Incorrect Questions 1 Flashcards
If you learn that the tax return that you prepared for your client last year contained a material error, you should:
A. Promptly inform your client.
B. Inform the IRS even before informing your client.
C. A and B.
D. None of the above.
A. Promptly inform your client.
Like the AICPA Code of Professional Conduct, Circular 230 requires the tax practitioner to promptly inform a client of such a material error.
Under Circular 230, it is proper to delay as long as possible in fulfilling an IRS request for records or information if:
A. You have investigated and believe in good faith that the information is privileged.
B. It would benefit your client strategically in his tax dispute with the IRS.
C. A and B
D. None of the above.
A. You have investigated and believe in good faith that the information is privileged.
Section 10.20 requires prompt compliance with an IRS request for information or records unless the practitioner believes in good faith and on reasonable grounds that they are privileged.
A CPA prepared a tax return for a client who will receive a refund check. The client is traveling abroad and asked the CPA to pick up the check at the client’s home address. Under Treasury Circular 230, any of the following actions, if taken by the CPA relating to the refund check, would be a violation of the rules of practice before the Internal Revenue Services, except
A. Endorsing the check and depositing it into the client’s bank account.
B. Holding the check for safe keeping and awaiting the client’s return.
C. Holding the check until the client is billed, then endorsing and depositing the check in to the CPA’s account as payment for the bill.
D. Endorsing the check and dep
B. Holding the check for safe keeping and awaiting the client’s return.
Under Treasury Circular 230, in which of the following situations is a CPA prohibited from giving written advice concerning one or more federal tax issues?
A. The CPA takes into account the possibility that a tax return will not be audited.
B. The CPA reasonably relies upon representations of the client.
C. The CPA considers all relevant facts that are known.
D. The CPA takes into consideration assumptions about future events related to the relevant facts.
A. The CPA takes into account the possibility that a tax return will not be audited.
A CPA should never give tax advice turning upon the possibility that the IRS might not audit the client’s tax return.
Teo has a private company audit client. He also provides it with tax services. For which of the following services may he charge a contingent fee and still be in compliance with Circular 230?
A. Preparation of an original income tax return.
B. A claim for refund filed in connection with a determination of statutory interest or penalties.
C. Representing the client in judicial proceedings.
D. B and C only.
D. B and C only.
Section 10.27 allows contingent fees in only three situations, and A. is not one of them. There are too many chances to win the “audit lottery” with original tax returns.
CPA Sharon annually prepares MBC’s tax returns. Which of the following actions or inactions would violate the SSTSs?
A. Sharon signs a tax return containing a position that she believes to have a realistic possibility of being sustained without disclosing it.
B. Sharon relies upon the representations of MBC’s officers without independently verifying their accuracy.
C. Sharon uncovers a material misstatement made in last year’s return but fails to promptly inform the taxing authority of the error.
D. None of the above.
C. Sharon uncovers a material misstatement made in last year’s return but fails to promptly inform the taxing authority of the error.
Without the client’s permission, Sharon cannot inform the taxing authority of the error.
CPA Amanda has been Kathy’s tax accountant for a few years. Under which of the following situations has Amanda violated the SSTSs?
A. There is a tax law change that could affect Kathy’s previous returns and Amanda doesn’t tell her because she had not agreed to do so.
B. For the last three years, Kathy has grossed $400,000, $500,000, and $450,000, respectively, but this year the W-2 indicates an income of only $375,000. The W-2 seems to be genuine. Amanda files the return without asking Kathy any questions about the reduction in income.
C. Amanda does the tax returns for a limited partnership in which Kathy is a limited partner. She notices that the partnership’s records indicate a higher payout to Kathy than Kathy had told Amanda. Amanda makes no inquiry about the discrepancy.
D. Kathy wants to take a position that Amanda believes has a 30% chance of being sustained if it is reviewed by the relevant tax authority in a jurisdiction where SSTS No. 1 applies. Amanda discloses the position.
C. Amanda does the tax returns for a limited partnership in which Kathy is a limited partner. She notices that the partnership’s records indicate a higher payout to Kathy than Kathy had told Amanda. Amanda makes no inquiry about the discrepancy.
Amanda has violated SSTS No. 3 by ignoring this red flag regarding the accuracy of Kathy’s return.
A CPA prepares a client’s tax return containing business travel expenses without inquiring about the existence of documentation for the expenses. Which statement best describes the consequence of the CPA’s lack of inquiry?
A. The CPA may be assessed a tax return preparer penalty.
B. The CPA may be charged with preparing a fraudulent return.
C. The client will not owe an understatement penalty if the return is audited and the expenses disallowed.
D. The client will not be subject to a fraud penalty.
A. The CPA may be assessed a tax return preparer penalty.
Business travel expenses require documentation, and if a CPA acting as a tax return preparer does not inquire as to whether that documentation exists before claiming the deduction, may be punished.
Pratt was a CPA and tax partner. He prepared Hutchinson’s personal income tax returns for many years. One year, Pratt discovered an error he had made in the previous year’s return. Had the return been properly prepared, Hutchinson would have owed the IRS $23.59 more than he had paid. Which of the following is true?
A. Pratt must tell the IRS.
B. Pratt must tell Hutchinson.
C. Because the error was immaterial, Pratt does not need to tell anyone.
D. A and B.
C. Because the error was immaterial, Pratt does not need to tell anyone.
The C choice is best. Had the amount been material, B would have been the best choice. As noted, whether material or not, Pratt is not to inform the IRS absent Hutchinson’s permission.
CPA Alden prepared the individual income tax returns for Sterling for many years. When preparing 2009’s return, Alden discovered a material error in the 2008 return that had caused Sterling to substantially underpay his taxes for 2008. Alden informed Sterling of the error and urged him to inform the IRS. Sterling refused, and threatened to fire Alden if he went to the IRS. Which of the following is true?
A. Alden must refuse to prepare Sterling’s 2009 return.
B. Alden should consider refusing to prepare Sterling’s 2009 return.
C. If Alden does prepare Sterling’s 2009 return, he must ensure that 2008’s error is not repeated.
D. B and C.
D. B and C.
Stanley, a CPA who has grown tired of his audit career, has just shifted to a tax position. In getting up to speed, which of the following pieces of advice for Stanley would not be accurate?
A. No standard format is required for tax advice.
B. Written communications are preferable for important matters.
C. Written communications are required for complicated matters.
D. A and B.
C. Written communications are required for complicated matters.
SSTS No. 7 does not require written advice for complicated matters so this is the best answer.
A CPA assists a taxpayer in tax planning regarding a transaction that meets the definition of a tax shelter as defined in the Internal Revenue Code. Under the AICPA Statements on Standards for Tax Services, the CPA should inform the taxpayer of the penalty risks unless the transaction, at the minimum, meets which of the following standards for being sustained if challenged?
A. More likely than not.
B. Not frivolous.
C. Realistic possibility.
D. Substantial authority.
A. More likely than not.
SSTS No. 1 advises that “[w]hen recommending a tax return position or when preparing or signing a tax return on which a position is taken, a member should, when relevant, advise the taxpayer regarding potential penalty consequences of such tax return position and the opportunity, if any, to avoid such penalties through disclosure.”
According to the AICPA Statement on Standards for Tax Services, which of the following factors should a CPA consider in choosing whether to provide oral or written advice to a client?
A. Whether the client will seek a second opinion.
B. The tax sophistication of the client.
C. The likelihood that current tax litigation will impact the advice.
D. The client’s business acumen.
B. The tax sophistication of the client.
Melba is a tax client of CPA Buck. Melba is not a great record keeper, and Buck would like to save Melba some money by using estimates, rather than by incurring great expense in recovering or reconstructing original records. Which of the following is not true?
A. Buck will violate SSTS No. 4 if he fails to disclose that he has used estimates.
B. Buck will violate SSTS No. 4 if he lists Melba’s estimated business expenses as $987.32.
C. Buck will violate SSTS No. 4 if he uses estimates in situations where a simple phone call to a bank could give him exact numbers.
D. Buck will violate SSTS No. 4 if he uses estimates provided by Melba that appear on their face to be materially inaccurate.
A. Buck will violate SSTS No. 4 if he fails to disclose that he has used estimates.
CPA Nickerson is preparing a tax return for client Bonnie. Which of the following is true regarding SSTS No. 2?
A. It is appropriate for Nickerson to remove an item on grounds that the answer would be disadvantageous to Bonnie.
B. If Nickerson does have reasonable grounds for omitting an answer, he need not disclose them.
C. A and B.
D. None of the above.
B. If Nickerson does have reasonable grounds for omitting an answer, he need not disclose them.
Which of the following will not get CPA Sandy in trouble with the IRS?
A. Failing to furnish copies of returns to her clients.
B. Failing to sign returns she prepares and files.
C. Failure to furnish her preparer’s identifying number to her clients.
D. Failure to keep copies of the returns she prepares.
C. Failure to furnish her preparer’s identifying number to her clients.
Under current rules, Sandy must furnish the preparer’s identifying number to the IRS but not to her clients.
Louis, the volunteer treasurer of a nonprofit organization and a member of its board of directors, compiles the data and fills out its annual Form 990, Return of Organization Exempt from Income Tax. Under the Internal Revenue Code, Louis is not considered a tax return preparer because:
A. He is a member of the board of directors.
B. The return does not contain a claim for a tax refund.
C. He is not compensated.
D. Returns for nonprofit organizations are exempt from the preparer rules.
C. He is not compensated.
People are TRPs if (a) they are paid, (b) to prepare or retain employees to prepare, (c) a substantial portion, (d) of any federal tax return. Because Louis was not paid specifically to prepare the return, he does not satisfy the first requirement to be a TRP.
Tax return preparers can be subject to penalties under the Internal Revenue Code for failure to do any of the following except
A. Sign a tax return as a preparer.
B. Disclose a conflict of interest.
C. Provide a client with a copy of the tax return.
D. Keep a record of Returns prepared.
B. Disclose a conflict of interest.
The I.R.C. contains no penalty for failing to disclose a conflict of interest when preparing a tax return.
Which of the following bodies ordinarily would have the authority to suspend or revoke a CPA's license to practice public accounting? A. The SEC. B. The AICPA. C. A state CPA society. D. A state board of accountancy.
D. A state board of accountancy.
When an auditor’s recklessness is manifested in repeated defective audits, what might happen?
A. The SEC might discipline the auditor under Rule 102(e).
B. The state board of accountancy might suspend the auditor’s CPA license.
C. The state society of CPAs might punish the auditor.
D. All of the listed choices.
D. All of the listed choices.
CPA Smithers has had some professional difficulties. Which of the following is true?
A. If the state board of accountancy revokes Smithers’ CPA license, s/he will be automatically expulsed from the AICPA.
B. If the state society of CPAs expulses Smithers, the state board of accountancy will automatically revoke his/her CPA license.
C. Both of the listed choices.
Because choice B is wrong, this answer is necessarily wrong.
D. Neither of the listed choices.
A. If the state board of accountancy revokes Smithers’ CPA license, s/he will be automatically expulsed from the AICPA.
But not the other way around.
Pittsburg does not have a CPA license. Which of the following activities may he properly perform?
A. Auditing.
B. Preparing tax returns.
C. Examining prospective financial information in accordance with SSAE.
D. All of the listed choices.
B. Preparing tax returns.
No CPA license is needed to prepare a tax return.
CPA Talmac’s engagement letter with his tax client contained a provision that the client probably did not notice when he signed the engagement letter. It absolved Talmac of any liability should s/he breach the contract with the client. This proved a fortuitous provision for Talmac, who did breach the contract by providing substantially defective tax advice that cost the client more than $10,000 in penalties and interest. Which of the following is true?
A. The liability disclaimer will protect Talmac from liability.
B. The liability disclaimer will probably be ignored by a court.
C. A and B.
D. None of the above.
B. The liability disclaimer will probably be ignored by a court.
Most courts do not allow professionals such as doctors, lawyers, and accountants to avoid liability for their malpractice via such disclaimers. Courts usually hold that such disclaimers violate public policy and are, therefore, unenforceable.
Which of the following statements is generally correct regarding the liability of a CPA who negligently gives an opinion on an audit of a client’s financial statements?
A. The CPA is only liable to those third parties who are in privity of contract with the CPA.
B. The CPA is only liable to the client.
C. The CPA is liable to anyone in a class of third parties who the CPA knows will rely on the opinion.
D. The CPA is liable to all possible foreseeable users of the CPA’s opinion.
C. The CPA is liable to anyone in a class of third parties who the CPA knows will rely on the opinion.
Which of the following is the best defense a CPA firm can assert in a suit for common law fraud based on its unqualified opinion on materially false financial statements?
A. Contributory negligence on the part of the client.
B. A disclaimer contained in the engagement letter.
C. Lack of privity.
D. Lack of scienter.
D. Lack of scienter.
While conducting an audit, Larson Associates, CPAs, failed to detect material misstatements included in its client’s financial statements.
Larson’s unqualified opinion was included with the financial statements in a registration statement and prospectus for a public offering of securities made by the client. Larson knew that its opinion and the financial statements would be used for this purpose.
In a suit by a purchaser against Larson for common law fraud, Larson’s best defense would be that
A. Larson did not have actual or constructive knowledge of the misstatements. B. Larson's client knew or should have known of the misstatements. C. Larson did not have actual knowledge that the purchaser was an intended beneficiary of the audit. D. Larson was not in privity of contract with its client.
A. Larson did not have actual or constructive knowledge of the misstatements.
Cable Corp. orally engaged Drake & Co., CPAs, to audit its financial statements.
Cable’s management informed Drake that it suspected the accounts receivable were materially overstated. Though the financial statements Drake audited included a materially overstated accounts receivable balance, Drake issued an unqualified opinion. Cable used the financial statements to obtain a loan to expand its operations.
Cable defaulted on the loan and incurred a substantial loss.
If Cable sues Drake for negligence in failing to discover the overstatement, Drake’s best defense would be that Drake did not
A. Have privity of contract with Cable. B. Sign an engagement letter. C. Perform the audit recklessly or with an intent to deceive. D. Violate generally accepted auditing standards in performing the audit.
D. Violate generally accepted auditing standards in performing the audit.
The intent, or scienter, element necessary to establish a cause of action for fraud will be met if the plaintiff can show that the
A. Defendant made a misrepresentation with a reckless disregard for the truth.
B. Defendant made a false representation of fact.
C. Plaintiff actually relied on the defendant’s misrepresentation.
D. Plaintiff justifiably relied on the defendant’s misrepresentation.
A. Defendant made a misrepresentation with a reckless disregard for the truth.
A CPA who fraudulently performs an audit of a corporation’s financial statements will
A. Probably be liable to any person who suffered a loss as a result of the fraud.
B. Be liable only to the corporation and to third parties who are members of a class of intended users of the financial statements.
C. Probably be liable to the corporation even though its management was aware of the fraud and did not rely on the financial statements.
D. Be liable only to third parties in privity of contract with the CPA.
A. Probably be liable to any person who suffered a loss as a result of the fraud.
In most jurisdictions, the CPA will be liable if foreseeable users rely on the fraudulently prepared statements and suffer a loss. This is true whomever the plaintiffs may be, so long as they can prove reliance and loss and that they are foreseeable users.
Under the “Ultramares” rule, to which of the following parties will an accountant be liable for negligence?
Parties in privity Foreseen parties
Yes Yes
Yes No
No Yes
No No
Parties in privity: Yes Foreseen parties: No
Bosco Corporation had a very complicated tax situation. It hired CPA Arnold to prepare its corporate income tax return. Arnold made an error that caused Bosco to overpay its taxes by $3,000. The payment could have been avoided had Arnold advised Bosco to structure a particular transaction in a slightly different way. Bosco paid $233,000 rather than the $230,000 that it might have paid. Upset with Arnold’s error, Bosco refused to pay the $20,000 fee specified in the engagement letter on grounds that Arnold had breached the contract by giving inaccurate advice. Which of the following is true regarding Arnold’s fee?
A. Because he breached the contract by giving defective advice, Arnold cannot recover his fee.
B. Because he substantially performed the contract, Arnold will recover his fee minus the damages his breach caused Bosco ($20,000 - $3,000 = $17,000).
C. A and B.
D. None of the above.
B. Because he substantially performed the contract, Arnold will recover his fee minus the damages his breach caused Bosco ($20,000 - $3,000 = $17,000).
Arnold must pay for the damage that his error caused. He should recover $17,000 for his fee.
Hark CPA, failed to follow generally accepted auditing standards in auditing Long Corp.’s financial statements. Long’s management had told Hark that the audited statements would be submitted to several banks to obtain financing. Relying on the statements, Third Bank gave Long a loan.
Long defaulted on the loan.
In a jurisdiction applying the Ultramares decision, if Third sues Hark, Hark will
A. Win because there was no privity of contract between Hark and Third. B. Lose because Hark knew that banks would be relying on the financial statements. C. Win because Third was contributorily negligent in granting the loan. D. Lose because Hark was negligent in performing the audit.
A. Win because there was no privity of contract between Hark and Third.
In responding to the Enron-era frauds, SOX did not do which of the following?
A. Strengthen criminal penalties for securities fraud.
B. Restrict provision by auditors of public companies of nonaudit services.
C. Require rotation of audit firms every seven years.
D. Create the PCAOB.
C. Require rotation of audit firms every seven years.
SOX did not require rotation of audit firms, only of the audit engagement partner and the reviewing partner and some other key partners. So this answer states the one thing SOX did not do and is therefore the correct answer.
A business manager (D) for an accounting firm was in charge of, among other things, purchasing equipment, procuring office supplies, and overseeing the day-to-day operation of the office. By using a company credit card to pay for various personal expenses, including property taxes, jewelry, clothing, and a wine cellar; accepting reimbursement for business-related expenses that D had paid for with a company credit card but said were out of pocket; and creating false invoices for nonexistent purchases for which she received reimbursement, D stole half a million dollars from the accounting firm. Several of the false invoices were e-mailed by D for purposes of seeking reimbursement. Which of the following is true?
A. D is guilty of theft but not wire fraud.
B. D is guilty of wire fraud.
C. A and B. D. None of the above.
B. D is guilty of wire fraud.
Because electronic transmission of the false invoices was essential to the execution of the fraudulent scheme, D was guilty of wire fraud.
Which is critical to a conviction under the mail fraud statute?
A. That defendant be involved in a fraudulent scheme for which sending a letter through the mail is an essential part.
B. The defendant mails the letter himself.
C. A and B.
D. None of the above.
A. That defendant be involved in a fraudulent scheme for which sending a letter through the mail is an essential part.
Plaintiff (P) came into a huge sum of money. An accounting firm (D) advised P on two tax-planning strategies, opining that they were “more likely than not” to be upheld by the IRS, and helped him implement them. They were known as FLIPs and BLIPs, and involved buying and exchanging warrants, options, and shares of various Swiss and Cayman Islands companies. Ultimately, the IRS audited three years worth of P’s tax returns because these were aggressive tax shelters that the IRS had targeted for prosecution. P sued D and others under RICO for a violation of Sec. 1962(c). Which of the following is true?
A. Because D has not yet been found criminally liable for securities fraud, P cannot pursue its RICO claim.
B. D is probably liable for a 1962(c) violation.
C. A and B.
D. None of the above.
B. D is probably liable for a 1962(c) violation.
Because securities fraud cannot serve as a “predicate act” under RICO 1962(c) absent a prior criminal conviction (of which we have no indication here), defendant will not be liable under RICO.
Waxo, Inc., is a small, privately held corporation that was caught paying bribes to foreign heads of state in order to secure government contracts. Waxo hid these transactions, in part, by falsifying its accounting records. Which of the following is true?
A. Waxo violated the antibribery provisions of the FCPA.
B. Waxo violated the accounting provisions of the FCPA.
C. A and B.
D. None of the above.
A. Waxo violated the antibribery provisions of the FCPA.
By paying these bribes, Waxo violated the antibribery provisions of the FCPA. These provisions apply to almost all American companies.
Because Albany is not an SEC-registered firm, the FCPA’s accounting provisions do not apply to it, so B is not an accurate choice.
Under which of the following circumstances would it be permissible for Trego to share confidential client information?
A. He has been hospitalized on April 14 and needs to share information with his partner, Tandy, who will complete a client’s tax return before the April 15 deadline.
B. A client has filed a complaint with the State Board of Accountancy about Trego’s work, and he needs to show the Board confidential information to prove that he acted professionally throughout the engagement.
C. None of the above.
D. A and B.
D. A and B.
Two recognized exceptions to the confidentiality requirement are disclosure to other firm members on a need-to-know basis and disclosure during an ethics examination.
Colby is the managing partner of a small accounting firm. He has heard of the Generally Accepted Privacy Principles (GAPP) and wants to know what his responsibilities are regarding client information. Among others, Colby’s firm must:
A. Provide its clients notice of its privacy policies and procedures.
B. Collect information only in compliance with its policies and procedures.
C. Provide clients with access to their personal information for review and update.
D. All of the above.
D. All of the above.
Lakin is a CPA whose client, Sublette, is being sued by a state government in state court for evasion of state income taxes. Sublette does not want Lakin to testify against him regarding information that Sublette communicated to Lakin. Which of the following is true in a state with a statutory version of the accountant-client testimonial privilege?
A. Only Lakin can invoke the testimonial privilege.
B. Sublette can invoke the privilege as to parts of the communications he had with Lakin, while asking Lakin to testify as to other parts.
Waiver of the privilege as to part of a communication is waiver as to all.
C. If the suit was in federal court, the state privilege would not apply even though the communication took place in the state.
D. A and B.
C. If the suit was in federal court, the state privilege would not apply even though the communication took place in the state.
State privilege statutes apply only in the state courts in the particular state, not in federal court.
Girard gave tax advice to Frontenac Corporation. The Department of Justice and IRS are now investigating certain tax shelter transactions that Frontenac Corp. entered into. Girard is resisting their requests for information by citing the tax practitioner’s privilege of §7525 of the I.R.C. To which of the following would that privilege be inapplicable?
A. Criminal proceedings.
B. Written advice in connection with promotion of a tax shelter.
C. A and B.
D. None of the above.
C. A and B.
Salina wants to know which of the following recognizes an accountant-client testimonial privilege:
A. Federal courts creating procedural rules.
B. Congress for very limited purposes when tax practitioners are involved.
This choice is accurate, because Congress in §7525 of the I.R.C. recognized such a privilege in limited fashion, but it is not the best choice because another choice is accurate also.
C. Approximately 15 state legislatures.
Salina wants to know which of the following recognizes an accountant-client testimonial privilege:
A. Federal courts creating procedural rules.
B. Congress for very limited purposes when tax practitioners are involved.
C. Approximately 15 state legislatures.
D. B and C.
D. B and C.
Which of the following is a correct statement about the circumstances under which a CPA firm may or may not disclose the names of its clients without the clients’ express permission?
A. A CPA firm may disclose this information if the practice is limited to bankruptcy matters, so that prospective clients with similar concerns will be able to contact current clients.
B. A CPA firm may disclose this information if the practice is limited to performing asset valuations in anticipation of mergers and acquisitions.
C. A CPA firm may disclose this information unless disclosure would suggest that the client may be experiencing financial difficulties.
D. A CPA firm may not disclose this information because the identity of its clients is confidential information.
C. A CPA firm may disclose this information unless disclosure would suggest that the client may be experiencing financial difficulties.
In which of the following situations is there a violation of client confidentiality under the AICPA Code of Professional Conduct?
A. A member discloses confidential client information to a court in connection with arbitration proceedings relating to the client.
B. A member discloses confidential client information to a professional liability insurance carrier after learning of a potential claim against the member.
C. A member whose practice is primarily bankruptcy discloses a client’s name.
D. A member uses a records retention agency to store clients’ records that contain confidential client information.
C. A member whose practice is primarily bankruptcy discloses a client’s name.
Mary offers to buy Hal’s desktop computer for $400. Hal sends Mary an e-mail of acceptance. The $400 is to be paid upon Hal’s delivery of the computer. Which of the following properly classifies this contract?
A. This is a bilateral, valid, executory contract. B. This is a bilateral, valid, executed contract. C. This is a unilateral, express, executory contract. D. This is a unilateral, implied-in-fact, executed contract.
A. This is a bilateral, valid, executory contract.
An executory contract is one not fully performed. Neither party has performed their part of the contract. Thus, this contract is classified as bilateral, valid, and executory.
Susan Worth has a lease for two years at the Bedford Arms apartment complex. Susan has the opportunity to study at Oxford for one year and has agreed to sublease her apartment to Karen Knight. Karen is to take over the lease on August 1, 2010, and finish the term of the lease, which ends May 31, 2011. Susan and Karen execute an agreement for the lease takeover. In January 2011, Karen misses her rent payment and then moves out of the apartment. The Bedford Arms owner wants to recover from Susan. This contract:
A. Is governed by common law.
B. Is governed by the UCC.
C. Is governed by neither because it is not a lease.
D. Any contract under the UCC.
A. Is governed by common law.
Real property interests, including leases, are under common law.
Opal offered, in writing, to sell Larkin a parcel of land for $300,000. If Opal dies, the offer will
A. Terminate prior to Larkin’s acceptance only if Larkin received notice of Opal’s death.
B. Remain open for a reasonable period of time after Opal’s death.
C. Automatically terminate despite Larkin’s prior acceptance.
D. Automatically terminate prior to Larkin’s acceptance.
D. Automatically terminate prior to Larkin’s acceptance.
If there had been a valid acceptance first, a contract would have been formed. If there is a CONTRACT, then death does not always terminate contract obligations.
On day 1, Jackson, a merchant, mailed Sands a signed letter that contained an offer to sell Sands 500 electric fans at $10 per fan. The letter was received by Sands on day 3. The letter contained a promise not to revoke the offer but no expiration date. On day 4, Jackson mailed Sands a revocation of the offer to sell the fans. Sands received the revocation on day 6. On day 7, Sands mailed Jackson an acceptance of the offer. Jackson received the acceptance on day 9. Under the Sales Article of the UCC, was a contract formed?
A. No contract was formed because the offer failed to state an expiration date.
B. No contract was formed because Sands received the revocation of the offer before Sands accepted the offer.
C. A contract was formed on the day Jackson received Sands’ acceptance.
D. A contract was formed on the day Sands mailed the acceptance to Jackson.
D. A contract was formed on the day Sands mailed the acceptance to Jackson.
The offer was accepted using the same means of communication and so is valid when sent on day 7.
On February 12, Harris sent Fresno a written offer to purchase Fresno’s land.
The offer included the following provision: “Acceptance of this offer must be by registered or certified mail, received by Harris no later than February 18 by 5:00 p.m. CST.”
On February 18, Fresno sent Harris a letter accepting the offer by private overnight delivery service. Harris received the letter on February 19.
Which of the following statements is correct?
A. A contract was formed on February 19. B. Fresno's letter constituted a counteroffer. C. Fresno's use of the overnight delivery service was an effective form of acceptance. D. A contract was formed on February 18 regardless of when Harris actually received Fresno's letter.
B. Fresno’s letter constituted a counteroffer.
Normally, under the mailbox rule acceptances are valid as soon as they are mailed. However, in this case we have an exception, because the offeror specified the method of acceptance (registered or certified mail) AND a time by which offeror had to actually receive the acceptance. By the terms of the offer, the acceptance was not sent as authorized and arrived late. Therefore, it is a counteroffer, which Harris may now accept or reject.
On April 1, Fine Corp. faxed Moss an offer to purchase Moss’ warehouse for $500,000. The offer stated that it would remain open only until April 4 and that acceptance must be received to be effective. Moss sent an acceptance on April 4 by overnight mail and Fine received it on April 5.
Which of the following statements is correct?
A. No contract was formed because Moss sent the acceptance by an unauthorized method. B. No contract was formed because Fine received Moss' acceptance after April 4. C. A contract was formed when Moss sent the acceptance. D. A contract was formed when Fine received Moss' acceptance.
B. No contract was formed because Fine received Moss’ acceptance after April 4.
Although most acceptances of bilateral offers are sent by an authorized medium and effective when sent by the authorized medium, the offeror can condition acceptance to not be effective until received. Therefore, regardless of the medium used, the acceptance must be received before the offer terminates by lapse of time. This offer terminated at midnight on April 4, and the acceptance was not received until April 5, after the offer was terminated.
Carson Corp., a retail chain, asked Alto Construction to fix a broken window at one of Carson’s stores. Alto offered to make the repairs within three days at a price to be agreed on after the work was completed.
A contract based on Alto’s offer would fail because of indefiniteness as to the
A. Price involved. B. Nature of the subject matter. C. Parties to the contract. D. Time for performance.
A. Price involved.
Dunne and Cook signed a contract requiring Cook to rebind 500 of Dunne’s books at $3.00 per book. Later, Dunne requested, in good faith, that the price be reduced to $2.70 per book. Cook agreed orally to reduce the price to $2.70.
Under the circumstances, the oral agreement is
A. Enforceable, but proof of it is inadmissible into evidence. B. Enforceable, and proof of it is admissible into evidence. C. Unenforceable, because Dunne failed to give consideration, but proof of it is otherwise admissible into evidence. D. Unenforceable, due to the statute of frauds, and proof of it is inadmissible into evidence.
C. Unenforceable, because Dunne failed to give consideration, but proof of it is otherwise admissible into evidence.
Grove is seeking to avoid performing a promise to pay Brook $1,500. Grove is relying on lack of consideration on Brook’s part.
Grove will prevail if Grove can establish that
A. Prior to Grove's promise, Brook had already performed the requested act. B. Brook's only claim of consideration was the relinquishment of a legal right. C. Brook's asserted consideration is only worth $400. D. The consideration to be performed by Brook will be performed by a third party.
A. Prior to Grove’s promise, Brook had already performed the requested act.
Past actions cannot
count as consideration for current promises. For consideration to exist, a contract must be a bargained for exchange. If, for example, you took me to work yesterday, and I say today, “Because you gave me a ride yesterday, I promise to pay you $20,” you cannot hold me to the promise. There is no consideration.
In determining whether the consideration requirement to form a contract has been satisfied, the consideration exchanged by the parties to the contract must be
A. Of approximately equal value.
B. Legally sufficient.
C. Exchanged simultaneously by the parties.
D. Fair and reasonable under the circumstances
B. Legally sufficient.
Consideration must be sufficient. However, the general rule is that any obligation of legal value and bargained-for is sufficient consideration.
In which of the following situations does the first promise serve as valid consideration for the second promise?
A. A police officer’s promise to catch a thief for a victim’s promise to pay a reward.
B. A builder’s promise to complete a contract for a purchaser’s promise to extend the time for completion.
C. A debtor’s promise to pay $500 for a creditor’s promise to forgive the balance of a $600 liquidated debt.
D. A debtor’s promise to pay $500 for a creditor’s promise to forgive the balance of a $600 disputed debt
D. A debtor’s promise to pay $500 for a creditor’s promise to forgive the balance of a $600 disputed debt.
Sand orally promised Frost a $10,000 bonus, in addition to a monthly salary, if Frost would work two years for Sand.
If Frost works for the two years, will the Statute of Frauds prevent Frost from collecting the bonus?
A. No, because Frost fully performed. B. No, because the contract did not involve an interest in real estate. C. Yes, because the contract could not be performed within one year. D. Yes, because the monthly salary was the consideration for the contract
A. No, because Frost fully performed.
Where the parties have entered into a written contract intended as the final expression of their agreement, which of the following agreements will be admitted into evidence because they are not prohibited by the parol evidence rule?
Subsequent oral agreements Prior written agreements
Yes Yes
Yes No
No Yes
No No
Subsequent oral agreements Yes
Prior written agreements No
The parol evidence rule will not allow evidence of prior agreements to be admitted as evidence.
Rogers and Lennon entered into a written computer consulting agreement that required Lennon to provide certain weekly reports to Rogers. The agreement also stated that Lennon would provide the computer equipment necessary to perform the services and that Rogers’ computer would not be used. As the parties were executing the agreement, they orally agreed that Lennon could use Rogers’ computer. After executing the agreement, Rogers and Lennon orally agreed that Lennon would report on a monthly, rather than weekly, basis. The parties now disagree on Lennon’s right to use Rogers’ computer and how often Lennon must report to Rogers. In the event of a lawsuit between the parties, the parol evidence rule will
A. Not apply to any of the parties’ agreements because the consulting agreement did not have to be in writing.
B. Not prevent Lennon from proving the parties’ oral agreement that Lennon could use Rogers’ computer.
C. Not prevent the admission into evidence of testimony regarding Lennon’s right to report on a monthly basis.
D. Not apply to the parties’ agreement to allow Lennon to use Rogers’ computer because it was contemporaneous with the written agreement
C. Not prevent the admission into evidence of testimony regarding Lennon’s right to report on a monthly basis.
This answer is correct because an exception to the parol evidence rule allows evidence of “subsequent agreements” to be admitted into evidence. The parol evidence rule applies to complete and unambiguous written contracts and prohibits any evidence that would modify or alter the contract. This rule would apply to oral agreements made “prior” to the formation of the written contract but does not apply to “subsequent” agreements.
Under the parol evidence rule, oral evidence will be excluded if it relates to
A. A contemporaneous oral agreement relating to a term in the contract.
B. Failure of a condition precedent.
C. Lack of contractual capacity.
D. A modification made several days after the contract was executed
A. A contemporaneous oral agreement relating to a term in the contract.
To which of the following transactions does the common law Statute of Frauds not apply?
A. Contracts for the sale of real estate.
B. Agreements made in consideration of marriage.
C. Promises to pay the debt of another.
D. Contracts that can be performed within one year
D. Contracts that can be performed within one year.
Only contracts that CANNOT be performed within a year must be in writing.
On June 1, 20x5, Decker orally guaranteed the payment of a $5,000 note Decker’s cousin owed Baker. Decker’s agreement with Baker provided that Decker’s guaranty would terminate in 18 months. On June 3, 20x5, Baker wrote Decker confirming Decker’s guaranty. Decker did not object to the confirmation. On August 23, 20x5, Decker’s cousin defaulted on the note and Baker demanded that Decker honor the guaranty. Decker refused. Which of the following statements is correct?
A. Decker is liable under the oral guaranty because Decker did not object to Baker’s June 3 letter.
B. Decker is not liable under the oral guaranty because it expired more than one year after June 1.
C. Decker is liable under the oral guaranty because Baker demanded payment within one year of the date the guaranty was given.
D. Decker is not liable under the oral guaranty because Decker’s promise was not in writing
D. Decker is not liable under the oral guaranty because Decker’s promise was not in writing.
This answer is correct because a guaranty contract under the Statute of Frauds to be enforceable against the guarantor must be in a writing signed by the guarantor, or a signed memorandum (written evidence of oral guaranty). Here, Decker signed neither, and Decker is not liable under the oral guaranty.
Which of the following statements is true with regard to the Statute of Frauds?
A. All contracts involving consideration of more than $500 must be in writing.
B. The written contract must be signed by all parties.
C. The Statute of Frauds applies to contracts that can be fully performed within one year from the date they are made.
D. The contract terms may be stated in more than one document
D. The contract terms may be stated in more than one document.
Carson agreed orally to repair Ives' rare book for $450. Before the work was started, Ives asked Carson to perform additional repairs to the book and agreed to increase the contract price to $650. After Carson completed the work, Ives refused to pay and Carson sued. Ives' defense was based on the Statute of Frauds. What total amount will Carson recover? A. $0 B. $200 C. $450 D. $650
D. $650
Bond and Spear orally agreed that Bond would buy a car from Spear for $475. Bond paid Spear a $100 deposit. The next day, Spear received an offer of $575, the car’s fair market value.
Spear immediately notified Bond that Spear would not sell the car to Bond and returned Bond’s $100.
If Bond sues Spear and Spear defends on the basis of the Statute of Frauds, Bond will probably
A. Lose, because the agreement was for less than the fair market value of the car. B. Win, because the agreement was for less than $500. C. Lose, because the agreement was not in writing and signed by Spear. D. Win, because Bond paid a deposit
B. Win, because the agreement was for less than $500.
This is correct because for the sale of goods under the Statute of Frauds, contracts for goods priced at $ 500 or more require a writing to be enforceable. This oral contract for a good (car) is $475, under $500, and thus enforceable.
Nolan agreed orally with Train to sell Train a house for $100,000. Train sent Nolan a signed agreement and a down payment of $10,000. Nolan did not sign the agreement but allowed Train to move into the house. Before closing, Nolan refused to go through with the sale. Train sued Nolan to compel specific performance. Under the provisions of the Statute of Frauds,
A. Train will win because Train signed the agreement and Nolan did not object.
B. Train will win because Train made a down payment and took possession.
C. Nolan will win because Nolan did not sign the agreement.
D. Nolan will win because the house was worth more than $500.
B. Train will win because Train made a down payment and took possession.
The Statute of Frauds applies to real property transactions like this one and generally requires that they be in writing to be enforceable. However, there is an exception to this part of the Statute if the buyer, by taking possession of the property and making a down payment cannot be returned to the status quo. In such a case, the oral agreement is perfectly valid and enforceable.
A building subcontractor submitted a bid for construction of a portion of a high-rise office building.
The bid contained material computational errors. The general contractor accepted the bid with knowledge of the errors.
Which of the following statements best represents the subcontractor’s liability?
A. Not liable because the contractor knew of the errors. B. Not liable because the errors were a result of gross negligence. C. Liable because the errors were unilateral. D. Liable because the errors were material.
A. Not liable because the contractor knew of the errors.
Usually, a unilateral mistake is not a defense to contractual liability. However, when the error is computational and the other party knew or should have known of the error, it may be used as a defense.
To prevail in a common law action for fraud in the inducement, a plaintiff must prove that the
A. Defendant was an expert with regard to the misrepresentations.
B. Defendant made the misrepresentations with knowledge of their falsity and with an intention to deceive.
C. Misrepresentations were in writing.
D. Plaintiff was in a fiduciary relationship with the defendant.
B. Defendant made the misrepresentations with knowledge of their falsity and with an intention to deceive.
A common law fraud action requires four proofs: a false statement of fact or misrepresentation by the defendant, knowledge of the false statement by the defendant, reliance by the plaintiff, and a loss suffered by the plaintiff. If these elements are present, the plaintiff is a winner.
Long purchased a life insurance policy with Tempo Life Insurance Co.
The policy named Long’s daughter as beneficiary. Six months after the policy was issued, Long died of a heart attack.
Long had failed to disclose on the insurance application a known preexisting heart condition that caused the heart attack.
Tempo refused to pay the death benefit to Long’s daughter.
If Long’s daughter sues, Tempo will
A. Win, because Long's daughter is an incidental beneficiary. B. Win, because of Long's failure to disclose the preexisting heart condition. C. Lose, because Long's death was from natural causes. D. Lose, because Long's daughter is a third-party donee beneficiary.
B. Win, because of Long’s failure to disclose the preexisting heart condition.
On May 25, Fresno sold Bronson, a minor, a used computer. On June 1, Bronson reached the age of majority. On June 10, Fresno wanted to rescind the sale. Fresno offered to return Bronson’s money and demanded that Bronson return the computer. Bronson refused, claiming that a binding contract existed. Bronson’s refusal is:
A. Not justified because Fresno is not bound by the contract unless Bronson specifically ratifies the contract after reaching the age of majority.
B. Not justified, because Fresno does not have to perform under the contract if Bronson has a right to disaffirm the contract.
C. Justified, because Bronson and Fresno are bound by the contract as of the date Bronson reached the age of majority.
D. Justified, because Fresno must perform under the contract regardless of Bronson’s minority.
D. Justified, because Fresno must perform under the contract regardless of Bronson’s minority.
If a buyer accepts an offer containing an immaterial unilateral mistake, the resulting contract will be
A. Void as a matter of law.
B. Void at the election of the buyer.
C. Valid as to both parties.
D. Voidable at the election of the seller.
C. Valid as to both parties.
This answer is correct because the mistake is immaterial and has no effect on an otherwise valid contract. Therefore, the contract is enforceable by either party.
Which of the following, if intentionally misstated by a seller to a buyer, would be considered a fraudulent inducement to make a contract? A. Nonexpert opinion. B. Appraised value. C. Prediction. D. Immaterial fact.
B. Appraised value.
On reaching majority, a minor may ratify a contract in any of the following ways except by
A. Failing to disaffirm within a reasonable time after reaching majority.
B. Orally ratifying the entire contract.
C. Acting in a manner that amounts to ratification.
D. Affirming, in writing, some of the terms of the contract.
D. Affirming, in writing, some of the terms of the contract.
For a purchaser of land to avoid a contract with the seller based on duress, it must be shown that the seller’s improper threats
A. Constituted a crime or tort.
B. Would have induced a reasonably prudent person to assent to the contract.
C. Actually induced the purchaser to assent to the contract.
D. Were made with the intent to influence the purchaser.
C. Actually induced the purchaser to assent to the contract.
What type of conduct generally will make a contract voidable?
A. Fraud in the execution.
B. Fraud in the inducement.
C. Physical coercion.
D. Contracting with a person under guardianship.
B. Fraud in the inducement.
Johns leased an apartment from Olsen.
Shortly before the lease expired, Olsen threatened Johns with eviction and physical harm if Johns did not sign a new lease for twice the old rent. Johns, unable to afford the expense to fight eviction and in fear of physical harm, signed the new lease. Three months later, Johns moved and sued to void the lease claiming duress.
The lease will be held
A. Void because of the unreasonable increase in rent. B. Voidable because of Olsen's threat to bring eviction proceedings. C. Void because of Johns' financial condition. D. Voidable because of Olsen's threat of physical harm.
D. Voidable because of Olsen’s threat of physical harm.
When there has been no performance by either party, which of the following events generally will result in the discharge of a party’s obligation to perform as required under the original contract?
Accord and satisfaction Mutual rescission
Yes Yes
Yes No
No Yes
No No
Accord and satisfaction Yes
Mutual rescission Yes
A is correct because two methods of discharge of the original contract are by accord (agreement to accept a different performance) and satisfaction whereby the substituted performance is performed, and mutual rescission, whereby both parties agree to the discharge of their obligations (mutual rescission).
Ordinarily, in an action for breach of a construction contract, the statute of limitations time period would be computed from the date the A. Contract is negotiated. B. Contract is breached. C. Construction is begun. D. Contract is signed.
B. Contract is breached.
Kaye contracted to sell Hodges a building for $310,000. The contract required Hodges to pay the entire amount at closing. Kaye refused to close the sale of the building. Hodges sued Kaye.
To what relief is Hodges entitled?
A. Punitive damages and compensatory damages. B. Specific performance and compensatory damages. C. Consequential damages or punitive damages. D. Compensatory damages or specific performance.
D. Compensatory damages or specific performance.
An aggrieved party, upon breach of contract, cannot have both specific performance (requiring Kaye to deed the property to Hodges), and compensatory damages for failure to deliver the deed. To allow both would result in an unjust enrichment for Hodges.
Ames Construction Co. contracted to build a warehouse for White Corp. The construction specifications required Ames to use Ace lighting fixtures. Inadvertently, Ames installed Perfection lighting fixtures, which are of slightly lesser quality than Ace fixtures, but in all other respects meet White’s needs. Which of the following statements is correct?
A. White’s recovery will be limited to monetary damages because Ames’ breach of the construction contract was not material.
B. White will not be able to recover any damages from Ames because the breach was inadvertent.
C. Ames did not breach the construction contract because the Perfection fixtures were substantially as good as the Ace fixtures.
D. Ames must install Ace fixtures or White will not be obligated to accept the warehouse.
A. White’s recovery will be limited to monetary damages because Ames’ breach of the construction contract was not material.
On June 15, 2004, Alpha, Inc., contracted with Delta Manufacturing, Inc., to buy a vacant parcel of land Delta owned. Alpha intended to build a distribution warehouse on the land because of its location near a major highway. The contract stated that: “Alpha’s obligations hereunder are subject to the vacant parcel being rezoned to a commercial zoning classification by July 31, 2005.” Which of the following statements is correct?
A. If the parcel is not rezoned by July 31, and Alpha refuses to purchase it, Alpha would not be in breach of contract.
B. If the parcel is rezoned by July 31, and Alpha refuses to purchase it, Delta would be able to successfully sue Alpha for specific performance.
C. The contract is not binding on either party because Alpha’s performance is conditional.
D. If the parcel is rezoned by July 31, and Delta refuses to sell it, Delta’s breach would not discharge Alpha’s obligation to tender payment.
A. If the parcel is not rezoned by July 31, and Alpha refuses to purchase it, Alpha would not be in breach of contract.
The rezoning clause is a condition precedent. Alpha has no duty to perform under the contract until and unless the parcel is rezoned by July 31. Essentially, the condition must be met before there are any contractual obligations.
The statute of limitations for an alleged breach of contract
A. Does not apply if the contract was oral.
B. Requires that a lawsuit is commenced and a judgment rendered within a prescribed period of time.
C. Is determined on a case by case basis.
D. Generally commences on the date of the breach.
D. Generally commences on the date of the breach.
To cancel a contract and to restore the parties to their original positions before the contract, the parties should execute a A. Novation B. Release C. Rescission D. Revocation
C. Rescission
A rescission is the undoing of a contract. Both sides are returned to their original positions, and the contractual obligations on both sides are discharged.
One of the criteria for a valid assignment of a sales contract to a third party is that the assignment must
A. Not materially increase the other party’s risk or duty.
B. Not be revocable by the assignor.
C. Be supported by adequate consideration from the assignee.
D. Be in writing and signed by the assignor.
A. Not materially increase the other party’s risk or duty.
Only changes that require a minor adjustment, like sending a check to a different address, may be assigned.
Graham contracted with the City of Harris to train and employ high school dropouts residing in Harris. Graham breached the contract. Long, a resident of Harris and a high school dropout, sued Graham for damages.
Under the circumstances, Long will
A. Win, because Long is a third-party beneficiary entitled to enforce the contract. B. Win, because the intent of the contract was to confer a benefit on all high school dropouts residing in Harris. C. Lose, because Long is merely an incidental beneficiary of the contract. D. Lose, because Harris did not assign its contract rights to Long.
C. Lose, because Long is merely an incidental beneficiary of the contract.
Long is a third-party beneficiary, because although he or she did not sign the contract, Long will benefit from it. More specifically, Long is an incidental beneficiary, because Long was not intended to be the primary beneficiary of the contract. As an incidental beneficiary, Long will not be able to enforce the contract. Only intended beneficiaries can sue. An example of such a person is a named beneficiary in a life insurance contract.
Union Bank lent $200,000 to Wagner. Union required Wagner to obtain a life insurance policy naming Union as beneficiary. While the loan was outstanding, Wagner stopped paying the premiums on the policy. Union paid the premiums, adding the amounts paid to Wagner’s loan. Wagner died and the insurance company refused to pay the policy proceeds to Union. Union may
A. Recover the policy proceeds because it is a creditor beneficiary.
B. Recover the policy proceeds because it is a donee beneficiary.
C. Not recover the policy proceeds because it is not in privity of contract with the insurance company.
D. Not recover the policy proceeds because it is only an incidental beneficiary.
A. Recover the policy proceeds because it is a creditor beneficiary.
A person is a creditor beneficiary if two things are in place: one party to a contract in question owed the creditor money, and the contract in question was made specifically to satisfy that debt.
West, Inc., and Barton entered into a contract. After receiving valuable consideration from Egan, West assigned its rights under the Barton contract to Egan. In which of the following circumstances would West not be liable to Egan? A. West released Barton. B. West breached the contract. C. Egan released Barton. D. Barton paid West.
C. Egan released Barton.
Egan has all the rights of West based on the assignment. Thus, Egan can release Barton, discharging the Barton contract, and West has no further liability to Egan.
