation

Choice ‘‘d’’ is correct. Generally, the statute of limitations runs from the time the contract was breached, not from the time the contract was entered (if the time the contract was entered were used, there \/1/0uld be no remedy for breaches that occurred late in long-term contracts). Consequently, choice ‘‘a’’ is incorrect.

Choice ‘‘b’’ is incorrect. Whether a contract is oral or written is most relevant to whether it is enforceable under the Statute of Frauds.

Choice ‘‘c’’ is incorrect. Whether a contract could be performed within a year is most relevant to the Statute of Frauds.

Question 13

Question CPA-01246

To prevail on the defense of fraud in the inducement, a victim must prove that the:

1. Defrauder was in a fiduciary relationship with the victim.
2. Defrauder was an expert with regard to the misrepresentations.
3. Misrepresentations were in writing.
4. Defrauder made the misrepresentations with knowledge of their falsity and with an intention to deceive.

Answer 13

Explanation

Choice ‘‘d’’ is correct. The common law defense of fraud requires a showing of intent to deceive. Fraud in the inducement (as opposed to fraud in the execution) merely means that the victim was deceived as to the reason for the transaction.

Choice ‘‘b’’ is incorrect. A person need not be an expert concerning the subject matter of the deceit to be liable for misrepresentation. The person need only knowingly lie.

Choices ‘‘c’’ and ‘‘a’’ are incorrect. Fraud in the inducement means that the victim was deceived as to the reasons for entering into the fraudulent transaction; there is no requirement that the misrepresentation have been made in writing, so ‘‘c’’ is incorrect. Similarly, there is no requirement of a fiduciary relationship, so ‘‘a’’ is incorrect.

Question 14

Question CPA-01250

Which of the following offers of proof are inadmissible under the parol evidence rule when a written contract is intended as the complete agreement of the parties:

1. Proof of the existence of a subsequent oral modification of the contract.
2. Proof of the existence of a prior oral agreement that contradicts the written contract.
3. I only.
4. Both I and II.

C. II only.

d. Neither I nor II.

Answer 14

Explanation

Choice ‘‘c’’ is correct. The parol evidence rule prohibits evidence of prior oral or written agreements that seek to contradict the terms of a fully integrated contract (i.e., one intended as the complete agreement). Thus, II is prohibited. However, the parol evidence rule does not prohibit introduction of subsequent agreements; thus, I is not prohibited.

Question 15

Question CPA-01252

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?

1. White will not be able to recover any damages from Ames because the breach was inadvertent.
2. Ames did not breach the construction contract because the Perfection fixtures were substantially as good as the Ace fixtures.
3. Ames must install Ace fixtures or White will not be obligated to accept the warehouse.
4. White’s recovery will be limited to monetary damages because Ames’ breach of the construction contract was not material.

Answer 15

Explanation

Choice ‘‘d’’ is correct. Contracts governed by the common law, especially construction contracts, do not allow rescission for minor breaches, but limit the nonbreaching party to recovery of damages.

Choice ‘‘a’’ is incorrect. Contract law generally does not differentiate between intentional and inadvertent breaches; damages are recoverable for both.

Choice ‘‘b’’ is incorrect. First, the facts say that Perfection fixtures were of a lesser quality than Ace fixtures, and even if this were not true, there still would be a breach; the contract called for Ace fixtures and so only the use of Ace fixtures would constitute full compliance with the contract.

Choice ‘‘c’’ is incorrect. Contracts governed by the common law, especially construction contracts follow the doctrine of substantial performance. A party who receives substantially all of the benefit of the bargain is bound to the contract and can seek only damages for any minor breaches.

Question 16

Question CPA-01254

All of the following are effective methods of ratifying a contract entered into by a minor, except:

1. Ratifying the contract before reaching the age of majority.
2. Failing to disaffirm the contract within a reasonable time after reaching the age of majority.
3. Expressly ratifying the contract after reaching the age of majority.
4. Impliedly ratifying the contract after reaching the age of majority.

Answer 16

Explanation

Choice ‘‘a’’ is correct. A minor can disaffirm any contract until a reasonable time after reaching the age of majority. Thus, a ‘‘ratification’’ prior to reaching majority can be rev0ked and is not effective.

Choice ‘‘c’’ is incorrect. Express ratification after reaching the age of majority is one way to ratify a contract.

Choice ‘‘b’’ is incorrect. Failing to disaffirm a contract within a reasonable time after reaching the age of majority constitutes a ratification.

Choice ‘‘d’’ is incorrect. Impliedly ratifying after reaching the age of majority (e.g., by retaining the benefits of the contract or failing to timely disaffirm) effectively ratifies a minor’s contract.

Question 17

Question CPA-01259

Which of the following statements correctly applies to a typical statute of limitations?

1. The statute prohibits the admission into evidence of proof of oral statements about the meaning of a written contract.
2. The statute provides that only the party against whom enforcement of a contract is sought must have signed the contract.
3. The statute limits the right of a party to recover damages for misrepresentation unless the false statements were intentionally made.
4. The statute requires that a legal action for breach of contract be commenced within a certain period of time after the breach occurs.

Answer 17

Explanation

Choice ‘‘d’’ is correct. A statute of limitations requires that actions to enforce rights under a contract be brought within a certain time after breach has occurred.

Choice ‘‘b’’ is incorrect. The Statute of Frauds, not statute of limitations, is concerned about who has signed a contract.

Choice ‘‘c’’ is incorrect. The right to recover if there was an intentional false statement inv0lves the concept of scienter.

Choice ‘‘a’’ is incorrect. Oral statements offered to prove the meaning of a written contract inv0lves the parol evidence rule.

Question 18

Question CPA-01263

On February 1, Bums contracted in writing with Nagel to sell Nagel a used car. The contract provided that Bums was to deliver the car on February 15 and Nagel was to pay the $800 purchase price not later than March 15. On February 21, Bums assigned the contract to Ross for $600. Nagel was not notified of the assignment. Which of the following statements is correct?

1. By making the assignment, Bums impliedly warranted Nagel would pay the full purchase price.
2. By making the assignment, Bums impliedly warranted a lack of knowledge of any fact impairing the value of the assignment.
3. The assignment to Ross is invalid because Nagel was not notified.
4. Ross will not be subject to any contract defenses Nagel could have raised against Burns.

Answer 18

Explanation

Choice ‘‘b’’ is correct. Essentially, by the assignment, Bums sold the contract right to collect the $800 from Nagel. In such a case, the assignor warrants that he does not know of anything that would impair the value of the assignment; otherwise, people would attempt to assign contracts whenever they knew of a problem.

Choice ‘‘a’’ is incorrect. There is no implied warranty that the promiser will perform.

Choice ‘‘c’’ is incorrect. The obliger need not be given notice to effectively assign a contract right. However, until the obliger receives notice, no liability is incurred by paying the assignor.

Choice ‘‘d’’ is incorrect. An assignee generally is subject to all of the defenses that the promiser would have against the assignor relating to the contract (e.g., that the car was stolen).

Question 19

Question CPA-01286

Master Mfg., Inc. contracted with Accur Computer Repair Corp. to maintain Master’s computer system. Master’s manufacturing process depends on its computer system operating properly at all times. A liquidated damages clause in the contract provided that Accur pay $1,000 to Master for each day that Accur was late responding to a service request. On January 12, Accurwas notified that Master’s computer system failed. Accur did not respond to Master’s service request until January 15. If Master sues Accur under the liquidated damage provision of the contract, Master will:

1. Win, because under all circumstances liquidated damage provisions are enforceable.
2. Lose, because liquidated damage provisions violate public policy.
3. Lose, because Accur’s breach was not material.
4. Win, unless the liquidated damage provision is determined to be a penalty.

Answer 19

Explanation

Choice ‘‘d’’ is correct. A liquidated damages clause is enforceable if at the time of contracting it appears that the amount of damages in case of breach would be difficult to assess and the amount is a reasonable approximation of damages and not a penalty.

Choice ‘‘a’’ is incorrect. A liquidated damages clause is not enforceable if it constitutes a penalty, if actual damages would be easy to assess at the time the contract was made, or if the liquidated damages amount is not a reasonable approximation of actual damages.

Choice ‘‘c’’ is incorrect. The agreement of the parties made time of the essence under the contract, since Master could not operate without its computer system and this fact was made clear to Accur. Thus, the delay is a material breach.

Choice ‘‘b’’ is incorrect. Liquidated damages provisions do not violate public policy if at the time of contracting it appears that the amount of damages in case of breach would be difficult to assess and the amount is a reasonable approximation of damages and not a penalty.

Question 20

Question CPA-01289

On September 10, Harris, Inc., a new car dealer, placed a newspaper advertisement stating that Harris \/1/0uld sell 10 cars at its showroom for a special discount only on September 12, 13, and 14. On September 12, King called Harris and expressed an interest in buying one of the advertised cars. King was told that five of the cars had been sold and to come to the showroom as soon as possible. On September 13, Harris made a televised announcement that the sale would end at 10:00 PM that night. King went to Harris’ showroom on September 14 and demanded the right to buy a car at the special discount. Harris had sold the 10 cars and refused King’s demand. King sued Harris for breach of contract. Harris’ best defense to King’s suit would be that Harris’:

1. Television announcement rev0ked the offer.
2. Offer had not been accepted.
3. Offer was unenforceable.

Advertisement was not an offer

Answer 20

Explanation

Choice ‘‘d’’ is correct. Advertisements are generally not offers, but invitations to negotiate. An advertisement is an offer only if it is a promise to perform a very specific act conditioned upon acceptance. If Harris’ ad had stated that Harris would sell 10 specifically identified cars for a specified price during the sale, Harris’ advertisement \/1/0uld be an offer. Harris’ actual advertisement is too vague to be an offer.

Choice ‘‘c’’ is incorrect. The advertisement here is too vague to be considered an offer since it does not specify which cars or what the special discount is.

Choice ‘‘a’’ is incorrect. The announcement did not rev0ke an offer because the original ad was too vague to be considered an offer since it does not specify which cars or what the special discount is. Moreover, generally rev0cations must be made through the same means as the offer. If the newspaper ad were an offer, a television announcement would not be a sufficient way to rev0ke it.

Choice ‘‘b’’ is incorrect. The advertisement here is too vague to be considered an offer since it does not specify which cars or what the special discount is. Thus, there was no offer to be accepted or not accepted. Moreover, even if the ad were an offer, because all 10 cars had already been sold by the time King came in to accept, any attempted acceptance was too late; the offer had terminated because all 10 cars were sold.

Question 21

Question CPA-01291

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?

1. A contract was formed when Fine received Moss’ acceptance.
2. A contract was formed when Moss sent the acceptance.
3. No contract was formed because Fine received Moss’ acceptance after April 4.
4. No contract was formed because Moss sent the acceptance by an unauthorized method.

Answer 21

Explanation

Choice ‘‘c’’ is correct. Generally, under the mailbox rule, acceptance is effective when sent. However, an offerer may opt out of the mailbox rule by stating that the acceptance must be received by a certain date to be effective. Fine’s offer here required receipt by April 4. Moss’ acceptance was received after the April 4th deadline.

Choice ‘‘d’’ is incorrect. The offer did not require any particular method of acceptance, only receipt within a specified time. Thus, any reasonable means of acceptance was authorized.

Choice ‘‘b’’ is incorrect. Since the offerer required that the acceptance be received to be effective, the mailbox rule would not be applicable.

Choice ‘‘a’’ is incorrect. The offer stated that an acceptance had to be received by April 4 and the attempted acceptance here was received on April 5. Thus, it was ineffective because the offer had already terminated on the date attempted acceptance was received.

Question 22

Question CPA-01293

In which of the following situations does the first promise sen,e as valid consideration for the second promise?

1. A police officer’s promise to catch a thief for a victim’s promise to pay a reward.
2. A builder’s promise to complete a contract for a purchaser’s promise to extend the time for completion.
3. A debtor’s promise to pay $500 for a creditor’s promise to forgive the balance of a $600 disputed debt.
4. A debtor’s promise to pay $500 for a creditor’s promise to forgive the balance of a $600 liquidated debt.

Answer 22

Explanation

Choice ‘‘c’’ is correct. Anything having legally recognized value can constitute consideration. If parties legitimately disagree as to the amount owed under their contract, a promise to compromise, such as the parties are doing here, has legal value and constitutes consideration since both parties are giving up the right to litigate the dispute.

Choice ‘‘a’’ is incorrect. A promise to do something that one is already obligated to do has no legal value and is not valid consideration under the preexisting legal duty rule. A police officer has a preexisting legal duty to catch thieves; therefore, this promise cannot sen,e as consideration.

Choice ‘‘b’’ is incorrect. A promise to do something one is already obligated to do has no value and is not valid consideration under the preexisting legal duty rule. Here, the builder already owed a duty to complete the contract, and so his second promise to do so is not valid consideration.

Choice ‘‘d’’ is incorrect. If parties legitimately disagree as to the amount owed under their contract, a promise to compromise has legal value and constitutes consideration since both parties are giving up the right to litigate the dispute. However, here the amount owed is liquidated, which means that it is not in dispute. A promise to compromise here has no legal value and cannot sen,e as consideration since there is no legitimate right to litigate a liquidated claim.

Question 23

Question CPA-01295

West, an Indiana real estate broker, misrepresented to Zimmer that West was licensed in Kansas under the Kansas statute that regulates real estate brokers and requires all brokers to be licensed. Zimmer signed a contract agreeing to pay West a 5°/o commission for selling Zimmer’s home in Kansas. West did not sign the contract. West sold Zimmer’s home. If West sued Zimmer for nonpayment of commission, Zimmer would be:

1. Liable to West for the full commission.
2. Liable to West only for the value of services rendered.
3. Not liable to West for any amount because West did not sign the contract.
4. Not liable to West for any amount because West violated the Kansas licensing requirements.

Answer 23

Explanation

Choice ‘‘d’’ is correct. The buyer Zimmer is not liable to West, the unlicensed real estate broker, because West violated Kansas licensing requirements. Failure to have a license required to protect the public (as opposed to merely raise revenue) renders the contract v0id. Real estate broker licenses are required to protect the public.

Choices ‘‘b’’ and ‘‘a’’ are incorrect, because this licensing law was not designed to raise revenue and, therefore, the contract is v0id and a party cannot be held liable on a v0id contract.

Choice ‘‘c’’ is incorrect. Under the Statute of Frauds, certain contracts must be signed by the party sought to be bound to be enforceable. The contract here-to provide brokerage services-probably is not within the Statute since it is for services and can be performed within a year. But even if the contract were within the Statute, it still would be enforceable against Zimmer since Zimmer signed it; it is irrelevant that West did not sign.

Question 24

Question CPA-01296

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 VI/Ork, Ives refused to pay and Carson sued. Ives’ defense was based on the Statute of Frauds. What total amount will Carson recover?

a.

$450

b.

$0

C.

$650

d.

$200

Answer 24

Explanation

Choice ‘‘c’’ is correct. The contract here is for services (repair of a book) and so is governed by the common law. The common law requires modifications to be supported by consideration on both sides. There is consideration on both sides here since Carson agreed to perform additional repairs and Ives agreed to pay more. The Statute of Frauds is not a problem here since the contract is for services and can be performed within a year (the examiners were trying to trick you by taking the contract over the $500 threshold, but that threshold applies only to contracts for the sale of goods). Thus, the oral contract is enforceable as modified.

Choices ‘‘b’’, ‘‘d’’, and ‘‘a’’ are incorrect, per the above answer.

Question 25

Question CPA-01325

In an action for breach of contract, the statute of limitations time period \/1/0uld be computed from the date of the:

1. Commencement of the action.
2. Breach of the contract.
3. Signing of the contract.
4. Negotiation of the contract.

Answer 25

Explanation

Choice ‘‘b’’ is correct. In an action for breach of contract, the statute of limitations time is computed from the date of the breach. Otherwise, in a long-term contract, the statute could run before the breach occurs. Therefore, ‘‘c’’, ‘‘d’’, and ‘‘a’’ are incorrect.

Question 26

Question CPA-01327

Which of the following, if intentionally misstated by a seller to a buyer, would be considered a fraudulent inducement to make a contract?

1. Nonexpert opinion.
2. Prediction.
3. Immaterial fact.
4. Appraised value.

Answer 26

Explanation

Choice ‘‘d’’ is correct. Fraud requires misrepresentation of a material fact. Ordinarily, opinions or statements of value do not constitute misrepresentations of material facts unless made by experts. Appraised value would constitute a misrepresentation of a material fact because it was made by an expert.

Choice ‘‘a’’ is incorrect. Fraud requires misrepresentation of a material fact. Opinions are not facts.

Choice ‘‘b’’ is incorrect. Predictions are not material facts but rather are mere guesses as to what the future may hold. Therefore, they cannot be the basis for fraud.

Choice ‘‘c’’ is incorrect. Immaterial facts cannot be the basis for a fraud defense since they are not very relevant to the contract decision-making process.

Question 27

Question CPA-01332

If a buyer accepts an offer containing an immaterial unilateral mistake, the resulting contract will be:

1. Void at the election of the buyer.
2. Valid as to both parties.
3. Void as a matter of law.
4. Voidable at the election of the seller.

Answer 27

Explanation

Choice ‘‘b’’ is correct. An immaterial unilateral mistake is not a defense to a contract. A material unilateral mistake can be a defense if the nonmistaken party either knew or should have known of the mistake.

Choices ‘‘c’’ and ‘‘a’’ are incorrect. A contract based on a mistake is v0idable at the option of the adversely affected party.

Choice ‘‘d’’ is incorrect. A contract based on a material unilateral mistake is v0idable at the option of the adversely affected party. Although the mistake here apparently affects the seller, the facts state that it was immaterial and so is not a ground for rescission.

Question 28

Question CPA-01338

Under the parol evidence rule, oral evidence will be excluded if it relates to:

1. Lack of contractual capacity.
2. Failure of a condition precedent.
3. A modification made several days after the contract was executed.
4. A contemporaneous oral agreement relating to a term in the contract.

Answer 28

Explanation

Choice ‘‘d’’ is correct. The parol evidence rule generally bars evidence of prior or contemporaneous oral statements offered to vary the terms of a fully integrated written contract. Oral evidence is permissible when the contract is incomplete, ambiguous, invalid, or subject to a condition precedent, or when modification is made after the original contract is written. A contemporaneous oral agreement will be excluded.

Choice ‘‘b’’ is incorrect. Oral evidence is admissible to prove the failure of a condition precedent since this does not vary the terms of the contract but rather is a collateral issue. The parol evidence rule bars only prior or contemporaneous oral statements that seek to vary the contract’s terms.

Choice ‘‘a’’ is incorrect. The parol evidence rule bars only prior and contemporaneous oral statements that seek to vary the terms of a contract. The lack of contractual capacity is not relevant to the parol evidence rule.

Choice ‘‘c’’ is incorrect. The parol evidence rule bars evidence of prior or contemporaneous statements that contradict a written contract. It does not exclude evidence of subsequent statements.

Question 29

Question CPA-01340

To cancel a contract and to restore the parties to their original positions before the contract, the parties should execute a:

1. Rev0cation.
2. Release.
3. Novation.
4. Rescission.

Answer 29

Explanation

Choice ‘‘d’’ is correct. A rescission ‘‘undoes’’ a contract and restores the parties to the positions they would have been in if no contract were made.

Choice ‘‘c’’ is incorrect. In a novation, the original parties enter into a new contract that releases at least one of the original parties and substitutes at least one new party. All inv0lved parties must agree.

Choice ‘‘b’’ is incorrect, since a release simply discharges a party. It does not restore the party to their original position.

Choice ‘‘a’’ is incorrect. A rev0cation refers to the withdrawal of an offer. A contract may not be rev0ked.

Question 30

Question CPA-01346

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?

1. Punitive damages and compensatory damages.
2. Compensatory damages or specific performance.
3. Consequential damages or punitive damages.
4. Specific performance and compensatory damages.

Answer 30

Explanation

Choice ‘‘b’’ is correct. When a contract for the sale of real property is breached, the nonbreaching party can either recover compensatory damages (damages that compensate for the breach) or obtain specific performance (forced performance).

Choice ‘‘a’’ is incorrect. In contract cases, punitive damages are generally not awarded.

Choice ‘‘d’’ is incorrect. Damages are designed to compensate for nonperformance while specific performance forces performance. These are alternative remedies. A party cannot obtain specific performance and recover compensatory damages.

Choice ‘‘c’’ is incorrect. In contract cases, punitive damages are generally not awarded. Moreover, a party generally is not limited to consequential damages (the collateral damages that result from a breach); the actual damages that result from the breach are also recoverable (compensatory damages).

Question 31

Question CPA-01347

In determining whether the consideration requirement to form a contract has been satisfied, the consideration exchanged by the parties to the contract must be:

1. Legally sufficient.
2. Fair and reasonable under the circumstances.
3. Of approximately equal value.
4. Exchanged simultaneously by the parties.

Answer 31

Explanation

Choice ‘‘a’’ is correct. To be effective, consideration must be legally sufficient, which means something that the law recognizes as consideration.

Choice ‘‘c’’ is incorrect. The courts do not require contracts to be ‘‘fair,’’ giving each party equal benefit.

Choice ‘‘d’’ is incorrect. There is no requirement that consideration be exchanged simultaneously. For example, in a unilateral contract, the promise is given first and the performance, which is the consideration on the other side, comes later.

Choice ‘‘b’’ is incorrect. The courts will not inquire into the fairness of a bargain.

Question 32

Question CPA-01351

On June 15, Peters orally offered to sell a used lawn mower to Mason for $125. Peters specified that Mason had until June 20 to accept the offer. On June 16, Peters received an offer to purchase the lawn mower for $150 from Bronson, Mason’s neighbor. Peters accepted Bronson’s offer. On June 17, Mason saw Bronson using the lawn mower and was told the mower had been sold to Bronson. Mason immediately wrote to Peters to accept the June 15 offer. Which of the following statements is correct?

1. Peters’ offer had been rev0ked and Mason’s acceptance was ineffective.
2. Peters was obligated to keep the June 15 offer open until June 20.
3. Mason’s acceptance would be effective when mailed.
4. Mason’s acceptance would be effective when received by Peters.

Answer 32

Explanation

Choice ‘‘a’’ is correct. Peters’ offer was already rev0ked. To be effective, an acceptance must be received before the offer is terminated. An offer may be terminated by the offerer at any time unless the offeree gave consideration to keep the offer open. Mason gave no consideration to keep the offer here open; thus Peters could rev0ke. An offer is considered to be rev0ked if the offeree obtains information from a reliable source that the subject matter of the offer has been sold. Here, Mason received the information of the sale before he attempted to accept.

Therefore, his attempted acceptance came too late and was ineffective.

Choice ‘‘d’’ is incorrect. The normal rule for contracts is the mailbox rule - an acceptance is effective upon dispatch rather than upon receipt.

Choice ‘‘c’’ is incorrect. While the normal rule is that an acceptance will be effective upon dispatch, to be effective, an acceptance must also come before the offer is terminated. Here the offer was terminated before the letter was sent because Mason received reliable information that the subject matter of the offer had already been sold.

Choice ‘‘b’’ is incorrect. An offer will be irrev0cable only if the offeree gives consideration to keep the offer open (an option contract) or the offer is a merchant’s firm offer. Here, Mason did not give consideration to keep the offer open, and firm offers must be in writing and made by a merchant, yet the offer here was oral and nothing indicates that Peters is a lawn mower merchant.

Question 33

Question CPA-01353

Rail, who was 16 years old, purchased an $800 computer from Elco Electronics. Rail and Elco are located in a state where the age of majority is 18. On several occasions Rail returned the computer to Elco for repairs. Rail was very unhappy with the computer. T\/\/0 days after reaching the age of 18, Rail was still frustrated with the computer’s reliability, and returned it to Elco, demanding an $800 refund. Elco refused, claiming that Rail no longer had a right to disaffirm the contract. Elco’s refusal is:

1. Incorrect, because Rail could disaffirm the contract at any time.
2. Incorrect, because Rail disaffirmed the contract within a reasonable period of time after reaching the age of 18.
3. Correct, because Rail’s multiple requests for service acted as a ratification of the contract.
4. Correct, because Rail could have transferred good title to a good faith purchaser for value.

Answer 33

Explanation

Choice ‘‘b’’ is correct. A minor may disaffirm a contract within a reasonable time after reaching majority, and two days is certainly a reasonable time.

Choice ‘‘c’’ is incorrect. A minor cannot ratify a contract until reaching majority. Thus, Rail’s requests for repairs before reaching majority are irrelevant.

Choice ‘‘d’’ is incorrect. A minor has a right to disaffirm contracts despite the minor’s power to transfer good title to a good faith purchaser.

Choice ‘‘a’’ is incorrect. A minor must disaffirm a contract within a reasonable time after reaching majority.

Question 34

Question CPA-01356

Which of the following statements is true with regard to the Statute of Frauds?

1. All contracts inv0lving consideration of more than $500 must be in writing.
2. The written contract must be signed by all parties.
3. The Statute of Frauds applies to contracts that can be fully performed within one year from the date they are made.
4. The contract terms may be stated in more than one document.

Answer 34

Explanation

Choice ‘‘d’’ is correct. There is no requirement that the terms of a written contract be contained in a single writing.

Choice ‘‘a’’ is incorrect. The $500 rule applies only to contracts for the sale of goods under the UCC. ,Note: Be careful when selecting answers that contain absolute terms such as all, always, only, etc.)

Choice ‘‘b’’ is incorrect. The Statute of Frauds does not require the contract to be in writing-only that some writing reflects the material terms of the contract and that that writing is signed by the party sought to be held liable, not necessarily both parties. (Again, be careful when selecting answers that contain absolute terms such as all, always, only, etc.)

Choice ‘‘c’’ is incorrect. The Statute of Frauds does not apply to contracts that can be fully performed within one year.

Question 35

Question CPA-01405

Maco, Inc. and Kent contracted for Kent to provide Maco certain consulting services at an hourly rate of $20. Kent’s normal hourly rate was $90 per hour, the fair market value of the services. Kent agreed to the $20 rate because Kent was having serious financial problems. At the time the agreement was negotiated, Maco was aware of Kent’s financial condition and refused to pay more than $20 per hour for Kent’s services. Kent has now sued to rescind the contract with Maco, claiming duress by Maco during the negotiations. Under the circumstances, Kent wiII:

1. Win, because Maco was aware of Kent’s serious financial problems.
2. Win, because Maco refused to pay the fair market value of Kent’s services.
3. Lose, because Maco cannot prove that Kent, at the time, had no other offers to provide consulting services.
4. Lose, because Mace’s actions did not constitute duress.

Answer 35

Explanation

Choice ‘‘d’’ is correct. Duress occurs when a person overcomes the will of another through wrongful force or threats of imminent force. Economic duress generally is not recognized as a defense to contract, and even where it is, it is usually required that the party taking advantage of the other party’s poor financial condition must have caused the poor condition.

Choice ‘‘b’’ is incorrect. The parties to a contract are free to drive the best bargain they can. It is not a defense that the price agreed to was unfair.

Choice ‘‘a’’ is incorrect. A party is free to drive the best bargain he can in contracting. The fact that the other party is in a poor financial condition does not change this rule.

Choice ‘‘c’’ is incorrect. Kent contracted to provide services for $20 per hour and the state of his other offers for work is unrelated to the contract here.

Question 36

Question CPA-01408

Miller negotiated the sale of Miller’s liquor store to Jackson. Jackson asked to see the prior year’s financial statements. Using the store’s checkbook, Miller prepared a balance sheet and profit and loss statement as well as he could. Miller told Jackson to have an accountant examine Miller’s records because Miller was not an accountant. Jackson failed to do so and purchased the store in reliance on Miller’s financial statements. Jackson later learned that the financial statements included several errors that resulted in a material overstatement of assets and net income. Miller was not aware that the errors existed. Jackson sued Miller, claiming Miller misrepresented the store’s financial condition and that Jackson relied on the financial statements in making the decision to acquire the store. Which of the following statements is correct?

1. Money damages is the only remedy available to Jackson if, in fact, Miller has committed a misrepresentation.
2. Jackson will prevail if the errors in the financial statements were material.
3. Jackson will not prevail because Jackson’s reliance on the financial statements was not reasonable.
4. Jackson \/1/0uld be entitled to rescind the purchase even if the errors in the financial statements were not material.

Answer 36

Explanation

Choice ‘‘c’’ is correct. Since Miller did not intentionally misrepresent the store’s financial condition (i.e., the misrepresentation was unintentional), the misrepresentation is a defense only if reliance on it was reasonable. It was not reasonable to rely here since Miller told Jackson that Miller did not know what he was doing and that Jackson should hire an accountant.

Choice ‘‘b’’ is incorrect. Even if the misrepresentations were material, because Miller’s misrepresentation was innocent, it is actionable only if Jackson reasonably relied on the misrepresentation. Jackson did not reasonably rely on the misrepresentation, because Miller had told him that Miller was not an accountant and that Jackson should have Miller’s work checked.

Choice ‘‘a’’ is incorrect. For misrepresentation, the injured party has a choice of v0iding the contract (and getting the purchase price back) or damages.

Choice ‘‘d’’ is incorrect, since Jackson would have to prove that the errors were ‘‘material’’ in order to rescind the agreement.

Question 37

Question CPA-01411

Ferco, Inc. claims to be a creditor beneficiary of a contract between Bell and Allied Industries, Inc. Allied is indebted to Ferco. The contract between Bell and Allied provides that Bell is to purchase certain goods from Allied and pay the purchase price directly to Ferco until Allied’s obligation is satisfied. Without justification, Bell failed to pay Ferco and Ferco sued Bell. Ferco will:

1. Prevail, provided Ferco was aware of the contract between Bell and Allied at the time the contract was entered into.
2. Not prevail, because Ferco lacked privity of contract with either Bell or Allied.
3. Prevail, because Ferco was an intended beneficiary of the contract between Allied and Bell.
4. Not prevail, because Ferco did not give any consideration to Bell.

Answer 37

Explanation

Choice ‘‘c’’ is correct. Intended beneficiaries (persons who were intended to be benefited by a contract other than the bargaining parties) can enforce the contract as soon as their rights vest. Here, Allied clearly intended Ferco to receive benefits of the contract and Ferco’s rights vested upon filing suit for Bell’s breach, if not before.

Choice ‘‘b’’ is incorrect. Intended beneficiaries are in privity (one of the parties to a contract) since they are actually named in the contract.

Choice ‘‘d’’ is incorrect. There is no requirement that an intended beneficiary give consideration; it is sufficient that consideration flows between the other parties.

Choice ‘‘a’’ is incorrect. An intended beneficiary need not know of the contract when it is made; his or her rights may vest in the contract later by relying on it, assenting to it, or bringing suit on it.

Question 38

Question CPA-01417

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:

1. Not apply to any of the parties’ agreements because the consulting agreement did not have to be in writing.
2. Not prevent the admission into evidence of testimony regarding Lennon’s right to report on a monthly basis.
3. Not prevent Lennon from proving the parties’ oral agreement that Lennon could use Rogers’ computer.
4. Not apply to the parties’ agreement to allow Lennon to use Rogers’ computer because it was contemporaneous with the written agreement.

Answer 38

Explanation

Choice ‘‘b’’ is correct. The parol evidence rule prohibits introduction of prior or contemporaneous oral statements that seek to vary the terms of a written contract. It does not prohibit introduction of subsequent oral statements that modify the contract.

Choice ‘‘a’’ is incorrect. The parol evidence rule applies whenever there is a written contract, not only to contracts that must be in writing because of the Statute of Frauds.

Choice ‘‘c’’ is incorrect. The parol evidence rule prohibits introduction of prior or contemporaneous oral statements that seek to vary the terms of a written contract. The agreement that Lennon could use Rogers’ computer is different from what the contract provides and was made contemporaneously with the written contract. Thus, the parol evidence rule will bar its introduction.

Choice ‘‘d’’ is incorrect. The parol evidence rule bars contemporaneous oral statements that seek to vary the terms of a written contract.

Question 39

Question CPA-01420

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?

1. Ace would not be liable to Wilcox if Ace had notified Wilcox of the assignment.
2. Ace’s duty to paint Wilcox’s warehouse was nondelegable.
3. Ace’s delegation of the duty to paint Wilcox’s warehouse was a breach of the contract.
4. Ace remained liable to Wilcox despite the fact that Ace assigned the contract to Pure.

Answer 39

Explanation

Choice ‘‘d’’ is correct. In the absence of an agreement to the contrary, the assignment of a contract does not relieve the assignor of his/her obligations under the contract. Here, Ace remains liable to Wilcox even though Ace assigned (delegated) its contractual responsibility to Pure.

Choice ‘‘a’’ is incorrect. Notice alone isn’t enough to remove liability. Ace could av0id liability only by an agreement among all of the parties substituting Pure for Ace and releasing Ace. Such an agreement is known as a novation.

Choice ‘‘b’’ is incorrect. Only duties that inv0lve specialized personal skills (i.e., rely heavily on the personal attributes of the person performing) cannot be delegated, and a contract to paint a warehouse does not rely on specialized skills, as would a contract to paint a portrait.

Choice ‘‘c’’ is incorrect. The duty to paint a building does not inv0lve highly specialized skills and, therefore, is delegable. Since Ace’s duty to paint Wilcox’s warehouse could be delegated, the act of delegating was not a breach of contract.

Question 40

Question CPA-01427

Yost contracted with Egan for Yost to buy certain real property. If the contract is otherwise silent, Yost’s rights under the contract are:

1. Nonassignable as a matter of law.
2. Nonassignable because they are personal to Yost.
3. Assignable only with Egan’s consent.
4. Generally assignable.

Answer 40

Explanation

Choice ‘‘d’’ is correct. Most contracts are assignable unless they inv0lve personal services or the assignment would vary the risks or burdens of the contract. Normally a real estate contract is assignable.

Choices ‘‘c’’, ‘‘b’’, and ‘‘a’’ are incorrect. Generally, unless a contract inv0lves specialized personal services or otherwise relies heavily on the personal attributes of the parties, it is assignable without consent. A contract to purchase real estate does not inv0lve personal services, therefore no consent is needed.

Question 41

Question CPA-02262

With regard to an agreement for the sale of real estate, the Statute of Frauds:

1. Requires that the entire agreement be in a single writing.
2. Requires that the purchase price be fair and adequate in relation to the value of the real estate.
3. Does not apply if the value of the real estate is less than $500.
4. Does not require that the agreement be signed by all parties.

Answer 41

Explanation

Choice ‘‘d’’ is correct. The Statute of Frauds does not require that an agreement be signed by all parties, merely the party to be charged. The contract, however, generally is unenforceable against a party who did not sign.

Choice ‘‘c’’ is incorrect. The $500 threshold concerns sale of goods and not real estate.

Choice ‘‘a’’ is incorrect. There is no such rule. The contract could be made up of a series of writings, that when taken together reflect the material terms of the contract.

Choice ‘‘b’’ is incorrect. There is no such rule. The Statute of Frauds is concerned with whether certain contracts are evidenced by the party to be held liable under the contract and not with the fairness and adequacy of the

pn• ce.

Question 42

Question CPA-02275

Wren purchased a factory from First Federal Realty. Wren paid 20°/o at the closing and gave a note for the balance secured by a 20-year mortgage. Five years later, Wren found it increasingly difficult to make payments on the note and defaulted. First Federal threatened to accelerate the loan and foreclose if Wren continued in default.

First Federal told Wren to make payment or obtain an acceptable third party to assume the obligation. Wren offered the land to Moss, Inc. for $10,000 less than the equity Wren had in the property. This was acceptable to First Federal and at the closing Moss paid the arrearage, assumed the mortgage and note, and had title transferred to its name. First Federal released Wren. The transaction in question is a (an):

1. Novation.
2. Third party beneficiary contract.
3. Purchase of land subject to a mortgage.
4. Assignment and delegation.

Answer 42

Explanation

Choice ‘‘a’’ is correct. In a novation, a new contract substitutes a new party for an old party in an existing contract and all of the parties agree to release the party who was substituted out. That is what happened here.

Choice ‘‘c’’ is incorrect. A person who takes ‘‘subject to’’ a mortgage does not agree to be personally liable on the mortgage. Here, Moss agreed to be personally liable, making this an assumption of a mortgage rather than taking subject to a mortgage.

Choice ‘‘d’’ is incorrect. In an assignment/delegation situation, the assignor (Wren) continues to be liable on the obligation. Here, Moss was substituted for Wren when Moss assumed the mortgage, so Wren has no rights or duties under the original contract.

Choice ‘‘b’’ is incorrect. The transaction is best described as a novation because there is a substitution of parties.

Question 43

Question CPA-02388

Under a contract governed by the UCC Sales Article, which of the following statements is correct?

1. Unless both the seller and the buyer are merchants, neither party is obligated to perform the contract in good faith.
2. The contract will not be enforceable if it fails to expressly specify a time and a place for delivery of the goods.
3. The seller may be excused from performance if the goods are accidentally destroyed before the risk of loss passes to the buyer.
4. 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.

Answer 43

Explanation

Choice ‘‘c’’ is correct. Under Article 2 of the UCC the seller of goods may be excused from performance if the goods (subject matter of the contract) are accidentally destroyed before the risk of loss passes to the buyer and performance is thereby rendered impossible.

Choice ‘‘a’’ is incorrect since the UCC requires that all parties to a contract act in good faith.

Choice ‘‘b’’ is incorrect. In the absence of a place for delivery the UCC provides for the ‘‘seller’s place’’ of business. In the absence of a time for delivery the UCC provides a reasonable time.

Choice ‘‘d’’ is incorrect. In all cases the goods must be identified to the contract for title to pass to the buyer.

Question 44

Question CPA-04779

Kram sent Fargo, a real estate broker, a signed offer to sell a specified parcel of land to Fargo for $250,000. Kram, an engineer, had inherited the land. On the same day that Kram’s letter was received, Fargo telephoned Kram and accepted the offer. Which of the following statements is correct under the common law statute of frauds?

1. A contract was formed but would be enforceable only against Kram.
2. No contract could be formed because Kram’s letter was signed only by Kram.
3. A contract was formed and would be enforceable against both Kram and Fargo.
4. No contract could be formed because Fargo’s acceptance was oral.

Answer 44

Explanation

Choice ‘‘a’’ is correct. A contract was formed between Kram and Fargo because Kram made a valid offer and Fargo made a valid acceptance of that offer. Under the Statute of Frauds, contracts inv0lving interests in real property are enforceable only if their material terms are set forth in a writing signed by the party sought to be held liable. The original signed offer from Kram would be a sufficient writing to satisfy the Statute of Frauds if Fargo is seeking to enforce the contract. Since Fargo accepted by telephone, there is no writing signed by Fargo. Thus, the contract could be enforced against Kram, but could not be enforced against Fargo due to the lack of a signed writing by Fargo.

Choices ‘‘d’’ and ‘‘b’’ are incorrect because they state that no contract was formed. There was a contract. The Statute of Frauds does not make oral contracts invalid, it only makes them unenforceable.

Choice ‘‘c’’ is incorrect because the contract could not be enforced against Fargo. A real estate contract is within the Statute of Frauds, and a contract within the Statute of Frauds generally is enforceable against a party only if that party signed a written memorandum containing the material terms of the contract.

Question 45

Question CPA-04783

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:

1. Not justified, because Fresno is not bound by the contract unless Bronson specifically ratifies the contract after reaching the age of majority.
2. Justified, because Fresno must perform under the contract regardless of Bronson’s minority.
3. Not justified, because Fresno does not have to perform under the contract if Bronson has a right to disaffirm the contract.
4. Justified, because Bronson and Fresno are bound by the contract as of the date Bronson reached the age of majority.

Answer 45

Explanation

Choice ‘‘b’’ is correct. In this problem, Fresno was an adult and Bronson was a minor at the time of contracting. The common law gives minors the right to disaffirm a contract anytime while a minor or within a reasonable time after becoming an adult. Only the minor has the right to disaffirm. The adult may not disaffirm the contract.

Choice ‘‘a’’ is incorrect. Fresno, the adult, is bound by the contract unless Bronson disaffirms. Bronson does not have to ratify.

Choice ‘‘c’’ is incorrect. Fresno, the adult, is bound by the contract unless Bronson disaffirms. Fresno does not have the right to get out of the contract. Only Bronson, the minor, does.

Choice ‘‘d’’ is incorrect. Fresno was bound by the contract on the date it was made. Bronson becomes bound upon ratifying or failing to disaffirm the contract within a reasonable time after reaching the age of majority.

Question 46

Question CPA-04788

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?

1. West breached the contract.
2. Barton paid West.
3. Egan released Barton.
4. West released Barton.

Answer 46

Explanation

Choice ‘‘c’’ is correct. In an assignment for consideration, the assignor and obliger are both liable to the assignee. However, if the assignee releases the obliger, it will serve to release the assignor as well. Thus, if Egan (the assignee) releases Barton (the obliger), West (the assignor) will be released as well.

Choice ‘‘d’’ is incorrect. In an assignment for consideration, the assignor and obliger are both liable to the assignee. Thus, if West (the assignor) released Barton (the obliger), West would remain liable to Egan (the assignee) because Egan paid consideration to be assigned West’s rights.

Choice ‘‘a’’ is incorrect. In an assignment for consideration, the assignor owes a contractual duty to the assignee. If the assignor breaches his contract with the obliger so that the obliger is discharged from performing for the assignee, the assignee can hold the assignor liable.

Choice ‘‘b’’ is incorrect. In an assignment for consideration, the assignor and the obliger are both liable to the assignee. Thus, if Barton (the obliger) pays West (the assignor) it does nothing to extinguish the obligation owed to Egan (the assignee). Therefore, it would not constitute a release of West (the assignor).

Question 47

Question CPA-04964

Jen is at a client preparing to begin her audit of their financial statements. Her new laptop computer is not booting up when she presses the start button. She bangs the lid down and vows, loud enough for Paul to hear, that she would sell the computer to anyone for a dollar. Paul reaches into his wallet, places one dollar down on Jen’s desk, and declares to her, ‘‘Sold!’’ Paul’s act:

1. Is not a valid acceptance, because Jen’s offer did not sufficiently identify the offeree.
2. Is a valid acceptance, because Paul’s statement of ‘‘Sold’’ is universally known to commit a seller of goods to sell those goods to the buyer.
3. Is not a valid acceptance, because Jen does not seriously intend to sell the computer.
4. Is a valid acceptance.

Answer 47

Explanation

Choice ‘‘c’’ is correct. To be sufficient to be an offer, the communication must create a reasonable expectation in the offeree that the offerer intends to make a contract. Given the circumstances (a laptop for $1; not at a sale, etc.) it would be unreasonable to assume that Jen was serious.

Choices ‘‘d’’ and ‘‘b’’ are incorrect. A reasonable person would not assume that Jen’s statement offering to sell the computer was serious. Therefore, there is no offer for Paul to validly accept.

Choice ‘‘a’’ is incorrect. An offer need not name the offeree; it is sufficient if it limits who may accept. As Jen had only one computer, her statement would be understood as limiting the offeree to the first person who gave her one dollar.

Question 48

Question CPA-04967

Jen offers to sell Bob her laptop computer for $500. Bob is not sure he can afford it and asks Jen if she will keep the offer open until noon the next day. Jen tells Bob that she will keep her offer open if he gives her his promise that he won’t buy another computer before that time. Bob gives her his promise not to buy another computer. Jen

•

IS:

1. Obligated to keep the offer open because she gave her word.
2. Obligated to keep the offer open until noon the next day because there is a valid option contract in place.
3. Not obligated to keep the offer open to Bob because he didn’t buy it right away.
4. Not obligated to keep the offer open because Bob did not give valid consideration to create an option contract.

Answer 48

Explanation

Choice ‘‘b’’ is correct. Generally, a promise to keep an offer open for a specified time is unenforceable unless it is made in writing by a merchant (i.e., a merchant’s firm offer) or consideration supports the promise, in which case, an option contract is formed. Here, Bob gave his promise to not purchase another computer in exchange for Jen’s promise to keep the promise open. Bob was not legally obligated to forgo purchasing another computer, and giving up the right to do so is valid consideration. Thus, the parties created an option contract to keep the offer open.

Choice ‘‘c’’ is incorrect. Although an offer generally may be rev0ked if not accepted ‘‘right away,’’ an exception to this rule exists if the offer is an option. The offer here is an option contract because Bob gave consideration to keep it open (his promise to not buy another computer before noon the following day).

Choice ‘‘d’’ is incorrect. Bob did give valid consideration to form an option contract. Bob was not legally obligated to forgo purchasing another computer, so giving up the right to do so is valid consideration.

Choice ‘‘a’’ is incorrect. Jen’s mere promise to keep the offer open did not obligate her to keep the offer open. Without consideration from Bob to form an option contract to keep the offer open, Jen is not legally obligated to keep the offer open. Thus, choice ‘‘b’’ is a more complete answer.

Question 49

Question CPA-04970

Karen tells her friend Judi that she plans to shave her dog’s long hair so short Judi will be able to see the freckles on his skin. Judi feels so bad for the dog that she offers to pay Karen $50 to have a professional dog groomer cut the dog’s hair to a more attractive length and style. Karen immediately leaves for the groomer and has the dog’s hair professionally groomed. Judi’s promise to pay is:

1. Unenforceable even though Karen had a professional groomer cut the dog’s hair in anticipation of receiving $50 from Judi.
2. Enforceable because Karen was only saying she was shaving the dog to get Judi to offer her some money.
3. Enforceable because Karen had a professional groomer cut the dog’s hair.
4. Unenforceable because Karen should not have considered shaving the dog’s hair in the first place.

Answer 49

Explanation

Choice ‘‘c’’ is correct. Karen and Judi formed a unilateral contract. A unilateral contract is formed when a promise is made in exchange for an act. Here, Judi promised to pay Karen $50 if Karen had a professional groomer style the dog’s hair. Karen accepted the offer by having a professional groomer cut her dog’s hair. Karen’s performance of the requested act not only was an acceptance, but it also was valid consideration to support Judi’s promise.

Consideration need not have monetary value to the promiser; a detriment to the promisee is sufficient. Here, Karen did not have to have the dog’s hair cut by a professional groomer. Thus, her doing so was a detriment and constituted consideration sufficient to support Judi’s promise.

Choice ‘‘a’’ is incorrect. Judi’s offer was an offer to create a unilateral contract, which could be and was accepted by Karen’s performing the act specified in the offer (i.e., having the dog’s hair cut).

Choice ‘‘d’’ is incorrect. No such reason is valid.

Choice ‘‘b’’ is incorrect. It is enforceable, because Karen acted according to Judi’s offer based upon Judi’s promise to give her $50. Karen’s motivation for saying that she would shave her dog is irrelevant.

Question 50

Question CPA-04972

Maureen is 15 years old. She buys a $2,000 bicycle that she continues to use and keep in repair after reaching the age of majority. Maureen has:

1. Rescinded the contract.
2. Ratified the contract.
3. Disaffirmed the contract.
4. Rejected the contract.

Answer 50

Explanation

Choice ‘‘b’’ is correct. Upon reaching the age of majority, a person can become bound on contracts entered into as a minor through ratification by retaining the benefits of the contract.

Choice ‘‘c’’ is incorrect. A minor may disaffirm a contract (i.e., negate her assent to enter into the contract) any time up to a reasonable time after reaching the age of majority. Maureen did nothing here to indicate that she wanted to negate her assent to enter into the contract.

Choice ‘‘a’’ is incorrect. Rescission is an act of ‘‘undoing’’ a contract. Maureen did nothing here to indicate that she wanted to undo the contract.

Choice ‘‘d’’ is incorrect. An offer can be rejected, in which case no contract is formed. Thus, technically, a contract cannot be rejected.

Question 51

Question CPA-05272

Which of the following types of mistake will generally make a contract unenforceable and allow it to be rescinded?

1. A unilateral mistake of value.
2. A mutual mistake of value.
3. A unilateral mistake of fact.
4. A mutual mistake of fact.

Answer 51

Explanation

Choice ‘‘d’’ is correct. A mutual mistake of a material fact will make a contract v0idable at the option of the adversely affected party.

Choice ‘‘c’’ is incorrect. Generally, a unilateral mistake of fact does not make the contract v0idable. The mistaken party can av0id a contract on the basis of a unilateral mistake only if the other party either knew or should have known of the mistake.

Choice ‘‘a’’ is incorrect. Only mistakes as to material facts can make a contract unenforceable. Value generally is not a fact but, rather, is a matter of opinion.

Choice ‘‘b’’ is incorrect. Only mistakes as to material facts can make a contract unenforceable. Value generally is not a fact but, rather, is a matter of opinion.

Question 52

Question CPA-05296

Which of the following contract rights can generally be assigned?

1. A right whose assignment is prohibited by statute.
2. The right of an insured to coverage under a fire insurance policy.
3. The right to receive a sum of money.
4. The right to receive personal services.

Answer 52

Explanation

Choice ‘‘c’’ is correct. Generally, one can assign rights under a contract with the exception of personal services or when the assignment increases the obliger’s risk. The right to receive money is a very common right that is assignable.

Choice ‘‘d’’ is incorrect. Generally, the right to receive personal services is not assignable.

Choice ‘‘b’’ is incorrect. Generally one cannot assign a right if the assignment will vary the obliger’s risk. Insurance policies are contracts inv0lving the assessment of risk. Therefore, coverage rights under these contracts are not assignable.

Choice ‘‘a’’ is incorrect. If a statute prohibits assignment of a particular right then, obviously, the right is not assignable by operation of law.

Question 53

Question CPA-05527

Which of the following promises is supported by legally sufficient consideration and will be enforceable?

1. A person’s promise to pay a real estate agent $1,000 in return for the real estate agent’s earlier act ofnot

charging commission for selling the person’s house.

1. A parent’s promise to pay one child $500 because that child is not as wealthy as the child’s sibling.
2. A promise to pay a minor $500 to paint a garage.
3. A promise to pay the police $250 to catch a thief.

Answer 53

Explanation

Choice ‘‘c’’ is correct. To constitute consideration, there must be a bargained for exchange of something of value. A detriment to the promisee or a benefit to the promiser constitutes value. A promise to pay a minor $500 to paint a garage constitutes a detriment to the promisee; the promisee is not otherwise bound to pay the minor $500 to paint the garage, and the minor’s painting the garage constitutes valid consideration to support the promise to pay

$500.

Choice ‘‘a’’ is incorrect. To constitute consideration, there must be a bargained for exchange of value. A detriment to the promisee or a benefit to the promiser constitutes value. Past acts generally do not constitute valid consideration because the acts were not bargained for. Thus, a promise to pay $1,000 in return for a prior performed act (not charging for services) is not supported by consideration.

Choice ‘‘b’’ is incorrect. To constitute consideration, there must be a bargained for exchange of value. A detriment to the promisee or a benefit to the promiser constitutes value. Here, there is no bargained for exchange. The promise is gratuitous and not supported by consideration.

Choice ‘‘d’’ is incorrect. To constitute consideration, there must be a bargained for exchange of value. A detriment to the promisee or a benefit to the promiser constitutes value. A promise to perform a pre-existing duty does not constitute valid consideration. Because a police officer already owes a crime victim a duty to catch the perpetrator, the police officer’s promise to perform his duty does not constitute valid consideration.

Question 54

Question CPA-05542

For which of the following contracts will a court generally grant the remedy of specific performance?

1. A contract of employment.
2. A contract for the sale of a patent.
3. A contract for the sale of fungible goods.
4. A contract for the sale of stock that is traded on a national stock exchange.

Answer 54

Explanation

Choice ‘‘b’’ is correct. Specific performance is a court order to perform under the terms of a contract. Generally, it is available only in contracts for unique or rare property. A patent, by definition, is unique. Therefore, specific performance would be available to enforce a contract for the sale of a patent.

Choice ‘‘a’’ is incorrect. Specific performance is not available to enforce a contract of employment, at least not in an action by the employer, because it would be tantamount to an order of inv0luntary servitude, which is prohibited by the 14th Amendment to the United States Constitution.

Choice ‘‘c’’ is incorrect. Specific performance is available only to enforce a contract inv0lving unique or rare property. It is not available to enforce a contract for fungible goods, as such goods are easily replaced.

Choice ‘‘d’’ is incorrect. Specific performance is available only to enforce a contract inv0lving unique or rare property. It is not available to enforce a contract for fungible items. Stock traded on a national securities exchange is fungible.

Question 55

Question CPA-05666

Camp orally guaranteed payment of a loan Camp’s cousin Wilcox had obtained from Camp’s friend Main. The loan was to be repaid in 10 monthly payments. After making six payments, Wilcox defaulted on the loan and Main demanded that Camp honor the guaranty. Regarding Camp’s liability to Main, Camp is:

1. Not liable under the oral guaranty because Camp’s guaranty must be in writing to be enforceable.
2. Liable under the oral guaranty because the loan would be paid within one year.
3. Not liable under the oral guaranty because of failure of consideration.
4. Liable under the oral guaranty because Camp benefitted by maintaining a personal relationship with Main.

Answer 55

Explanation

Choice ‘‘a’’ is correct. A promise to pay the debt of another must be evidenced by some type of writing to be enforceable. Camp’s oral promise to pay the debt of Wilcox is not enforceable without some type of writing.

Choices ‘‘b’’ and ‘‘d’’ are incorrect because they state Camp is liable. Camp is not liable due to the lack of a writing.

Choice ‘‘c’’ is incorrect. Consideration is present. Each of the parties promised to do something of legal value. Main promised to loan Wilcox money. Wilcox promised to repay the loan. Camp promised to pay if Wilcox defaulted. Each of the promises serves to make the others enforceable.

Question 56

Question CPA-06507

On December 1, Gem orally contracted with Mason for Mason to manage Gem’s restaurant for one year starting the following January 1. They agreed that Gem would pay Mason $40,000 and that Mason would be allowed to continue to work for Gem if ‘‘everything worked out.” On June 1, Mason quit to take a better paying job, alleging that the contract violated the statute of frauds. What will be the outcome of a suit by Gem for breach of contract?

1. Gem will lose because the contract required payment of more than $500.
2. Gem will win because the contract was executory.
3. Gem will win because the contract was for services not goods.
4. Gem will lose because the contract could not be performed within one year.

Answer 56

Explanation

Choice ‘‘d’’ is correct. As a general rule, under the statute of frauds, a contract that cannot be performed within one year from the time of its making is unenforceable absent proof of its material terms in a writing signed by the party being sued. Here, the contract by its terms could not be performed within a year from the time it was made and Gem cannot prove the material terms of the contract through a writing signed by Mason. Therefore, Gem would lose its breach of contract action.

Choice ‘‘b’’ is incorrect. The statute of frauds requires proof of the material terms of certain contracts to be evidenced by a writing signed by the party being sued. There is an exception to the statute if the contract has been performed. Since the contract here is executory, the exception does not apply, so Gem will lose (not be able to enforce the contract) rather than win because the contract is executory.

Choice ‘‘c’’ is incorrect. The statute of frauds applies to contracts other than contracts for the sale of goods. It applies to a service contract if by its terms it cannot be performed within a year. Thus, the fact that the contract here is for services rather than goods is not a reason for Gem to win the law suit to enforce the agreement with Mason. Gem will lose because the statute of frauds applies and Gem does not have a writing signed by Mason that sets out the material terms of the agreement.

Choice ‘‘a’’ is incorrect. The $500 threshold is not relevant to the contract here. That threshold applies to contracts for the sale of goods. The contract here is for services. What matters for service contracts is whether or not they can be performed within a year of their making. If they cannot, such as the contract here, they are within the statute of frauds regardless of the price inv0lved.

Question 57

Question CPA-06525

Card communicated an offer to sell Card’s stereo to Bend for $250. Which of the following statements is correct regarding the effect of the communication of the offer?

1. Bend should immediately accept or reject the offer to av0id liability to Card.
2. Card is required to mitigate any loss Card would sustain in the event Bend rejects the offer.
3. Bend may not reject the offer for a reasonable period of time.
4. Card is not obligated to sell the stereo to Bend until Bend accepts the offer.

Answer 57

Explanation

Choice ‘‘d’’ is correct. In order to form a contract, there must be at least an offer, an acceptance, and consideration. Card’s communication is an offer. The stereo and the $250 would be the consideration for the contract here. But, Card will not be bound until Bend accepts the offer.

Choice ‘‘a’’ is incorrect. As a general rule, silence cannot constitute an acceptance, and Bend cannot be liable on a contract until it is accepted. If Bend remains silent, no contract is formed and Bend has no liability.

Choice ‘‘b’’ is incorrect. Card owes no contractual duties to Bend until Bend has accepted Card’s offer. Thus, there is no duty to mitigate here.

Choice ‘‘c’’ is incorrect. An offeree may reject an offer at any time.

Question 58

Question CPA-06900

Pierce owed Duke $3,000. Pierce contracted with Lodge to paint Lodge’s house and Lodge agreed to pay Duke

$3,000 to satisfy Pierce’s debt. Pierce painted Lodge’s house but Lodge did not pay Duke the $3,000. In a lawsuit by Duke against Pierce and Lodge, who will be liable to Duke?

1. Lodge only.
2. Both Pierce and Lodge.
3. Pierce only.
4. Neither Pierce nor Lodge.

Answer 58

Explanation

Choice ‘‘b’’ is correct. Duke is a creditor of Pierce and Pierce made a contract with Lodge benefiting Duke, making Duke a creditor beneficiary of the Pierce-Lodge contract. If there is a breach of a contract benefiting a third party creditor, the creditor beneficiary may sue the promiser under the third party beneficiary contract or the party who owed the creditor the original debt under the original debt. Thus, none of the other choices are correct.

Question 59

Question CPA-08223

To which of the following transactions does the common law Statute of Frauds not apply?

1. Promises to pay the debt of another.
2. Contracts for the sale of real estate.
3. Agreements made in consideration of marriage.
4. Contracts that can be performed within one year.

Answer 59

Explanation

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.

Choice ‘‘b’’ is incorrect. All contracts for the sale of real property are within the common law Statute of Frauds and so must be evidenced by a writing to be enforceable.

Choice ‘‘c’’ is incorrect. Contracts for which the consideration is marriage are within the common law Statute of Frauds and so must be evidenced by a writing to be enforceable.

Choice ‘‘a’’ is incorrect. Promises to pay the debt of another are suretyship promises and are within the common law Statute of Frauds. Therefore, they must be evidenced by a writing to be enforceable.

Question 60

Question CPA-08227

Which of the following types of conduct renders a contract v0id?

1. Duress through improper threats.
2. Mutual mistake as to facts forming the basis of the contract.
3. Duress through physical compulsion.
4. Undue influence by a dominant party in a confidential relationship.

Answer 60

Explanation

Choice ‘‘c’’ is correct. Duress through physical harm or the threat of physical harm renders a contract v0id rather than merely v0idable.

Choice ‘‘b’’ is incorrect. Mutual mistake renders a contract v0idable by either party, rather than v0id.

Choice ‘‘d’’ is incorrect. Use of undue influence renders a contract v0idable at the option of the party influenced.

Choice ‘‘a’’ is incorrect. Duress through improper threats is too broad to be correct. If the improper threats regard social or economic disadvantage, the contract is merely v0idable. If the threats inv0lve physical violence, then the contract is v0id.

Question 61

Question CPA-08228

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 rev0ke the offer but no expiration date. On day 4, Jackson mailed Sands a rev0cation of the offer to sell the fans. Sands received the rev0cation 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?

1. No contract was formed because the offer failed to state an expiration date.
2. A contract was formed on the day Jackson received Sands’ acceptance.
3. No contract was formed because Sands received the rev0cation of the offer before Sands accepted the offer.
4. A contract was formed on the day Sands mailed the acceptance to Jackson.

Answer 61

Explanation

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 rev0cation of the offer, and Sands accepted after

receiving the rev0cation. However, the rev0cation was invalid because the offer was a merchant’s firm offeF–an

offer made by a merchant in writing giving assurances that it will be kept open. Such offers are irrev0cable 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 irrev0cable 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.

Choice ‘‘a’’ is incorrect. Offers need not state an expiration date to be valid. Absent an expiration date, offers are open for a reasonable time.

Choice ‘‘c’’ is incorrect. As explained above, the rev0cation was ineffective because the offer was a merchant’s firm offer and could not be rev0ked for a reasonable time.

Choice ‘‘b’’ is incorrect. Unless the offer provides otherwise, it is effective upon dispatch rather than receipt.

Question 62

Question CPA-08229

What type of conduct generally will make a contract v0idable?

1. Fraud in the inducement.
2. Physical coercion.
3. Contracting with a person under guardianship.
4. Fraud in the execution.

Answer 62

Explanation

Choice ‘‘a’’ 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 v0idable.

Choice ‘‘d’’ is incorrect. Fraud in the execution (that is, the party did not know that he was signing a contract) renders a contract v0id.

Choice ‘‘b’’ is incorrect. Physical coercion (or the threat of physical coercion) is a type of duress that renders a contract v0id rather than v0idable.

Choice ‘‘c’’ is incorrect. Entering into a contract with a person who is without capacity and has a guardian appointed (that is, after a court has declared the person incompetent) renders the contract v0id.

Question 64

What is the significance of FOB Shipping Point and FOB Destination?

Accountants report a merchandiser’s and a manufacturer’s revenues when a sale is made. The term, FOB Shipping Point, indicates that the sale occurred at the shipping point—at the seller’s shipping dock. FOB Destination indicates that the sale will occur when it arrives at the destination—at the buyer’s receiving dock.

Accountants also assume that the cost of transporting the goods corresponds to these terms. If the sale occurred at the shipping point (seller’s shipping dock), then the buyer should take responsibility for the cost of transporting the goods. (The buyer will record this cost as Freight-In or Transportation-In.) If the sale doesn’t occur until the goods reach the destination (terms are FOB Destination), then the seller should be responsible for transporting the goods until they reach the buyer’s unloading dock. (The seller will record the transportation cost as Freight-Out, Transportation-Out, or Delivery Expense.)

Question 65

1084 1092 1126 1128 1131 1148 2307