II. Business Law

Question 1

Which agency is responsible for determining the continuing professional education requirements for licensed CPAs?

1. The Securities and Exchange Commission
2. The board of accountancy for the state in which the licensed CPA practices
3. The American Institute of Certified Public Accountants
4. The National Association of State Boards of Accountancy

Answer 1

State boards of accountancy establish CPE requirements.

Question 2

Which of the following contract subject matters would be covered by the Sales Article 2 of the Uniform Commercial Code?

1. A loan from a credit union for the purchase of a mobile home
2. A financing agreement with Ford Motor Credit for the purchase of an Expedition SUV
3. A contract for the purchase and installation of four tires for a car
4. A security interest in consumer’s financed purchase of a refrigerator

Answer 2

3.

Since the tires are the major part of the cost in the contract, the contract would be under UCC Article 2.

Question 3

aq.app.laws.006_2-18

Which of the following is a true statement about the UCC?

1. It applies in all situations in which goods are part of the contract.
2. It allows for more flexibility than common law.
3. The UCC applies only to sales of goods by merchants.
4. All of the above.

Answer 3

2.

The UCC was written to help sales transaction be conducted more simply and uniformly.

Question 4

aq.app.laws.007_2-18

Which of the following subject matters would be governed by the UCC?

1. Dentures fitted by a dentist
2. Growing crops
3. Purchase of a partnership interests
4. The lease of a rototiller

Answer 4

2.

Crops, whether harvested or growing, are governed by UCC Article 2 Sale of Goods.

Question 5

app.laws.008_0819

Which of the following contract subject matters would be covered by the Sales Article 2 of the Uniform Commercial Code?

1. A loan from a credit union for the purchase of a mobile home
2. A financing agreement with Ford Motor Credit for the purchase of an Expedition SUV
3. A contract for the purchase and installation of four tires for a car
4. A security interest in consumer’s financed purchase of a refrigerator

Answer 5

3.

Since the tires are the major part of the cost in the contract, the contract would be under UCC Article 2.

Question 6

aq.type.contract.005_0718

Sean Reckers has had a guardian appointed for him by a court. After the appointment, Sean entered into a contract with Reince Larabee for the purchase of Larabee’s 400-acre ranch. The contract between Reckers and Larabee is

1. Voidable.
2. Void.
3. Valid.
4. Voidable at the option of Reckers.

Answer 6

2.

When one party has been declared incompetent by a court, neither side can enforce the contract and the courts do not honor it.

Question 7

assess.AICPA.082067REG-I.A_2-18

Mary offers to buy Hal’s desktop computer for $400. Hal sends Mary an e-mail of acceptance. The $400 is to be paid upon Hal’s delivery of the computer. Which of the following properly classifies this contract?

1. This is a bilateral, valid, executory contract.
2. This is a bilateral, valid, executed contract.
3. This is a unilateral, express, executory contract.
4. This is a unilateral, implied-in-fact, executed contract.

Answer 7

1.

A bilateral contract is a promise in exchange for a promise creating a contract. Mary made the offer (promise) to buy Hal’s desktop computer, and Hal accepted her offer by the promise to sell. The contract meets the four requirements for a valid contract; offer and acceptance, consideration (computer for $400), nothing to indicate either party lacks legal capacity, and selling and buying of a computer is a legal purpose. An executory contract is one not fully performed. Neither party has performed their part of the contract. Thus, this contract is classified as bilateral, valid, and executory.

Question 8

Question 4 (PQ3788)

Acceptance of a bilateral offer sent by an authorized medium is effective only upon the offeror’s receipt of the acceptance.

• True
• False

Answer 8

False

Question 9

Question 5 (PQ3807)

Jane has a one-year $60,000 contract to perform accounting services for John. John is so pleased with the quality of her work, he offers and she accepts a promise to pay her an additional $5,000 at the end of the year without any change of her duties. This promise is enforceable.

• True
• False

Answer 9

False

Question 10

Question 2 (pq.consideration.002_2017)

Ralph is building a gazebo for the B & B Inn. After Ralph signed the contract with B&B, lumber prices rose $0.58 per foot. Ralph asks B&B to cover the cost of the price increase in addition to paying the original amount in their contract. Because the contract is covered by the UCC, B&B can agree and the extra cost must be paid despite the lack of additional consideration on Ralph’s part.

• True
• False

Answer 10

False

Question 11

aq.consideration.002_0818

Susan Nathaniel and Bart Nesbitt entered into a contract for Bart to sell to Susan 350 adult tricycles for use in the retirement communities owned by Susan. The price in the contract for each tricycle was $420. After the contract was signed, Bart called Susan and explained that one of his suppliers for tricycle parts had increased his prices by 10%. Bart asked Susan if she would be willing to pay $425 per tricycle in order to help him cover the cost increases. Susan agreed to do so. When the time for payment came, Susan paid only $420 per tricycle, explaining “I had a valid contract for $420. The price increase of a supplier is not my problem.” Which of the following statements is correct about Bart’s rights?

1. Bart cannot collect the extra $5 per tricycle because he provided no additional consideration to Susan when she agreed.
2. Bart cannot collect the additional $5 per tricycle because the agreement was entered into under duress.
3. Bart is entitled to collect the extra $5 per tricycle.
4. Bart cannot collect the additional $5 per tricycle because the parol evidence rule prohibits proof of the modification.

Answer 11

3.

Under the UCC, if the parties agree in good faith to a modification of their contract, then that modification is enforceable even if there is no additional consideration. Also, under the UCC, the contract can be modified through the good faith agreement of the parties with only one side receiving additional consideration.

Question 12

aq.consideration.003_0818

During a fundraiser for a local charity, Garrett Withycombe pledged $50,000 to be paid over a five-year period. The charity was then able to secure matching federal grants based on the pledges from the event in order to grow its programs. Garrett paid his $10,000 in his first year but by the second year had experienced some financial setbacks and did not make the $10,000 donation. Which of the following statements is correct about the charity’s rights?

1. The charity has the right to collect the pledge amount from Garrett.
2. The charity is a mere donee of a gift and promises to make gifts cannot be enforced.
3. Absent consideration on its part, the charity has no contractual standing to enforce Garrett’s promise.
4. The charity is a mere donee of a gift and promises to make gifts cannot be enforced, and absent consideration on its part, the charity has no contractual standing to enforce Garrett’s promise.

Answer 12

1.

Charitable subscriptions, although lacking consideration (they are a gift), are enforceable to the extent that the charity relied on the promised gifts—in this case, obtaining federal matching funds.

The doctrine of charitable subscriptions permits charities to enforce promised gifts.

Question 13

AICPA.901121REG-BL

Which of the following requires consideration to be binding on the parties?

1. Material modification of a contract involving the sale of real estate.
2. Ratification of a contract by a person after reaching the age of majority.
3. A written promise signed by a merchant to keep an offer to sell goods open for 10 days.
4. Material modification of a sale of goods contract under the UCC.

Answer 13

1.

A real estate contract cannot be modified unless additional or new consideration is given. Only UCC contracts for the sale of goods can be modified without new consideration.

*Ratification can be done orally. If Tom has a contract when he is a minor, turns 18, and then says to his creditor, “I agree to be bound by our contract,” then he has ratified the contract.

Question 14

Grove is seeking to avoid performing a promise to pay Brook $1,500. Grove is relying on lack of consideration on Brook’s part.

Grove will prevail if Grove can establish that

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

Answer 14

1.

Past actions cannot count as consideration for current promises. For consideration to exist, a contract must be a bargained for exchange. If, for example, you took me to work yesterday, and I say today, “Because you gave me a ride yesterday, I promise to pay you $20,” you cannot hold me to the promise. There is no consideration.

Question 15

AICPA.921114REG-BL

Castle borrowed $5,000 from Nelson and executed and delivered to Nelson a promissory note for $5,000 due on April 30. On April 1, Castle offered, and Nelson accepted, $4,000 in full satisfaction of the note. On May 15, Nelson demanded that Castle pay the $1,000 balance on the note. Castle refused.

If Nelson sued for the $1,000 balance, Castle would

1. Win, because the acceptance by Nelson of the $4,000 constituted an accord and satisfaction.
2. Win, because the debt was unliquidated.
3. Lose, because the amount of the note was not in dispute.
4. Lose, because no consideration was given to Nelson in exchange for accepting only $4,000.

Answer 15

1.

This answer is correct because although the amount of the debt is a certain amount ($5,000) and a liquidated debt, Castle offered a lesser sum ($4,000) 30 days before the debt was due as full satisfaction for the $5000 debt. This amount was accepted (accord) by Nelson. The giving-up of 30 days before payment was due is consideration and discharges the $5,000 debt.

Question 16

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Admission of evidence of a contract modification violates the parol evidence rule.

• True
• False

Answer 16

False

Question 17

(PQ3791)

Jim agrees orally with West Bank to guarantee a loan that West Bank will make to Susan to purchase an existing restaurant upon Susan’s agreement to pay Jim 10% of the gross revenues for two years. All parties orally agree. Jim’s guaranty agreement with West Bank is unenforceable under the Statute of Frauds.

• True
• False

Answer 17

False

Question 18

(PQ3794)

On April 1, the president of Gala University orally offers Sue a nine-month academic contract for $200,000 beginning September 1. Sue orally accepts.

Is this oral nine-month contract enforceable?

• True
• False

Answer 18

False

From April 1 of one year to September 1 of the next year is longer than one year.

Question 19

AICPA.050905-REG

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

Answer 19

4.

Fresno, as an adult, is bound to a valid contract and must perform even though Bronson as a minor had the right to disaffirm the contract.

Question 20

AICPA.130705REG

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

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

Answer 20

1. A mutual mistake does not make the contract void (the contract is not illegal). A mutual mistake simply means the parties can rescind the agreement—they have a defense.
2. Undue influence means that the contract is voidable, not void.
3. Physical threats do render a contract void.
4. Improper threats make the contract voidable at the option of the party who is threatened.

Question 21

AICPA.130707REG

What type of conduct generally will make a contract voidable?

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

Answer 21

1. This type of conduct creates void contracts because the nature of the paperwork has been falsified.
2. This creates a voidable contract. If someone misrepresents information about the contract subject matter, you are free to go ahead with the contract or rescind it—it is voidable.
3. This type of conduct creates contracts that are void.
4. Contracts with those lacking mental capacity to manage their affairs and who have been declared so (which is what a guardianship is) are void.

Question 22

AICPA.900523REG-BL

Paco Corp., a building contractor, offered to sell Preston several pieces of used construction equipment. Preston was engaged in the business of buying and selling equipment.

Paco’s written offer had been prepared by a secretary who typed the total price as $10,900, rather than $109,000, which was the approximate fair market value of the equipment.

Preston, on receipt of the offer, immediately accepted it. Paco learned of the error in the offer and refused to deliver the equipment to Preston unless Preston agreed to pay $109,000.

Preston has sued Paco for breach of contract.

Which of the following statements is correct?

1. Paco will not be liable because there has been a mutual mistake of fact.
2. Paco will be able to rescind the contract because Preston should have known that the price was erroneous.
3. Preston will prevail because Paco is a merchant.
4. The contract between Paco and Preston is void because the price set forth in the offer is substantially less than the equipment’s fair market value.

Answer 22

1. There was not a mutual mistake, because both sides did not make an error. This was a unilateral mistake or one made by a single person. A mutual mistake would occur, for example, if both a buyer and a seller thought they were transferring a diamond ring when in fact it was a cubic zirconium ring.
2. Usually a unilateral mistake cannot be rescinded. To have the right to rescind, the other side must have actually known of the error, or the error must be so large that the other side should reasonably have known of the error. Clearly, an error of nearly $100,000 should have been detected by the buyer, and so this contract may be rescinded.
3. The fact that one party is a merchant does not affect this analysis. Usually, a unilateral mistake cannot be rescinded. To have the right to rescind, the other side must have actually known of the error, or the error must be so large that the other side should reasonably have known of the error. Clearly, an error of nearly $100,000 should have been detected by the buyer, and so this contract may be rescinded.
4. Usually a unilateral mistake cannot be rescinded. To have the right to rescind, the other side must have actually known of the error, or the error must be so large that the other side should reasonably have known of the error. An error that is not grossly below market value will not meet these criteria. Here, clearly, an error of nearly $100,000 should have been detected by the buyer, and so this contract may be rescinded for that reason.

Question 23

AICPA.920528REG-BL

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. Appraised value.
3. Prediction.
4. Immaterial fact.

Answer 23

2.

This answer is correct because to constitute fraud the seller must intentionally state a false statement of fact to the buyer. Appraisals are performed by experts and are considered as a factual representation of the value of the property.

Therefore, a seller’s intentional misrepresentation of an appraised value is fraud.

Question 24

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

Answer 24

3.

Minors may disaffirm a contract before they turn 18 at any time and then for a reasonable time after they turn 18. A reasonable time is not likely to be more than, say, six months to a year. However, two days is very clearly within the reasonable time window.

Question 25

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 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 will

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

Answer 25

3.

This answer is correct because for duress to be proved Kent would have to show that Maco’s actions were threats that overcame Kent’s free will forcing Kent into a contract at the $20 rate. Kent needed money and willingly agreed to the $20 rate. Although Maco benefited from the contract rate, it did not force Kent to enter into the $20 rate contract.

Question 26

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

Answer 26

1.

Usually, a unilateral mistake is not a defense to contractual liability. However, when the error is computational and the other party knew or should have known of the error, it may be used as a defense.

Question 27

Robin, 17, purchased a used Mini Cooper auto from European Motors for $3,000. Robin used falsified identification that showed her to be 19 in order to purchase the car. Robin drove the car for seven months. On the day of her 18th birthday, Robin decided that she no longer wanted the car. However, she had been in an accident with the car and had not had the damages repaired because the cost of those repairs was $2,000. Robin took the car to European Motors and asked for her money back. European Motors has refused to accept the car because of the material damage to the body of the car. Which of the following statements is correct?

1. Because Robin is unable to return the car in the same or reasonable condition, it is too late to disaffirm the contract.
2. Robin has the right to disaffirm the contract and receive her money back.
3. Robin has waited too long to disaffirm the contract and is no longer entitled to get her money back.
4. Because Robin deceived European Motors about her age, she cannot exercise her rights to disaffirm the contract.

Answer 27

2.

A minor can disaffirm a contract at any time prior to or for a reasonable time after reaching the age of majority.

4.

Incorrect. Minors can deceive adult parties and still have the right to disaffirm the contract. Because minors lack the capacity to contract, they lack the capacity to misrepresent. Society places the burden on the adult parties to verify age and identification. Some states do permit actions in fraud or tort by adult parties against minors for their actions in formation but still follow the rules allowing minors to disaffirm.

Question 28

A buyer can revoke acceptance if goods the buyer accepted were accepted with the seller’s promise to fix a defect that the seller has not fixed.

• True
• False

Answer 28

True

Question 29

A buyer contracts to purchase 100 cases of copy paper. The seller by mistake ships 200 cases of copy paper. The buyer could legally, and without liability, reject the entire 200-case shipment.

• True
• False

Answer 29

True

Question 30

If a contract with an artist requires the personal satisfaction of the buyer with the painting before the purchase price will be paid, the personal satisfaction requirement is a condition precedent.

• True
• False

Answer 30

True

Question 31

Roxanne Perini signed a consulting agreement with Fox Industries, Inc. to perform an on-site study of the Fox culture and make recommendations in the areas of compliance, HR, and management structure. The study and Roxanne’s report were to be completed by May 15, 2018. Roxanne signed the agreement on January 31, 2018, but did not receive an executed agreement from Fox until February 28, 2018. The agreement called for seven on-site visits. Roxanne contacted the Fox project manager assigned to work with her on her visits on February 28, 2018. The project manager did not get back to Roxanne until March 15, 2018, and Roxanne’s first visit was not arranged until March 31, 2018. Roxanne was not able to complete her report until June 30. Fox has refused to pay Roxanne for her work because it was late. Which of the following statements is correct?

1. Roxanne is entitled to payment.
2. Roxanne is not entitled to payment because she went along with the delays instead of modifying the contract.
3. There cannot be substantial performance in a service contract and because Roxanne was late, she is not entitled to payment.
4. Fulfillment of the condition precedent requirement does not apply to service contracts.

Answer 31

1.

The condition precedent of access was not met. The late signing of the agreement and the tardiness of the project manager resulted in denial of access to Roxanne. She has not breached the contract and is entitled to payment.

Question 32

B ordered a carload of first-quality lettuce from S. S delivered a carload of second-quality lettuce. B phoned S to tell him that he was rejecting the shipment, explaining why. S told B to hold the lettuce for a few hours; he would furnish instructions as to what to do with it later in the day. By evening, S hadn’t contacted B again. B, afraid that the lettuce would spoil soon, sold it that evening to T for a fair price. The next morning S instructed B to ship the lettuce to M. When B explained why he couldn’t do that, S accused him of conversion. Which of the following statements is correct?

1. B has done what is required under the UCC when the buyer has rejected perishable goods.
2. B had no title to the lettuce and was not authorized by the seller to sell the lettuce.
3. B has improperly converted S’s property, and S is entitled to damages.
4. B’s taking action is a form of acceptance; therefore, B is required to pay for the lettuce.

Answer 32

1. Correct! The buyer’s obligation is to hold the goods for the seller and await instructions. If the seller does not give timely instructions, the buyer is authorized to sell the goods.
2. Incorrect. Title or no title, B is authorized to hold the goods for the seller and await instructions. In the case of perishable goods, the buyer can sell the goods if the instructions are not forthcoming.
3. Incorrect. There is no conversion if the buyer has followed the rules for rejection—await instructions and if none are forthcoming, in the case of perishable goods, go ahead and sell them.
4. Incorrect. The UCC provides that when there are perishable goods, the buyer should wait a reasonable amount of time for instructions, and if no instructions come from the seller, the buyer should do what he can to mitigate the loss for the seller, which is what the buyer did here.

Question 33

In 1983, Dart bought an office building from Graco under a written contract signed only by Dart. In 2015, Dart discovered that Graco made certain false representations during their negotiations concerning the building’s foundation. Dart could have reasonably discovered the foundation problems by 1989. Dart sued Graco claiming fraud in the formation of the contract.

Which of the following statements is correct?

1. The parol evidence rule will prevent the admission into evidence of proof concerning Dart’s allegations.
2. Dart will be able to rescind the contract because both parties did not sign it.
3. Dart must prove that the alleged misrepresentations were part of the written contract because the contract involved real estate.
4. The statute of limitations would likely prevent Dart from prevailing because of the length of time that has passed.

Answer 33

1. The parol evidence rule prohibits the inclusion of oral agreements when there is a written contract that fully reflects the intent of the parties. It does not keep a person from claiming fraud was committed.
2. Both sides do not need to sign to have a valid writing under the Statute of Frauds. So long as Graco has signed, the writing is sufficient.
3. The Statute of Frauds requires that a contract for the sale of real property be in writing. However, an action for fraud may still be brought, even if oral. This is a necessary allowance as those who commit fraud are rarely dumb enough to put the false statements in writing.
4. A statute of limitations sets a time limit past which a lawsuit cannot be brought. Unless a problem is undiscoverable, the time limit starts to expire at the time of the fraudulent transfer. A statute of limitations is usually four years or less; it is highly unlikely a statute would last for 26 years.

Question 34

The statute of limitations for an alleged breach of contract

1. Does not apply if the contract was oral.
2. Requires that a lawsuit is commenced and a judgment rendered within a prescribed period of time.
3. Is determined on a case by case basis.
4. Generally commences on the date of the breach.

Answer 34

1. A statute of limitations sets a fixed period (usually four years) that is the maximum amount of time a party has to file a lawsuit. It applies to all contracts—spoken and oral.
2. A statute of limitations sets a fixed period that is the maximum amount of time a party has to file a lawsuit. So long as the lawsuit is started before the time period expires, the statute is met. The lawsuit does not have to be finished within the time period.
3. A statute of limitations sets a fixed period that is the maximum amount of time a party has to file a lawsuit. It does not vary on a case-by-case basis.
4. A statute of limitations sets a fixed period (usually four years) that is the maximum amount of time a party has to file a lawsuit. In a breach of contract case, the period begins at the time the contract is breached.

Question 35

Which of the following results in an automatic discharge of performance obligations under a contract?

1. The filing of bankruptcy by either of the parties.
2. The death of one of the parties.
3. All of the above result in the automatic discharge of performance under a contract.
4. The expiration of the statute of limitations.

Answer 35

1. Incorrect. Only a bankruptcy decree(not filing) results in a discharge of contract obligations.
2. Incorrect. Only personal service contracts (artist doing a painting or singer doing a performance) are automatically discharged when there is the death of the party providing the personal service.
3. Incorrect. There are refinements of two of the three answers. Bankruptcy decrees result in discharges, not filings. Personal service contracts provide an automatic discharge, but not all contracts are discharged by death.
4. Correct! When suit can no longer be brought on the contract, the duties under the contract are discharged.

Question 36

Parc hired Glaze to remodel and furnish an office suite. Glaze submitted plans that Parc approved. After completing all the necessary construction and painting, Glaze purchased minor accessories that Parc rejected because they did not conform to the plans. Parc refused to allow Glaze to complete the project and refused to pay Glaze any part of the contract price. Glaze sued for the value of the work performed. Which of the following statements is correct?

1. Glaze will lose because Glaze breached the contract by not completing performance.
2. Glaze will win because Glaze substantially performed, and Parc prevented complete performance.
3. Glaze will lose because Glaze materially breached the contract by buying the accessories.
4. Glaze will win because Parc committed anticipatory breach.

Answer 36

1. There was no material breach. Glaze had substantially performed, and his or her failure to complete performance was not voluntary but was forced by Parc. Glaze will win the lawsuit.
2. There was no material breach. Glaze had substantially performed, and his or her failure to complete performance was not voluntary but was forced by Parc. Glaze will win the lawsuit.
3. There was no material breach, because the nonconformity was not significant. Glaze had substantially performed, and his or her failure to complete performance was not voluntary but was forced by Parc. Glaze will win the lawsuit.
4. Parc’s refusal to allow Glaze to complete the project is a material breach, not an anticipatory breach. Parc can sue for damages plus for the value of the work performed.

Question 37

Under the Sales Article of the UCC, which of the following statements is correct regarding a seller’s obligation under a F.O.B. destination contract?

1. The seller is required to arrange for the buyer to pick up the conforming goods at a specified destination.
2. The seller is required to tender delivery of conforming goods at a specified destination.
3. The seller is required to tender delivery of conforming goods at the buyer’s place of business.
4. The seller is required to tender delivery of conforming goods to a carrier who delivers to a destination specified by the buyer.

Answer 37

2.

If the shipment terms require the seller to deliver goods under an F.O.B. destination contract, the seller is required to properly “tender” the goods to the buyer at the specific destination stated in the contract (not a destination specified by the buyer). This place can be other than the buyer’s place of business.

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Question 38

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

Answer 38

1.

Correct! Parties can agree in advance of a breach the amount of damages to be paid in the event of a future default (breach). To be valid and enforceable, at the time the contract was entered into, damages must be difficult to estimate in the event of a breach, and the amount set as damages must be a reasonable estimate (not excessive). If the amount is unreasonable (excessive), the liquidated damage clause is deemed a penalty, and the clause in unenforceable.

2.

Incorrect. This answer is incorrect because if, at the time of contract formation, either damages would not be difficult to estimate or the amount set as damages is considered as a penalty, the liquidated damage clause would be unenforceable.

Question 39

Jane hired Delta to cut and remove nine trees from Jane’s lot for $1,000. Delta cut all of the trees but only removed about half of the debris. Will Jane be successful if she asks a court to force Delta to finish removing the debris since Jane has already paid Delta the $1,000?

1. Jane cannot force Delta to remove the debris.
2. Jane is entitled to a refund of her $1,000.
3. Jane is entitled to specific performance for removal of the debris.
4. Jane is entitled to a refund of her $1,000 and specific performance for removal of the debris.

Answer 39

1.

Correct! In suits for breach of contract, a court will award specific performance only where the obligation is to deliver a unique item, such as real estate or a rare artifact. Courts also will force a person to refrain from doing something they have agreed in a contract not to do. But to force a person to perform services would constitute involuntary servitude.

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Question 40

Jason’s Jellies had a contract to furnish small jars of jelly to Ricardo’s Bistro. Jason’s was able to obtain several larger supply contracts that were more profitable, but Jason’s could not continue to supply Ricardo’s. Which of the following is correct about Ricardo’s rights?

1. Ricardo has a right to specific performance from Jason.
2. Ricardo has the right to punitive damages because Jason breached deliberately.
3. Ricardo is entitled to liquidated damages for each day that he lost service.
4. Ricardo is entitled to compensatory and incidental damages.

Answer 40

1. Specific performance is available only under the UCC when the goods are rare or unique. Jelly does not qualify.
2. Punitive damages are available in rare circumstances in contracts and generally only in fraud cases. Most breaches are intentional, but that conduct (breaching the contract) is not sufficient for punitive damages.
3. There is no provision in the contract for liquidated damages.
4. Ricardo can recover whatever the additional costs of finding a substitute contract along with the costs of obtaining such a supplier as well as any legal fees incurred to recover the cost differential.

Question 41

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

Answer 41

1. This answer is incorrect because punitive damages are generally not awarded in an action for breach of contract. Kaye’s breach does permit Hodges to seek compensatory damages, damage to compensate for the loss of the bargain.
2. This answer is incorrect because an aggrieved party, upon breach of contract, cannot have both specific performance (requiring Kaye to deed the property to Hodges), and compensatory damages for failure to deliver the deed. To allow both would result in an unjust enrichment for Hodges.
3. This answer is incorrect because first punitive damages are rarely awarded in breach of contract cases, and second because consequential damages (foreseeable damages resulting beyond the contract itself such as loss profits) require Kaye to know or have reason to know of circumstances that will cause the nonbreaching party to suffer additional loss. There are no facts that Kaye had any such knowledge.
4. This answer is correct because Hodges has a choice of these remedies. Because the subject of the contract (realty) is unique (no two pieces of property with the same legal description) and damages are really inadequate because performance is more valuable than money damages, Hodges can file a petition for specific performance requiring Kaye to deed the property to Hodges. Hodges could elect instead to file a lawsuit for breach of contract and seek damages (for the loss of the bargain) actually sustained.

Question 42

Under the Sales Article of the UCC, which of the following rights is available to a seller when a buyer materially breaches a sales contract?

Right to cancel the contract Right to recover damages

A. Yes Yes

B. Yes No

C. No Yes

D. No No

1. Row A
2. Row B
3. Row C
4. Row D

Answer 42

1.

An aggrieved party may do both. It may cancel (and rescind) the contract upon the occurrence of a material breach, and it may sue for compensatory damages to cover the damages associated with the breach, which is the difference between the market price at the time of place of tender and unpaid contract price plus incidental and consequential damages (cost of breach).

Question 43

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

Answer 43

1.

Only in the event of a material, or substantial, breach can a party to a contract receive the full array of remedies available by law or contract. This breach is not material, because the fixtures were of only “slightly lesser quality” and “meet White’s needs.” Thus, White’s recovery will be limited to the difference in value between the Perfection and Ace fixtures. Had the breach been material, White would have had the right to demand that the fixtures be replaced with Ace fixtures.

Question 44

Under the UCC Sales Article, which of the following legal remedies would a buyer not have when a seller fails to transfer and deliver goods identified to the contract?

1. Suit for specific performance.
2. Suit for punitive damages.
3. Purchase substitute goods (cover).
4. Recover the identified goods (replevin).

Answer 44

2.

Punitive damages are not usually available in suits for breach of contract and not provided for under the UCC for breach of contract of sales of goods. The goal of contractual damages is to give the wronged party the “benefit of the bargain,” not to punish the person who has breached the contract. Punitive damages are usually available only in other types of lawsuits, such as intentional tort suits.

Question 45

Gray Fabricating Co. and Pine Corp. agreed orally that Pine would custom manufacture a processor for Gray at a price of $80,000.

After Pine completed the work at a cost of $60,000, Gray notified Pine that the processor was no longer needed. Pine is holding the processor and has requested payment from Gray. Pine has been unable to resell the processor for any price. Pine incurred storage fees of $1,000.

If Gray refuses to pay Pine and Pine sues Gray, the most Pine will be entitled to recover is

1. $60,000
2. $61,000
3. $80,000
4. $81,000

Answer 45

4.

The point of contractual damages is to give the wronged party the “benefit of the bargain.” In this case, Gray expected $80,000 as that benefit in exchange for the processor. It did not get any of that expectation, and incurred an extra $1000 in expenses. To make it realize its expected benefit of $80,000, Gray must give Pine $81,000, as it is currently out $1000 after paying the storage. It will get $81,000.

Question 46

Under the Sales Article of the UCC, which of the following statements regarding liquidated damages is(are) correct?

I. The injured party may collect any amount of liquidated damages provided for in the contract.

II. The seller may retain a deposit of up to $500 when a buyer defaults even if there is no liquidated damages provision in the contract.

1. I only.
2. II only.
3. Both I and II.
4. Neither I nor II.

Answer 46

2.

Correct! Where the seller justifiably withholds delivery of goods and the buyer has made a deposit or payment and there is no liquidated damage clause, the seller may keep $500 or 20% of the purchase price, whichever is less.

3.

Incorrect. Liquidated damages clauses are valid only if they are reasonable in terms of the actual loss caused and the actual losses accused would be difficult to estimate. If there is no liquidated damage clause and the buyer has made a deposit or payment, the seller may keep $500 or 20% of the purchase price, whichever is less.

Question 47

Lazur Corp. entered into a contract with Baker Suppliers, Inc. to purchase a used word processor from Baker. Lazur is engaged in the business of selling new and used word processors to the general public. The contract required Baker to ship the goods to Lazur by common carrier pursuant to the following provision in the contract: “FOB Baker Suppliers, Inc. loading dock.” Baker also represented in the contract that the word processor had been used for only ten hours by its previous owner. The contract included the provision that the word processor was being sold “as is” and this provision was in a larger and different type style than the remainder of the contract.

Assume that Lazur refused to accept the word processor even though it was in all respects conforming to the contract and that the contract is otherwise silent. Under the UCC Sales Article,

1. Baker can successfully sue for specific performance and make Lazur accept and pay for the word processor.
2. Baker may resell the word processor to another buyer.
3. Baker must sue for the difference between the market value of the word processor and the contract price plus its incidental damages.
4. Baker cannot successfully sue for consequential damages unless it attempts to resell the word processor.

Answer 47

1. Incorrect. Specific performance is not a remedy available to the seller, since the seller is only receiving money, which is not unique. Baker cannot force Lazur to accept the word processor.
2. Correct! A seller has the right to resell goods to another if the buyer refuses to accept the goods upon delivery.
3. Incorrect. Baker has a couple of additional remedies available. Baker can recover the full contract price plus incidental damages if he is unable to resell the identified goods. Alternatively, if the difference between the market value and contract price is inadequate to place Baker in as good a position as performance would have, then Baker can sue for lost profits plus incidental damages.
4. Incorrect. Baker could sue for consequential damages that Lazur had reason to know Baker would incur as a result of Lazur’s breach.

Question 48

Wendy Davis purchased a life insurance policy from Penn Life that named her son, Malcolm, as her beneficiary. Wendy died and Penn Life refused to pay Malcolm the policy amount. Which of the following is not correct about who can bring against whom because of the nonpayment?

1. Malcolm v. Wendy’s estate.
2. Malcolm v. Penn Life.
3. Wendy’s estate v. Penn Life.
4. All of the above represent suits that can be brought because of the nonpayment.

Answer 48

1. Malcolm is a donee beneficiary and does not have a right of action against his mother’s estate because the proceeds were a gift.
2. Incorrect. The donee beneficiary has the right to bring suit against the nonperforming party to the original contract.
3. Incorrect. As original parties to the contract, Wendy’s estate can bring suit on behalf of Wendy.
4. Incorrect. At least one of the answers is not a correct litigation possibility.

Question 49

Rory Ziegfield had a mortgage with PNB Bank. PNB Bank sold Rory’s mortgage to American Thrift on April 30, 2018. Rory made her usual monthly payment to PNB Bank on May 1, 2018. Rory also made her June 1, 2018, payment to PNB Bank. On June 3, 2018, American Thrift notified Rory that it now held her mortgage and included payment information for her as well as a notice that she was two months behind on her payments. Which of the following is correct about the rights of the three parties in this situation?

1. Rory will have to make up the two payments and then proceed to collect two payments from PNB Bank.
2. PNB Bank will have to pay Rory because it failed to notify her of the assignment.
3. Rory does not need to pay the missed two months to American Thrift.
4. American Thrift has no remedies against PNB Bank because American Thrift failed to do the required notifications of assignment.

Answer 49

1. Incorrect. Upon an assignment, it is the responsibility of the assignee (American Thrift) to notify the promisor (Rory) about the change in ownership. Until that notification has occurred, the promisor properly continues to pay the original promise (PNB Bank).
2. Incorrect. Upon an assignment, it is the responsibility of the assignee (American Thrift) to notify the promisor (Rory) about the change in ownership.
3. Correct! Upon an assignment, it is the responsibility of the assignee (American Thrift) to notify the promisor (Rory) about the change in ownership. Until that notification has occurred, the promisor properly continues to pay the original promise (PNB Bank).
4. Incorrect. American Thrift will have rights against PNB because of the date of the assignment. The failure to notify Rory does not mean that the assignment agreement cannot be enforced against PNB.

Question 50

Rory Ziegfield had a mortgage with PNB Bank. PNB Bank sold Rory’s mortgage to American Thrift on April 30, 2018. If Rory fails to make her mortgage payments, which of the following statements is correct?

1. American Thrift has no rights against PNB.
2. Both American Thrift and PNB Bank have the right to take steps to ensure that Rory fulfills her payment obligations.
3. American Thrift does not have the right to enforce Rory’s mortgage through foreclosure.
4. Rory is excused from payment because this type of contract is personal and cannot be assigned.

Answer 50

1. Incorrect. An assignment does not relieve the original parties in the assigned contract of liability. Absent a release, PNB has made a warranty about the right to payment.
2. Correct! Either one or the two together have the right to enforce the contract with Rory, one as an original party and the other as an assignee.
3. Incorrect. American Thrift, as a substituted party on an agreement, does have the right to enforce its rights against Rory.
4. Incorrect. The right to payment, which is not personal, can be assigned. The right to receive credit would be personal and could not be assigned. Rory is still obligated to make payments.

Question 51

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

Answer 51

4.

This answer is correct because unless the contract terms prohibit assignment, or the rights are personable to the person rendering them, or the assignment will materially increase or alter the risk or duties of the obligor, contract rights are generally assignable.

Question 52

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. Be in writing and signed by the assignor.
3. Not materially increase the other party’s risk or duty.
4. Not be revocable by the assignor.

Answer 52

1. An assignment may be entirely gratuitous. If I a am a landlord and I have a right to receive monthly rent payments from a tenant, I may assign my rights to that payment without consideration to my son or daughter to use to pay college expenses
2. The Statute of Frauds requires a writing only if a guaranty is involved, the contract cannot be performed within one year, an interest in real property will be transferred, or a contract is for a sale of goods priced at $500 or more. There is no other requirement that an assignment be in writing to be enforceable. Thus, an oral promise of an assignment is generally enforceable.
3. Generally, any right can be assigned. One exception is an assignment that materially increases the risks of the obligor (party obligated to perform the contact). For example, if I have a grocery store in Dallas and have a contract with ABC under which they will deliver produce to me, I cannot assign that right to a store in Los Angeles. ABC’s shipping costs would rise substantially
4. Gratuitous assignments are revocable at any time and are still valid.

Question 53

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

1. Reimbursement (Indemnification).
2. Subrogation.
3. Contribution.
4. Exoneration.

Answer 53

1. The right of reimbursement is between the debtor and a surety and is the same if there are multiple sureties. Any and all sureties have a right to be “paid back” by a debtor when payment is made on the debtor’s behalf.
2. The right of subrogation is between the debtor and a surety and is the same if there are multiple sureties. A creditor’s rights against a debtor become the rights of the surety or sureties after he/they pay the debtor’s debt.
3. Contribution is a right one co-surety has against another. There cannot be rights between sureties if there is only a single surety.
4. Exoneration has to do with a surety’s right to petition court to require a creditor to seek recovery against the debtor before holding guarantor liable. It has nothing to do with the suretyship arrangement, as we are not concerned with fault in such a situation.

3.

Question 54

Which of the following rights does a surety have?

Right to compel the creditor

to collect from the principal debtor

Right to compel the creditor

to proceed against the principal debtor’s collateral

1. Yes Yes
2. Yes No
3. No Yes
4. No No

Answer 54

4.

A surety is primarily liable on a debt upon debtor’s default. If the creditor wishes to collect from the surety, the creditor may do so. The surety may not compel the creditor to take either of these actions.

Question 55

Which of the following rights does one cosurety generally have against another cosurety?

1. Exoneration.
2. Subrogation.
3. Reimbursement.
4. Contribution.

Answer 55

1. Exoneration is a rare remedy that allows a guarantor to petition a court in equity, which requires the creditor to proceed against the principal before holding any guarantor liable.
2. Subrogation assists a guarantor’s right of reimbursement for payments a guarantor makes. It is a right either cosurety has, but not against another cosurety.
3. Reimbursement is usually a right of reimbursement from a debtor but not from the other cosurety, because payment has been made on the debtor’s behalf.
4. When two people act as a cosurety, neither can generally be held liable for an entire debt. Thus, when one cosurety, upon debtor’s default, pays more than his or her proportional share, the cosurety can recover from the other cosurety the amount paid in excess of his or her share.

Question 56

Ginnie of Ginnie’s Gems purchased inventory for her jewelry store from Tristar Gold through a credit arrangement. Ginnie signed a security agreement with Tristar Gold on May 10, 2018. The security interest was given in her inventory. On May 3, 2018, Ginnie had obtained a line of credit with Bank of the East for the purchase of additional inventory. The inventory was being purchased from Gold Reflections and was a series of specially designed pieces that Gold Reflections would be manufacturing. The pieces were finished on May 31, 2018. Which of following statements is correct?

1. Tristar’s security interest attached before Bank of the East’s security interest.
2. Bank of the East’s security interest attached on May 3.
3. Bank of the East’s interest attached first because its interest covered specific goods and was not general inventory.
4. There cannot be two security interests in the same collateral, and the second one (Tristar) is void.

Answer 56

1. Correct! The security must be identified in order for a security interest to attach. Bank of the East, although having a signed agreement prior to Tristar, could not attach until May 31.
2. Incorrect. In order for a security interest to attached, the goods must be identified, and that did not occur until May 31.
3. Incorrect. What the collateral is does not control attachment; what controls attachment is written agreement, underlying debt, interest in the collateral, and signature or confirmation by the debtor.
4. Incorrect. Generally there are always two or more creditors in the same collateral. Those other interests to not prevent further attachment of the collateral by creditors.

Question 57

Under the Secured Transactions Article of the UCC, which of the following statements is correct regarding a security interest that has not attached?

1. It is effective against the debtor, but not against third parties.
2. It is effective against both the debtor and third parties.
3. It is effective against third parties with unsecured claims.
4. It is not effective against either the debtor or third parties.

Answer 57

4.

For a security interest to attach, the following must be present:

• Underlying debt/obligation;
• Either a security agreement or possession of the collateral by the creditor; and
• Debtor must have interest in the property.
• Until all three are present, the security interest does not attach.

Until attachment, there is no security interest effective against the debtor. Think of this logically - a debtor cannot give a security interest in property in which he/she has no interest. For example, a debtor could pledge as collateral inventory that will be delivered. But, if it is never delivered, i.e., debtor never acquires an interest in it, there can be no rights of third parties in that inventory. You can’t pledge as collateral something you don’t own or have an interest in.

Question 58

Under the Secured Transactions article of the UCC, when does a security interest become enforceable?

1. A contract is executed between a debtor and a secured party under which the debtor gives the secured party rights in collateral if the debtor violates any of the terms contained in the contract.
2. The debtor and the secured party execute a security agreement describing the transfer of the collateral and, after doing so, the secured party files it with the requisite agency.
3. The debtor and the secured party execute a security agreement describing the transfer of collateral from seller to buyer and the secured party retains possession of the agreement.
4. The value has been given, the secured party receives a security agreement describing the collateral authenticated by the debtor, and the debtor has rights in the collateral.

Answer 58

1. Incorrect. The purpose of a security interest is to give the creditor an actual interest in the property, not an “iffy” interest in the future in the event of default or violation of the contract. The security interest exists from the time the debtor agrees to such an interest and its existence gives the creditor the right to proceed against the collateral without establishing that there is a default or breach.
2. Incorrect. Filing is done to perfect a security interest as against other creditors and buyers, but it is not required to create a valid security interest.
3. Incorrect. The debtor can transfer the collateral to the creditor as a means of security, but it is not required.
4. Correct! These are the exact elements for creation of a security interest.

Question 59

Under the Secured Transactions Article of the UCC, which of the following requirements is necessary to have a security interest attach?

Debtor has rights Proper filing of a security Value given by the

in the collateral agreement creditor

Yes Yes Yes

Yes Yes No

Yes No Yes

No Yes Yes

1. Row A
2. Row B
3. Row C
4. Row D

Answer 59

3.

Correct! To create a security interest

1. the creditor must give value,
2. the debtor must have rights in the collateral,
3. the creditor must take possession of the collateral or obtain the agreement in a signed or authenticated writing by the debtor.

Filing is not necessary to create an interest, it is only necessary to perfect an interest that has already been created.

Question 60

Emily has been running a flower shop as a sole proprietor. She purchased refrigerators for her flowers for $25,000 with Pimco Bank providing the funds for the order and purchase of those refrigerators. On February 1, Emily signed a security agreement presented to her by Pimco Bank that covered the refrigerators and all other after-acquired equipment in the flower shop. The refrigerators were delivered on March 10. On March 11, Pimco Bank filed a financing statement covering the refrigerators. On which date was the security interest attached?

1. February 1
2. March 10
3. March 11
4. The security interest has not yet attached because the bank was not the actual seller of the goods.

Answer 60

2.

Correct! Once Emily has an interest in the refrigerators, the security interest attaches. With the refrigerators being delivered, we know that she has an interest in the collateral and meets the third requirement for attachment.

Question 61

Jones lives in Oklahoma and is the owner of a large number of valuable antiques. Treasures Delight, located in Arkansas, is a seller of antiques. Treasures Delight is owned by Sally Delight. Delight offers to purchase all of the antiques owned by Jones paying 60% of the agreed price and, by agreement, signs a security agreement for the balance putting up her entire inventory as security. The security agreement provides for monthly payments. Which of the following is correct?

1. Since this is a purchase money security interest, Jones is automatically perfected without a filing.
2. Although this is a purchase money security interest, Jones must file to have a perfected security interest.
3. There is not a purchase money security interest because being antiques for resell classifies the collateral as inventory.
4. If Jones decides to file for perfection of his security interest, Jones would file a financing statement in Oklahoma.

Answer 61

2.

The antiques are classified as inventory (collateral to be held for resell). Thus, although a purchase money security interest was created, being inventory, a filing is required for perfection.

Question 62

Grey Corp. sells computers to the public. Grey sold and delivered a computer to West on credit. West executed and delivered to Grey a promissory note for the purchase price and a security agreement covering the computer. West purchased the computer for personal use. Grey did not file a financing statement.

Is Grey’s security interest perfected?

1. Yes, because Grey retained ownership of the computer.
2. Yes, because it was perfected at the time of attachment.
3. No, because the computer was a consumer good.
4. No, because Grey failed to file a financing statement.

Answer 62

2.

Filing is not necessary to perfect this security interest, because Grey has a purchase money security interest (PMSI) in the computer to be used for personal use (a consumer good). A PMSI arises when a creditor extends credit that is used to purchase the collateral, as a consumer good, which is the computer in this security agreement. A PMSI is perfected automatically at the time the interest attaches.

Question 63

Emily has been running a flower shop as a sole proprietor. She purchased refrigerators for her flowers for $25,000 with Pimco Bank providing the funds for the order and purchase of those refrigerators. On February 1, Emily signed a security agreement presented to her by Pimco Bank that covered the refrigerators and all other after-acquired equipment in the flower shop. On February 2, Pimco filed a financing statement covering the refrigerators. The refrigerators were delivered on March 10. On which date was the security interest perfected?

1. February 1.
2. February 2.
3. March 10.
4. The security interest is not yet perfected because the financing statement was not filed at the time of attachment of the security interest.

Answer 63

3.

Correct! Once Emily has an interest in the refrigerators, the security interest attaches and the earlier perfection can take effect. In this case perfection and attachment occurred later than the execution of the security agreement, but all three components—underlying debt, security agreement, and attachment—are necessary before there can be perfection.

Question 64

On July 8, Ace, a refrigerator wholesaler, purchased 50 refrigerators. This comprised Ace’s entire inventory and was financed under an agreement with Rome Bank that gave Rome a security interest in all refrigerators on Ace’s premises, all future acquired refrigerators, and the proceeds of sales. On July 12, Rome filed a financing statement that adequately identified the collateral. On August 15, Ace sold one refrigerator to Cray for personal use and four refrigerators to Zone Co. for its business.

Which of the following statements is correct?

1. The refrigerators sold to Zone will be subject to Rome’s security interest.
2. The refrigerator sold to Cray will not be subject to Rome’s security interest.
3. The security interest does not include the proceeds from the sale of the refrigerators to Zone.
4. The security interest may not cover after-acquired property even if the parties agree.

Answer 64

2.

Even though the interest is perfected, Cray still gets to keep the refrigerator. A buyer in the ordinary course of business takes goods free from a security interest, even if the buyer has knowledge of the security agreement.

Question 65

Spencer’s Appliance had a line of credit with First National Bank. Spencer’s gave First National Bank a security agreement in its inventory on February 1, 2019. First National filed a financing statement for its security interest on February 10, 2019. Spencer’s sold a refrigerator on March 1, 2019, to Jarrod Smith for use in his home, and Jarrod signed a security agreement for the refrigerator that same day. On March 3, 2019, Spencer’s purchased inventory from Frost-Free Refrigerators and Freezers. Spencer’s gave Frost-Free a security interest in its inventory, and Frost-Free filed a financing statement on March 10, 2019. Spencer’s did not pay either First National or Frost-Free, and both First National and Frost-Free sought to repossess Spencer’s inventory and the refrigerator from Jarrod. Which of the following statements is correct?

1. First National has first priority in the inventory and can repossess the refrigerator from Jarrod.
2. First National and Frost-Free have equal priority in Spencer’s Inventory but cannot repossess Jarrod’s refrigerator because First National did not file a financing statement.
3. Frost-Free has a secondary position to First National but can repossess the refrigerator from Jarrod.
4. Jarrod holds the refrigerator free from either the First National or Frost-Free security interest.

Answer 65

4.

Correct! As a bfp consumer purchaser in the ordinary course of business, Jarrod takes free and clear of any other security interests.

Question 66

Drew bought a computer for personal use from Hale Corp. for $3,000. Drew paid $2,000 in cash and signed a security agreement for the balance. Hale properly filed the security agreement. Drew defaulted in paying the balance of the purchase price. Hale asked Drew to pay the balance. When Drew refused, Hale peacefully repossessed the computer.

Under the UCC Secured Transactions Article, which of the following remedies will Hale have?

1. Obtain a deficiency judgment against Drew for the amount owed.
2. Sell the computer and retain any surplus over the amount owed.
3. Retain the computer over Drew’s objection.
4. Sell the computer without notifying Drew.

Answer 66

1.

Remedies after a default are cumulative. If one method does not fully satisfy the debt, others may be sought. If the computer is repossessed and sold, and money is still owed, Hale may seek a deficiency judgment against Drew for the remainder.

Question 67

Under the UCC Secured Transactions Article, which of the following statements is correct concerning the disposition of collateral by a secured creditor after a debtor’s default?

1. A good faith purchaser for value and without knowledge of any defects in the sale takes free of any subordinate liens or security interests.
2. The debtor may not redeem the collateral after the default.
3. Secured creditors with subordinate claims retain the right to redeem the collateral after the collateral is sold to a third party.
4. The collateral may only be disposed of at a public sale.

Answer 67

1.

As with most statutory-sanctioned sales (tax lien sales, judicial lien sales, etc.), a sale made by a secured party under Article 9 of the UCC, if made properly, passes good title free from any lien or security interest to the buyer. Until the sale the debtor or any other secured party has right of redemption. The sale can be public or private proceedings.

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Question 68

Under the UCC Secured Transactions Article, if a debtor is in default under a payment obligation secured by goods, the secured party has the right to;

Answer 68

1. Peacefully repossess the goods without judicial process
2. Reduce the claim to a judgement
3. Sell the goods and apply the proceeds toward the debt

Question 69

Under the federal Bankruptcy Code, an involuntary petition in bankruptcy may not be filed against which of the following parties?

1. A stockbroker.
2. A farmer.
3. A postal worker.
4. A railroad employee.

Answer 69

2.

Correct! Farmers are fully protected under other provisions of the bankruptcy law and cannot be involuntarily petitioned into bankruptcy. There is a long history to this protection for farmers in the bankruptcy laws, and that history involved companies trying to take over smaller farms by forcing the farmers into spending the money to deal with an involuntary petition filed by what amounted to competitors using strategies to consolidate farmlands.

Question 70

A party involuntarily petitioned into bankruptcy under Chapter 7 of the Federal Bankruptcy Code who succeeds in having the petition dismissed could recover;

Answer 70

1. Court costs and attorney’s fees
2. Compensatory damages
3. Punitive damages

Question 71

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

1. Arrest.
2. Mechanic’s lien.
3. Order of receivership.
4. Writ of garnishment.

Answer 71

4.

This action, if ordered by a court, will deduct sums directly from a paycheck. State laws generally limit the amount that can be deducted to around 25% of a debtor’s after-tax wages.

Question 72

Under the liability provisions of Section 11 of the Securities Act of 1933, a CPA may be liable to any purchaser of a security for certifying materially misstated financial statements that are included in the security’s registration statement.

Under Section 11, which of the following must be proven by a purchaser of the security?

Reliance on

the financial statementsFraud by the CPA

1. Yes Yes
2. Yes No
3. No Yes
4. No No

Answer 72

1. Under Section 11 of the 1933 Act, a plaintiff need not show either reliance or fraud (or even negligence) by the defendants.
2. However, defendants can win the day if they can disprove reliance.
3. And the defendants other than the issuer can win if they can establish that they acted with due diligence.
4. The primary things that plaintiffs must show to win their Section 11 claim are

• that there was a material misstatement in the registration statement on the effective date; that they can trace their shares to that registration statement; and that they suffered damages.

Question 73

Ivor and Associates, CPAs, audit the financial statements of Jaymo Corporation.

As a result of Ivor’s negligence in conducting the audit, the financial statements include material misstatements.

Ivor was unaware of this fact. The financial statements and Ivor’s unqualified opinion are included in a registration statement and prospectus for an original public offering of stock by Jaymo.

Thorp purchases shares in the offering. Thorp receives a copy of the prospectus prior to the purchase, but does not read it. The shares decline in value as a result of the misstatements in Jaymo’s financial statements becoming known.

Under which of the following Acts is Thorp most likely to prevail in a lawsuit against Ivor?

Securities Act ofSecurities Exchange Act of

1933, Section 111934, Section 10(b), Rule 10b-5

1. Yes Yes
2. Yes No
3. No Yes
4. No No

Answer 73

2.

The key fact here is that Ivor did not know of the error. It acted negligently, but not with bad intent (scienter). Absent bad intent, there can be no fraud and therefore no liability under Section 10(b) of the 1934 Act, which is an anti-fraud statute. However, defendants who are merely negligent are liable for materially false statements in a defective registration statement pursuant to Section 11 of the 1933 Act.

Question 74

While conducting an audit, Larson Associates, CPAs, fails to detect material misstatements included in its client’s financial statements. Larson’s unqualified opinion was included with the financial statements in a registration statement and prospectus for a public offering of securities made by the client. Larson knew that its opinion and the financial statements would be used for this purpose.

Which of the following statements is correct with regard to a suit against Larson and the client by a purchaser of the securities under Section 11 of the Securities Act of 1933?

1. The purchaser must prove that Larson was negligent in conducting the audit.
2. The purchaser must prove that Larson knew of the material misstatements.
3. Larson will not be liable if it had reasonable grounds to believe that the financial statements were accurate.
4. Larson will be liable unless the purchaser did not rely on the financial statements.

Answer 74

3.

An accountant defendant has a due diligence defense under Section 11 if it can prove that it acted carefully in performing the audit, even if mistakes were made.

However, the standard is one of negligence, not scienter, and the burden of proof is on the accountant.

Question 75

In which of the following types of action, brought against a CPA who issues an audit report containing an unqualified opinion on materially misstated financial statements, may a plaintiff prevail without proving reliance on the audit report?

1. An action for common-law fraud.
2. An action for common-law breach of contract.
3. An action brought under Section 11 of the Securities Act of 1933.
4. An action brought under Rule 10b-5 of the Securities Exchange Act of 1934.

Answer 75

1. Reliance is a key element of common-law fraud, along with material misstatement or omission, scienter (bad intent) and others.
2. If people wish to rescind a contract on the grounds that they were fraudulently induced into entering into it, they must prove that they relied to a reasonable extent upon materially misleading statements or omissions.
3. This Answer is Correct. With minor exceptions, a plaintiff in a Section 11 suit need not provide reliance in order to prevail.
4. Reliance upon a materially misleading statement or omission is a requirement of a Section 10(b) lawsuit, although it may be established without “eyeball reliance” through the fraud on the market theory.

Question 76

Ted buys Synchotic Corporation shares based on Synchotic’s announcement of record earnings. But just a few days later, on July 1, 2010, Synchotic admits that its earnings had been artificially inflated via fraudulent earnings management. Its stock price drops dramatically that day, and Ted makes a significant loss. Ted wishes to bring a 1934 Act securities-fraud lawsuit against Synchotic. In terms of the statute of limitations, when must Ted bring his lawsuit?

1. Within one year of when he should have discovered the fraud or within three years of the fraud.
2. Within one year of when he should have discovered the fraud and within three years of the fraud.
3. Within two years of when he should have discovered the fraud or within five years of the fraud.
4. Within two years of when he should have discovered the fraud and within five years of the fraud.

Answer 76

4.

This answer is correct because it uses the correct statute of limitations (2yr/5yr, rather than 1yr/3yr), and notes properly that the plaintiff must meet both deadlines.

Question 77

A CPA firm issues an unqualified opinion on financial statements not prepared in accordance with GAAP.

The CPA firm will have acted with scienter in all the following circumstances, except where the firm

1. Intentionally disregards the truth.
2. Has actual knowledge of fraud.
3. Negligently performs auditing procedures.
4. Intends to make monetary gain by concealing fraud.

Answer 77

3.

Scienter, very loosely defined, is a “guilty mind.” If a person intentionally does something incorrectly, then (s)he acts with scienter. Scienter may also be found in a person intentionally disregarding the truth. The key is intent of some kind, as opposed to simple carelessness.

When negligence is found, a person is found liable for failing to use due care, and not for intentional wrongdoing.

Question 78

Seimone, an auditor for the ABC accounting firm, learns that her audit client, Bupkis Co., is about to announce a record profit. She buys Bupkis shares in a fake name and profits upon the public announcement. Which of the following is true?

1. The SEC may bring civil charges against Seimone.
2. The SEC may bring criminal charges against Seimone.
3. A and B.
4. None of the above.

Answer 78

1.

The SEC may bring civil charges against Seimone.

Only the Department of Justice may bring federal criminal charges. However, both civil charges (by the SEC) and criminal charges (by DOJ) are commonly brought in insider-trading cases.

Question 79

CPA Sobel engages in insider trading of the shares of an audit client. She is caught. The SEC brings a civil action and forces Sobel to give up her insider-trading profits and pay a civil fine of three times the amount of the profits. Sobel thought she had been punished sufficiently, but then the DOJ began an investigation. Which of the following is true?

1. DOJ cannot bring criminal charges because Sobel has been punished enough.
2. The DOJ can choose to bring criminal charges to supplement the SEC’s civil action.
3. To bring criminal charges would amount to double jeopardy.
4. A and C.

Answer 79

3.

It is common for the SEC to bring civil charges and then the DOJ to bring criminal charges in insider-trading cases.