Reg 8 Flashcards
Which of the following events will release a noncompensated surety from liability to the creditor?
a.
The principal debtor was involuntarily petitioned into bankruptcy.
b.
The creditor was adjudicated incompetent after the debt arose.
c.
The creditor failed to notify the surety of a partial surrender of the principal debtor’s collateral.
d.
The principal debtor exerted duress to obtain the surety agreement.
Choice “c” is correct. A noncompensated surety will be discharged from liability if the principal debtor and the creditor modify the terms of the contract in any way. A partial surrender of the debtor’s collateral is a modification that will release a noncompensated surety from liability
Which of the following statements is(are) correct regarding debtors' rights? I. State exemption statutes prevent all of a debtor's personal property from being sold to pay a federal tax lien. II. Federal social security benefits received by a debtor are exempt from garnishment by creditors. a. I only. b. Neither I nor II. c. II only. d. Both I and II.
Choice “c” is correct. Federal law does not allow creditors to institute garnishment proceedings with respect to federal social security benefits.
Choice “a” is incorrect. Federal law, nor state law, controls what property is subject to federal tax liens.
Choice “d” is incorrect. Federal law, not state law, controls what property is subject to federal tax liens, and federal law does not allow creditors to institute garnishment proceedings with respect to federal social security benefits.
Choice “b” is incorrect. Federal law does not allow creditors to institute garnishment proceedings with respect to federal social security benefits, and federal law, nor state law, controls what property is subject to federal tax liens.
Which of the following acts always will result in the total release of a compensated surety?
a.
The principal debtor’s performance is tendered.
b.
The principal debtor’s obligation is partially released.
c.
The creditor extends the principal debtor’s time to pay.
d.
The creditor changes the manner of the principal debtor’s payment.
Choice “a” is correct. Tender of performance by the principal debtor completely releases the surety, even a compensated surety.
Choice “d” is incorrect. Changing the manner of payment will release a compensated surety only if the change increases the surety’s risk.
Choice “c” is incorrect. Changing the time of payment will release a compensated surety only if the change increases the surety’s risk.
Choice “b” is incorrect. Partially releasing the principal will only partially release the compensated surety.
When a principal debtor defaults and a surety pays the creditor the entire obligation, which of the following remedies gives the surety the best method of collecting from the debtor? a. Subrogation. b. Attachment. c. Exoneration. d. Contribution.
Choice “a” is correct. Subrogation is the right a surety has by which the surety succeeds to the creditor’s rights against the principal when the surety pays the principal’s obligations.
Choice “c” is incorrect. Exoneration is the right a surety has against the debtor to force the solvent debtor to pay a debt when the debtor refuses to do so.
Choice “d” is incorrect. Contribution is a right one surety has against the surety’s co-sureties to force them to pay their share of the debt.
Choice “b” is incorrect. Attachment is not a right of suretyship, but rather is a remedy with respect to the property of the debtor-principal.
Green was unable to repay a loan from State Bank when due. State refused to renew the loan unless Green provided an acceptable surety. Green asked Royal, a friend, to act as surety on the loan. To induce Royal to agree to become a surety, Green fraudulently represented Green’s financial condition and promised Royal discounts on merchandise sold at Green’s store. Royal agreed to act as surety and the loan was renewed. Later, Green’s obligation to State was discharged in Green’s bankruptcy. State wants to hold Royal liable. Royal may avoid liability:
a.
Because the arrangement was void at the inception.
b.
If Royal was an uncompensated surety.
c.
If Royal can show that State was aware of the fraudulent representations.
d.
Because the discharge in bankruptcy will prevent Royal from having a right of reimbursement.
Choice “c” is correct. Fraud on the surety by the principal debtor is not a defense unless the creditor knew of the fraud.
Choice “b” is incorrect. An uncompensated surety can be bound as long as the surety’s promise is made before consideration passed between the principal debtor and the creditor. Here, State renewed the loan in exchange for obtaining the surety. Thus, there is sufficient consideration to bind Royal.
Choice “d” is incorrect. Discharge in bankruptcy of the principal debtor does not discharge the surety.
Choice “a” is incorrect. Nothing in the facts makes the arrangement here void at the inception.
Wright cosigned King’s loan from Ace Bank. Which of the following events would release Wright from the obligation to pay the loan?
a.
King is adjudicated mentally incompetent.
b.
Ace is paid in full by King’s spouse.
c.
Ace seeking payment of the loan only from Wright.
d.
King is granted a discharge in bankruptcy.
Choice “b” is correct. Assuming that this is a suretyship situation and that Wright’s only obligation is as a surety, full payment of the underlying obligation discharges the surety.
Choice “c” is incorrect. Because nothing in the facts states that Wright signed only as a guarantor or guarantor of collection, Ace had no duty to first seek payment from King; so, Ace’s failure to first seek payment from King does not result in Wright’s discharge.
Choice “d” is incorrect. Discharge of the principal debtor for bankruptcy does not discharge a cosigner of a loan.
Choice “a” is incorrect. Incompetency of the principal debtor does not discharge a cosigner of a loan.
Under the Federal Fair Debt Collection Practices Act, which of the following would a collection service using improper debt collection practices be subject to?
a.
Criminal prosecution for violating the Act.
b.
Abolishment of the debt.
c.
Civil lawsuit for damages for violating the Act.
d.
Reduction of the debt.
Choice “c” is correct. The FDCPA gives parties injured by unfair collection practices the right to sue for damages. 15 USC 1692k(a)(1)
Choice “b” is incorrect. The FDCPA gives parties injured by unfair collection practices the right to sue for damages. It does not provide for abolishment of the debt.
Choice “d” is incorrect. The FDCPA gives parties injured by unfair collection practices the right to sue for damages. It does not provide for a reduction of the debt.
Choice “a” is incorrect. The FDCPA gives parties injured by unfair collection practices the right to sue for damages. It does not provide criminal penalties.
Ingot Corp. lent Flange $50,000. At Ingot’s request, Flange entered into an agreement with Quill and West for them to act as compensated co-sureties on the loan in the amount of $100,000 each. Ingot released West without Quill’s or Flange’s consent, and Flange later defaulted on the loan. Which of the following statements is correct?
a.
Quill will be liable for the entire loan balance.
b.
Flange will be released for 50% of the loan balance.
c.
Quill will be liable for 50% of the loan balance.
d.
Ingot’s release of West will have no effect on Flange’s and Quill’s liability to Ingot.
Choice “c” is correct. Release of a co-surety is treated the same as release of security. The release discharges the other co-sureties to the extent of the impairment of their rights. Had West not been released, Quill would have had a right of contribution against West for half of the debt. Thus, Quill is discharged to that extent.
Which of the following methods will allow a creditor to collect money from a debtor's wages? a. Arrest. b. Writ of garnishment. c. Mechanic's lien. d. Order of receivership.
Choice “b” is correct. A writ of garnishment will allow a creditor to collect money from a debtor’s wages.
Choices “a” and “d” are incorrect. Neither the arrest of the debtor nor an order of receivership will allow a creditor to collect money from a debtor’s wages.
Choice “c” is incorrect. A mechanic’s lien is placed on property such as an automobile and will prevent the owner from transferring “clean” title without paying the mechanic’s lien. A mechanic’s lien does not, by itself, allow the creditor to collect money from a debtor’s wages.
A party contracts to guarantee the collection of the debts of another. As a result of the guaranty, which of the following statements is correct?
a.
The creditor may proceed against the guarantor without attempting to collect from the debtor.
b.
The guaranty must be in writing.
c.
The creditor must be notified of the debtor’s default by the guarantor.
d.
The guarantor may use any defenses available to the debtor.
Choice “b” is correct. The Statute of Frauds requires promises to pay the debts of another to be evidenced by a writing containing the material terms.
Choice “a” is incorrect. Before seeking payment from a guarantor of collection, a creditor must first attempt to collect from the principal debtor.
Choice “d” is incorrect. The guarantor may use some, but not all, of the debtor’s defenses. For example, the debtor’s minority or bankruptcy is not a defense to the guarantor.
Choice “c” is incorrect. A surety generally has no right to be notified of the debtor’s default.
Which of the following events will release a noncompensated surety from liability?
a.
Insanity of the principal debtor at the time the contract was entered into with the creditor.
b.
Filing of an involuntary petition in bankruptcy against the principal debtor.
c.
Modification by the principal debtor and creditor of their contract that materially increases the surety’s risk of loss.
d.
Release of the principal debtor’s obligation by the creditor but with the reservation of the creditor’s rights against the surety.
Choice “c” is correct. Any variation on an uncompensated surety’s risk releases the surety.
Choice “d” is incorrect. If the release includes a reservation of rights against the surety, the surety is not discharged.
Choice “b” is incorrect. The fact that the principal debtor is bankrupt is not a defense to the surety.
Choice “a” is incorrect. The fact that the principal debtor was incompetent at the time the contract was made is not a defense available to the surety.
Nash, Owen, and Polk are co-sureties with maximum liabilities of $40,000, $60,000 and $80,000, respectively. The amount of the loan on which they have agreed to act as co-sureties is $180,000. The debtor defaulted at a time when the loan balance was $180,000. Nash paid the lender $36,000 in full settlement of all claims against Nash, Owen, and Polk. The total amount that Nash may recover from Owen and Polk is: a. $0 b. $24,000 c. $140,000 d. $28,000
Choice “d” is correct. A co-surety has a right of contribution from co-sureties. Where the debt has been reduced, each co-surety remains liable for the lesser of: (i) the reduced amount of debt or (ii) the original amount for which the co-surety has agreed to be responsible. However, the right of contribution allows each co-surety to recover from the other co-sureties their pro rata share of the payment. Here, Nash satisfied the debt by paying $36,000. Proportionally, Nash was liable for 40/180 (or 2/9) of the original debt, Owen was responsible for 3/9, and Polk was responsible for 4/9. Nash’s pro rata share of the $36,000 is $8,000; Owen’s share is $12,000; and Polk’s share is $16,000. Thus, Nash may recover $28,000.
The federal Fair Debt Collection Practices Act prohibits a debt collector from engaging in unfair practices. Under the Act, a debt collector generally can be prevented from:
a.
Communicating with a debtor who is represented by an attorney.
b.
Contacting a third party to ascertain a debtor’s location.
c.
Commencing a lawsuit to collect a debt.
d.
Continuing to collect a debt.
Choice “a” is correct. The Fair Debt Collection Practices Act prohibits contacting the debtor directly if an attorney represents the debtor.
Choice “b” is incorrect because a collection agency can contact a third party to discover a debtor’s whereabouts.
Choice “d” is incorrect because the Fair Debt Collection Practices Act is designed to curb abuses in the collection process. The Act is not designed to eliminate the debt.
Choice “c” is incorrect because all creditors have the right to sue debtors to collect debts.
Which of the following bonds are an obligation of a surety? a. Municipal bonds. b. Debenture bonds. c. Convertible bonds. d. Official bonds.
Choice “d” is correct. An official bond is a type of surety bond. Many states require public officials to obtain bonds from a surety for faithful performance of their duties. Such bonds obligate a surety for all losses that the public official causes by negligence or nonperformance of required duties.
Choice “c” is incorrect. A convertible bond is a corporate bond that may be converted into stock. A convertible bond has nothing to do with the obligations of a surety.
Choice “b” is incorrect. A debenture bond is simply an unsecured corporate bond. A debenture bond has nothing to do with the obligations of a surety.
Choice “a” is incorrect. A municipal bond is a bond issued by a city or other local government. A municipal bond has nothing to do with the obligations of a surety.
Sorus and Ace have agreed, in writing, to act as guarantors of collection on a debt owed by Pepper to Towns, Inc. The debt is evidenced by a promissory note. If Pepper defaults, Towns will be entitled to recover from Sorus and Ace unless:
a.
Sorus and Ace are in the process of exercising their rights against Pepper.
b.
Towns has not attempted to enforce the promissory note against Pepper.
c.
Sorus and Ace prove that Pepper was insolvent at the time the note was signed.
d.
Pepper dies before the note is due.
Choice “b” is correct. Sorus and Ace have agreed to be guarantors of collection. Thus, Towns, the creditor, must pursue the debtor, Pepper, before Towns is entitled to recover from Sorus and/or Ace.
Choice “a” is incorrect. Towns, the creditor, will be entitled to recover from Sorus and Ace, the sureties, even if the sureties are in the process of exercising their rights against the debtor (i.e., “right of exoneration”).
Choice “c” is incorrect. Insolvency of the debtor, either at the time the note was signed, or at the time of default, is not a defense of a surety.
Choice “d” is incorrect. Death of the debtor is not a defense of a surety.
Edwards Corp. lent Lark $200,000. At Edwards’ request, Lark entered into an agreement with Owen and Ward for them to act as compensated co-sureties on the loan in the amount of $200,000 each. If Edwards releases Ward without Owen’s or Lark’s consent, and Lark later defaults, which of the following statements is correct?
a.
Owen will be liable for 50% of the loan balance.
b.
Edwards’ release of Ward will have no effect on Lark’s and Owen’s liability to Edwards.
c.
Owen will be liable for the entire loan balance.
d.
Lark will be released for 50% of the loan balance.
Choice “a” is correct. Owen will be liable for 50% of the loan balance. The release of one co-surety (Ward) without the consent of the other co-surety (Owen) discharges the remaining co-surety’s (Owen) right of contribution from the released co-surety (Ward) and discharges the remaining co-surety to the extent the released party was liable. Owen and Ward were equally liable on the debt. Thus, Ward’s release will release Owen from 50% of Owen’s liability.
Mane Bank lent Eller $120,000 and received securities valued at $30,000 as collateral. At Mane's request, Salem and Rey agreed to act as uncompensated co-sureties on the loan. The agreement provided that Salem's and Rey's maximum liability would be $120,000 each. Mane released Rey without Salem's consent. Eller later defaulted when the collateral held by Mane was worthless and the loan balance was $90,000. Salem's maximum liability is: a. $45,000 b. $90,000 c. $30,000 d. $60,000
Choice “a” is correct. $45,000.
A release of a co-surety without the other co-surety’s consent and without “reservation of rights” against the other co-surety results in the remaining co-surety’s losing the right of contribution against the released co-surety. Thus, the remaining surety is discharged to the extent that the remaining surety could have recovered from the released surety. Here the sureties were liable for the debt equally. Thus, Salem is now liable for only $45,000, which is half of the $90,000 debt.
On June 1, Year 1, 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, Year 2, Baker wrote Decker confirming Decker’s guaranty. Decker did not object to the confirmation. On August 23, Year 2, 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 Baker demanded payment within one year of the date the guaranty was given.
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 Decker did not object to Baker’s June 3 letter.
d.
Decker is not liable under the oral guaranty because Decker’s promise was not in writing.
Choice “d” is correct. Under the Statute of Frauds a promise to pay the debt or default of another (a “surety” contract) must be evidenced by a writing signed by the surety (the party to be charged). Decker orally guaranteed the debt owed by Decker’s cousin. Thus, Decker’s promise is not enforceable. Baker’s confirmation is irrelevant.
A distinction between a surety and a co-surety is that only a co-surety is entitled to: a. Exoneration. b. Subrogation. c. Reimbursement (Indemnification). d. Contribution.
Choice “d” is correct. Only a co-surety has the right of contribution against other co-sureties. Contribution results in the sharing of liability on a pro-rata basis among co-sureties.
Choice “c” is incorrect, because reimbursement or indemnification is the right of both a surety and co-sureties to be repaid by the debtor for the surety’s or co-sureties’ payment to the creditor.
Choice “b” is incorrect, because subrogation is the right of both a surety and of the co-sureties, which have paid the creditor, to “stand in the shoes of the creditor” and sue the debtor for payment.
Choice “a” is incorrect, because exoneration is both: (i) the right of a surety (and the right of co-sureties) to bring an action against a debtor who has assets but has failed to pay the creditor and (ii) the right of a co-surety to bring a lawsuit to require the other co-sureties to pay their pro-rata share of the principal’s debt.
Which of the following defenses would a surety be able to assert successfully to limit the surety’s liability to a creditor?
a.
The incapacity of the surety.
b.
A personal defense the principal debtor has against the creditor.
c.
A discharge in bankruptcy of the principal debtor.
d.
The incapacity of the principal debtor.
Choice “a” is correct. A surety may raise his or her own contract defenses to limit his or her liability; thus, the surety’s own incapacity is a defense to the surety promise.
Choice “c” is incorrect. The debtor’s discharge in bankruptcy is not available as a defense to the surety. A debtor’s possibility of going bankrupt is one of the main reasons that creditors require sureties.
Choice “b” is incorrect. A surety generally cannot raise the debtor’s personal defenses against the creditor.
Choice “d” is incorrect. A surety cannot raise the debtor’s incapacity as a defense against the creditor. A debtor’s infancy or mental incapacity is one of the main reasons why a creditor might require a surety.
First State Bank lent Debbie Nepsy $50,000 to purchase securities. Debbie agreed to repay the loan in 20 monthly installments of $2,500. Debbie stopped making payments after paying her first two installments. The bank then began phoning Debbie at all hours of the day and night, asking her to repay the loan, calling her a dead beat, and threatening to have her thrown in jail. Debbie explained that the securities she purchased are now worthless, so she will not repay the loan, and she told the bank to stop calling her. Nevertheless, the bank continued calling. The bank's actions are in violation of: a. The Fair Debt Collection Practices Act. b. The Clayton Act. c. The Securities Exchange Act of 1934. d. None of the answer choices are correct.
Choice “d” is correct. As will be explained below, the bank’s actions do not appear to violate any of the Acts listed in choices “c”, “a”, or “b”.
Choice “c” is incorrect. The Securities Exchange Act of 1934 regulates many aspects of securities after they are issued but does not apply to the bank’s collection activities here because it does not appear that the bank was involved in the sale of the securities beyond making the loan to Debbie.
Choice “a” is incorrect. The Fair Debt Collection Practices Act prohibits debt collection agencies from conducting such activities with respect to consumer debts, but the Act does not apply to a creditor attempting to collect its own debts.
Choice “b” is incorrect. The Clayton Act is applicable to antitrust matters in business, not to collection activities.
Carlos asked Rick and Peter to guarantee Carlos' debt to Gord Motors. Both Rick and Peter agree to act as sureties. The contract that all parties signed provides that Rick's maximum liability is $30,000, and Peter's is $20,000. Carlos owes Gord Motors $20,000 and is in default. Rick pays Gord Motors the entire amount. In the absence of an agreement to the contrary, Rick can recover from Peter: a. $20,000. b. Nothing. c. $12,000. d. $8,000.
Choice “d” is correct. As a general rule each surety is liable to the creditor for the entire amount of the debt. However, with respect to co-sureties, each co-surety can seek contribution from the other co-surety (or co-sureties) to the extent any co-surety pays more than his/her/its pro rata share of the debt. In this case Rick’s pro rata share of the debt is $30,000/($30,000 + $20,000) = 3/5. 3/5 x $20,000 = $12,000. Peter’s pro rata share is $20,000/($30,000 + $20,000) = 2/5. 2/5 x $20,000 = $8,000. Peter owes Rick $8,000 in contribution.
Lee repairs high-speed looms for Sew Corp., a clothing manufacturer. Which of the following circumstances best indicates that Lee is an employee of Sew and not an independent contractor?
a.
Lee is paid weekly by Sew.
b.
Lee’s work is not supervised by Sew personnel.
c.
Lee’s tools are owned by Lee.
d.
Lee’s work requires a high degree of technical skill.
Choice “a” is correct. A clear example of an employee is one who works full time for the employer, uses the employer’s tools, is compensated on a time basis, and is subject to supervision of the employer in the details of the work. A clear example of an independent contractor is one who has a calling of his own, who uses his own tools, is hired for a particular job, is paid a given amount for the job, and follows his own discretion. Thus, payment on a weekly basis is an indication that a person is an employee rather than an independent contractor.
Blue, a used car dealer, appointed Gage as an agent to sell Blue's cars. Gage was authorized by Blue to appoint subagents to assist in the sale of the cars. Vond was appointed as a sub-agent. To whom does Vond owe a fiduciary duty? a. Blue only. b. Gage only. c. Neither Blue nor Gage. d. Both Blue and Gage.
Choice “d” is correct. A subagent is one who assists the agent in the performance of his or her duties. When a subagent is appointed by an agent with authority to appoint a subagent, the subagent owes a duty to both the agent and the principal. Thus, choices “b”, “a”, and “c” are incorrect.
Which of the following statements is(are) correct regarding the relationship between an agent and a nondisclosed principal? I. The principal is required to indemnify the agent for any contract entered into by the agent within the scope of the agency agreement. II. The agent has the same actual authority as if the principal had been disclosed. a. Neither I nor II. b. II only. c. I only. d. Both I and II.
Choice “d” is correct. A principal owes her agent the duty of indemnification, which is a type of reimbursement for costs and liabilities incurred by the agent as a result of authorized acts on behalf of the principal.
Actual authority is the authority that the agent reasonably believes she possesses because of the principal’s communications to the agent. The agent has the same actual authority whether the principal is disclosed or undisclosed.
Which of the following statements represent(s) a principal's duty to an agent who works on a commission basis? I. The principal is required to maintain pertinent records, account to the agent, and pay the agent according to the terms of their agreement. II. The principal is required to reimburse the agent for all authorized expenses incurred unless the agreement calls for the agent to pay expenses out of the commission. a. I only. b. Both I and II. c. II only. d. Neither I nor II.
Choice “b” is correct. A principal is required to pay its commissioned agent as agreed and thus must maintain sufficient records in order to do so. Therefore, statement I is true. Statement II is also true. Generally, a principal must indemnify an agent for all expenses the agent reasonably incurs on the principal’s behalf unless the parties have agreed otherwise.
Trent was retained, in writing, to act as Post's agent for the sale of Post's memorabilia collection. Which of the following statements is correct? I. To be an agent, Trent must be at least 21 years of age. II. Post would be liable to Trent if the collection was destroyed before Trent found a purchaser. a. II only. b. I only. c. Both I and II. d. Neither I nor II.
Choice “d” is correct. I is incorrect because while a principal must have capacity, an agent need not have capacity; a minor may serve as an agent. II is incorrect because destruction of the subject matter of the agency constitutes a change in circumstances that will terminate the agency by operation of law and release the parties from their relationship.
Thorp was a purchasing agent for Ogden, a sole proprietor, and had the express authority to place purchase orders with Ogden’s suppliers. Thorp placed an order with Datz, Inc. on Ogden’s behalf after Ogden was declared incompetent in a judicial proceeding. Thorp was aware of Ogden’s incapacity. Which of the following statements is correct concerning Ogden’s liability to Datz?
a.
Ogden will not be liable because Ogden was a nondisclosed principal.
b.
Ogden will be liable because Datz was not informed of Ogden’s incapacity.
c.
Ogden will not be liable because Thorp’s agency ended when Ogden was declared incompetent.
d.
Ogden will be liable because Thorp acted with express authority.
Choice “c” is correct. An agency is terminated by operation of law upon the incapacity of the principal; no notice is needed.
Choice “b” is incorrect. An agency is terminated by operation of law upon the incapacity of the principal; notice to the third party with whom the agent deals is not necessary.
Choice “d” is incorrect. An agent’s authority is terminated by operation of law upon the incapacity of the principal regardless of whether the authority was express, implied, or apparent.
Choice “a” is incorrect. Ogden will not be liable because of the incapacity; Ogden’s status as a disclosed vs. undisclosed principal is irrelevant.
Young Corp. hired Wilson as a sales representative for six months at a salary of $5,000 per month plus 6% of sales. Which of the following statements is correct?
a.
The agreement between Young and Wilson formed an agency coupled with an interest.
b.
Wilson is obligated to act solely in Young’s interest in matters concerning Young’s business.
c.
The agreement between Young and Wilson is not enforceable unless it is in writing and signed by Wilson.
d.
Young does not have the power to dismiss Wilson during the six-month period without cause.
Choice “b” is correct. An agent owes the principal a duty of loyalty, which includes the duty to act solely in the principal’s interest in matters relating to the agency.
Choice “d” is incorrect. A principal has the power to terminate an agency relationship at any time, although the principal might be liable for damages if the termination is in breach of contract.
Choice “c” is incorrect. A contract for services need not be in writing unless it cannot be performed within one year. The service contract here is for six months.
Choice “a” is incorrect. An agency coupled with an interest arises only when the agent is given an interest in the subject matter of the agency. A sales commission is not a sufficient interest.
Which of the following actions requires an agent for a corporation to have a written agency agreement?
a.
Purchasing an interest in undeveloped land for the principal.
b.
Retaining an attorney to collect a business debt owed the principal.
c.
Purchasing office supplies for the principal’s business.
d.
Hiring an independent general contractor to renovate the principal’s office building.
Choice “a” is correct. Generally, agency power may be granted orally, even if the agent enters into contracts that must be in writing to be enforceable. However, most states require an agency agreement to be in writing if the agent is to purchase or convey interests in land.
Choice “c” is incorrect. Generally, agency power may be granted orally. The power to buy office supplies need not be granted in writing.
Choice “d” is incorrect. Generally, agency power may be granted orally. The power to hire persons to perform services need not be granted in writing. (Note that repairing a building involves a service and not an interest in land.)
Choice “b” is incorrect. Generally, agency power may be granted orally, even if the agent is to enter into contracts that must be in writing to be enforceable. The power to hire persons to perform services need not be granted in writing.
Bolt Corp. dismissed Ace as its general sales agent and notified all of Ace’s known customers by letter. Young Corp., a retail outlet located outside of Ace’s previously assigned sales territory, had never dealt with Ace. Young knew of Ace as a result of various business contacts. After his dismissal, Ace sold Young goods, to be delivered by Bolt, and received from Young a cash deposit for 20% of the purchase price. It was not unusual for an agent in Ace’s previous position to receive cash deposits. In an action by Young against Bolt on the sales contract, Young will:
a.
Win, because a principal is an insurer of an agent’s acts.
b.
Win, because Bolt’s notice was inadequate to terminate Ace’s apparent authority.
c.
Lose, because Ace lacked any express authority to make the contract.
d.
Lose, because Ace lacked any implied authority to make the contract.
Choice “b” is correct. Although Bolt gave known customer’s notice of Ace’s dismissal, some courts might also require a notice placed in a newspaper to terminate Ace’s apparent authority as to people, like Young, who had heard of Ace.
Choice “d” is incorrect. Although Ace lacked implied authority, a court might find that he had apparent authority since Bolt had held Ace out as its agent previously.
Choice “c” is incorrect. Although Ace lacked express authority, a court might find that he had apparent authority since Bolt had held Ace out as its agent previously.
Choice “a” is incorrect. A principal is not an insurer of an agent’s acts. A principal is liable only when the agent acts with authority.
Easy Corp. is a real estate developer and regularly engages real estate brokers to act on its behalf in acquiring parcels of land. The brokers are authorized to enter into such contracts, but are instructed to do so in their own names without disclosing Easy’s identity or relationship to the transaction. If a broker enters into a contract with a seller on Easy’s behalf:
a.
Easy will be bound by the contract because of the broker’s apparent authority.
b.
The broker will have the same actual authority as if Easy’s identity had been disclosed.
c.
The broker will not be personally bound by the contract because the broker has express authority to act.
d.
Easy will not be liable for any negligent acts committed by the broker while acting on Easy’s behalf.
Choice “b” is correct. Actual authority arises from the communications between the principal and the agent. Whether the agent discloses the principal to the third party with whom the agent contracts has no effect on the communications between the principal and the agent.
Choice “a” is incorrect. Apparent authority arises from the communications between the principal and the third party with whom the agent deals. If the principal is undisclosed, as under the facts here, the third party has no idea that there is a principal, and so there are no communications between the third party and the principal from which apparent authority can arise.
Choice “d” is incorrect. A principal generally is not liable for an agent’s torts, but can be liable when the torts are authorized. The fact that the principal is undisclosed has no effect on this rule.
Choice “c” is incorrect. When a principal is undisclosed, the third party with whom the agent deals may hold either the agent or the principal liable on contracts that the agent enters into on the principal’s behalf.
Noll gives Carr a written power of attorney. Which of the following statements is correct regarding this power of attorney?
a.
It must be for a definite period of time.
b.
It may continue in existence after Noll’s death.
c.
It may limit Carr’s authority to specific transactions.
d.
It must be signed by both Noll and Carr.
Choice “c” is correct. A power of attorney is a form of agency, and like all agencies the power of attorney agency relationship may be limited in scope of authority.
Choice “d” is incorrect. As a general rule, no writing is required to form an agency relationship, and even where a writing is required, the writing need only be signed by the principal (the one sought to be bound).
Choice “a” is incorrect. A power of attorney, like other agencies, need not explicitly state a duration.
Choice “b” is incorrect. A power of attorney, like all agencies, is terminated by the death of either the principal or the agent.
Which of the following rights will a third party be entitled to after validly contracting with an agent representing an undisclosed principal?
a.
Ratification of the contract by the principal.
b.
Election to void the contract after disclosure of the principal.
c.
Disclosure of the principal by the agent.
d.
Performance of the contract by the agent.
Choice “d” is correct. If the principal is undisclosed, the third party with whom the agent dealt can hold the agent liable on the contract.
Choice “c” is incorrect. A third party has no general right to discover the identity of an undisclosed principal.
Choice “a” is incorrect. A third party never has the right to force a principal to ratify a contract; only a principal has a right to choose to ratify an unauthorized contract.
Choice “b” is incorrect. As a general rule a third party who has contracted with an agent for an undisclosed principal has no right to rescind the contract upon subsequent disclosure of the principal. Such a right exists only if the nondisclosure was fraudulent.
North Inc. hired Sutter as a purchasing agent. North gave Sutter written authorization to purchase, without limit, electronic appliances. Later, Sutter was told not to purchase more than 300 of each appliance. Sutter contracted with Orr Corp. to purchase 500 tape recorders. Orr had been shown Sutter’s written authorization. Which of the following statements is correct?
a.
North will be liable to Orr because of Sutter’s apparent authority.
b.
Sutter will not be liable to reimburse North if North is liable to Orr.
c.
Sutter will be liable to Orr because Sutter’s actual authority was exceeded.
d.
North will not be liable to Orr because Sutter’s actual authority was exceeded.
Choice “a” is correct. Here, Sutter had no actual authority because actual authority is that authority which the agent reasonably believes he has, and here North told Sutter that he no longer had authority to make unlimited purchases. There is no requirement that actual authority granted in writing be rescinded in writing. Nevertheless, North will be bound because Sutter had apparent authority. Apparent authority arises from a third party’s reasonable beliefs based on the principal’s communications directed toward the third party. Here, North had given Sutter written authorization to make purchases for North without limitation, and Orr had been shown the written authorization. North’s secret limitation on Sutter’s authority has no effect on Sutter’s apparent authority. Thus, North is liable to Orr for the purchase of all 500 recorders because Sutter had apparent authority.
A general agent’s apparent authority to bind her principal to contracts with third parties will cease without notice to those third parties when the:
a.
Agent has fulfilled the purpose for which the agency relationship was created.
b.
Time set forth in the agreement creating the agency relationship has expired.
c.
Principal and agent have mutually agreed to end their relationship.
d.
Principal has received a discharge in bankruptcy under the liquidation provisions of the Bankruptcy Code.
Choice “d” is correct. Generally, a general agent’s apparent authority does not cease unless and until notice is given. However, if the principal has received a discharge in bankruptcy, notice is not required to terminate the agent’s apparent authority.
Starr is an agent of a disclosed principal, Maple. On May 1, Starr entered into an agreement with King Corp. on behalf of Maple that exceeded Starr’s authority as Maple’s agent. On May 5, King learned of Starr’s lack of authority and immediately notified Maple and Starr that it (King) was withdrawing from the May 1 agreement. On May 7, Maple ratified the May 1 agreement in its entirety. If King refuses to honor the agreement and Maple brings an action for breach of contract, Maple will:
a.
Prevail since Maple’s capacity as a principal was known to Starr.
b.
Lose since King notified Starr and Maple of its withdrawal prior to Maple’s ratification.
c.
Lose since the May 1 agreement is void due to Starr’s lack of authority.
d.
Prevail since the agreement of May 1 was ratified in its entirety.
Choice “b” is correct. A third party may withdraw from a transaction or agreement entered into with an agent who exceeded his or her authority at any time prior to the principal’s ratification of the agent’s unauthorized acts. In this case King notified Maple of King’s withdrawal from the agreement on May 1, six days before Maple’s attempted ratification on May 7. Therefore, Maple’s action will fail.
Which of the following acts, if committed by an agent, will cause a principal to be liable to a third party?
a.
An employee’s failure to notify the employer of a dangerous condition that results in injury to a third party.
b.
An intentional tort committed by an employee outside the scope of employment, which results in injury to a third party.
c.
A negligent act committed by an independent contractor, in performance of the contract, which results in injury to a third party.
d.
A negligent act committed by an employee outside the scope of employment that results in injury to a third
Choice “a” is correct. An employer is liable for his or her own negligent acts. Under the doctrine of respondeat superior, an employer is also liable for the negligence of employees committed within the scope of employment. Failure to correct a dangerous condition that resulted in injury would be negligence by the employer. Failure of an employee to warn the employer would also be negligence by the employee. This would also subject the employer to liability under the doctrine of respondeat superior.
What is the doctrine under which a corporation is made liable for the torts of the corporation's employees when the torts are committed within the scope of employment? a. Estoppel. b. Ratification. c. Respondeat superior. d. Ultra vires.
Choice “c” is correct. Under the doctrine of respondeat superior, a principal, including a corporation, can be held liable for an employee’s tort committed within the scope of employment.
Choice “d” is incorrect. Ultra vires is a doctrine limiting a corporation’s power to act outside the scope of the corporation’s stated purposes or statutory powers.
Choice “a” is incorrect. Corporation by estoppel prevents (stops) a party to a lawsuit from successfully arguing that an entity is not a corporation on account of the failure of the entity to comply fully and timely with all the provisions of state law with respect to the formation and operation of a corporation. The party is so prevented (“estopped”) on account of that party’s previously treating the entity as if the entity had been a properly-formed and properly-operated corporation.
Choice “b” is incorrect. Ratification occurs when a principal agrees to be bound by a previously unauthorized contract entered into by an agent on the principal’s behalf.
Which of the following is a prerequisite for the creation of an agency relationship? a. The agent must have capacity. b. Consideration must be given. c. The principal must have capacity. d. The agency-principal relationship agreement must be in writing.
Choice “c” is correct. Creation of an agency relationship requires the consent of the parties and that the principal be competent (not a minor and not incompetent).
Choice “b” is incorrect. Consideration is not required to create an agency relationship.
Choice “a” is incorrect. The agent need not have capacity; only the principal need have capacity.
Choice “d” is incorrect. A writing to establish an agency-principal agreement is generally not needed unless: (i) the agent is to buy/sell land on behalf of the principal and/or (ii) the agency relationship cannot be performed within one year.
Seth performs work for Stecker Corporation. Which of the following factors presents the strongest evidence that Seth is an independent contractor?
a.
Seth has worked for Stecker for over 15 years on a regular basis.
b.
Stecker allows Seth to participate in all of Stecker’s benefit programs.
c.
Stecker does not control the manner in which Seth performs his work.
d.
Seth says that he works as an independent contractor.
Choice “c” is correct. The most important factor in determining whether a person is an independent contractor is the right to control the manner in which work is performed. An employer has the right to control the manner in which an employee performs his or her work but has little control over the manner in which work is performed by the work of an independent contractor.
Trumpette Real Properties employs Roger to buy city property for a future high-rise development. Roger knows a good deal when he sees one and secretly buys some of the property through his newly formed corporation, Sneak, Incorporated. Sneak later sells the property to Trumpette for more than Sneak paid for it. Roger has breached the duty of: a. None of the answer choices are correct. b. Notification. c. Indemnification. d. Loyalty.
Choice “d” is correct. An agent owes a duty of loyalty to his principal. This duty includes the duties not to self-deal, usurp opportunities, or have conflicts of interest with the principal. Roger’s purchase through his corporation, Sneak, was self-dealing and usurped an opportunity belonging to his principal.
Choice “c” is incorrect. The duty of indemnification is the duty to hold the agent harmless for liabilities the agent incurs on behalf of the principal.
Choice “b” is incorrect. The agent has a duty to notify the principal of all issues known to the agent.
Choice “a” is incorrect per the above explanation.
Kent, without authority, contracted to buy computer equipment from Fox Corp. for Ace Corp. Kent told Fox that Kent was acting on Ace’s behalf. For Ace to ratify the contract with Fox,
a.
Kent must have acted reasonably and in Ace’s best interest.
b.
Kent must be a general agent of Ace.
c.
Ace must notify Fox that Ace intends to ratify the contract.
d.
Ace must know all material facts relating to the contract at the time it is ratified.
Choice “d” is correct. In order to ratify the contract (ratification of an entire unauthorized act) between Kent and Fox, Ace (principal) must have knowledge of all material facts of the transaction (and want to ratify it) at the time of the ratification.
Choice “b” is incorrect. Ratification of an unauthorized act does not require that the party acting be a general agent.
Choice “c” is incorrect. The principal (Ace) need not give notice of the intent to ratify because the third party already presumed the principal was bound through the agent’s act.
Choice “a” is incorrect. There is no requirement that the agent must have acted reasonably and in the principal’s best interest; the principal is given the option to ratify even if the agent acted recklessly and in his own interest.
Which of the following terms best describes the relationship between a corporation and the CPA it hires to audit corporate books? a. Employer and independent contractor. b. Master and servant. c. Employer and employee. d. Employer and principal.
Choice “a” is correct. An employer/independent contractor relationship arises when an employer hires someone to do a job but does not have control over the manner in which the work is performed. In performing and audit, a CPA must have independence with regard to how the audit is performed. Thus, an employer/independent contractor relationship arises.
Under agency law, which of the following statements best describes ratification?
a.
A principal’s affirmation of an agent’s unauthorized act.
b.
A principal’s disavowal of an agent’s unauthorized act.
c.
A principal’s approval in advance of an agent’s acts.
d.
A principal’s affirmation of an agent’s authorized act.
Choice “a” is correct. If (i) a person acts without authority but purportedly on behalf of a principal, (ii) the principal subsequently becomes aware of all of the material facts regarding the transaction, and (iii) the principal either expressly or by implication (e.g., by retaining the benefits of the transaction when he or she could have declined or returned the benefits) affirms the person’s unauthorized acts, a ratification has occurred.
Which of the following conditions must be met to form an agency?
a.
The principal must furnish legally adequate consideration for the agent’s services.
b.
The principal must possess contractual capacity.
c.
An agency agreement must be signed by both parties.
d.
An agency agreement must be in writing.
Choice “b” is correct. Formation of an agency relationship requires a principal who has contractual capacity.
Choice “d” is incorrect. Formation of an agency relationship may be oral; a writing is not required.
Choice “c” is incorrect. Because an agency relationship may be formed without a writing, the agreement need not be signed by both parties.
Choice “a” is incorrect. Formation of an agency relationship requires consent of the parties, but consideration is not required.
After which of the following situations would it usually not be necessary to notify third parties of the termination of an agency's existence? a. The destruction of the subject matter of the agency. b. A termination by mutual agreement. c. A termination by the principal. d. The achieving of the agency's purpose.
Choice “a” is correct. Notification to third parties is not required when actual authority of an agency relationship terminates as an operation of law. These include death of either the principal or the agent, incapacity of the principal, discharge in bankruptcy of the principal, failure to acquire a necessary license, destruction of the subject matter, or subsequent illegality.
Which of the following parties generally is ineligible to collect workers' compensation benefits? a. Minors. b. Union employees. c. Truck drivers. d. Temporary office workers.
Choice “d” is correct. Workers’ compensation programs are state run programs designed to enable employees to recover for injuries incurred while on the job. Most employers must participate in the programs; however, there are a few exceptions, including an exception for employers employing casual workers. A temporary office worker would be considered a casual employee.
Which of the following statements is(are) correct regarding the authority of the Occupational Safety and Health Administration (OSHA)? I. OSHA is authorized to establish standards that protect employees from exposure to substances that may be harmful to their health. II. OSHA is authorized to develop safety equipment and require employers to instruct employees in its use. a. Both I and II. b. II only. c. Neither I nor II. d. I only.
Choice “d” is correct. The general purpose of OSHA is to ensure workplace safety for employees. To further this goal, OSHA is authorized to establish regulations aimed at eliminating workplace hazards of all kinds, including exposure to substances that may be harmful to employees’ health. OSHA is not authorized to actually develop safety equipment, or require instruction for its use.
Taxes payable under the Federal Unemployment Tax Act (FUTA) are:
a.
Withheld from the wages of all covered employees.
b.
Payable by employers for all employees.
c.
Calculated as a fixed percentage of all compensation paid to an employee.
d.
Deductible by the employer as a business expense for federal income tax purposes.
Choice “d” is correct. FUTA tax is payable by the employer. It is deductible as a business expense. It is not withheld and is not payable on all wages.
Choice “c” is incorrect. The FUTA tax is not a fixed rate on all compensation. It applies only up to a $7,000 ceiling.
Choice “b” is incorrect. The FUTA tax applies only to employers who have a quarterly payroll of at least $1,500 or employ at least one employee at least one day a week for 20 weeks during a year.
Choice “a” is incorrect. The employer pays FUTA tax. The tax is not withheld from employees’ wages.
Under the Fair Labor Standards Act, if a covered, nonexempt employee works consecutive weeks of 45, 42, 38, and 33 hours, how many hours of overtime must be paid to the employee? a. 20 b. 18 c. 0 d. 7
Choice “d” is correct. Nonexempt employees are entitled to overtime pay whenever they work more than 40 hours in any given weekly period. Therefore, the employee is entitled to overtime of five hours from week 1 and 2 hours from week 2. Weeks 3 and 4 do not offset the entitlement.
Under which of the following conditions is an on-site inspection of a workplace by an investigator from the Occupational Safety and Health Administration (OSHA) permissible?
a.
Only if OSHA obtains a search warrant after showing probable cause.
b.
Only if the inspection is conducted after working hours.
c.
After OSHA provides the employer with at least 24 hours notice of the prospective inspection.
d.
At the request of employees.
Choice “d” is correct. OSHA allows inspections at the request of employees. 29 U.S.C. §657(f)(1)
Choice “a” is incorrect. OSHA provides for searches without a warrant based on probable cause. 29 U.S.C. §657(a)
Choice “b” is incorrect. OSHA provides for searches during regular business hours or at other reasonable times. 29 U.S.C. §657(a)
Choice “c” is incorrect. There is no 24-hour notice requirement.
Under the provisions of the Employee Retirement Income Security Act of 1974 (ERISA), which of the following statements is correct?
a.
Employees are entitled to make investment decisions.
b.
Employers are prevented from managing retirement plans.
c.
Employees are entitled to have an employer established pension plan.
d.
Employers are prevented from unduly delaying an employee’s participation in a pension plan.
Choice “d” is correct. Employers cannot unduly delay an employee’s participation in a pension plan.
Choice “c” is incorrect. ERISA does not establish a right to a pension plan; it just regulates pension plans if they are adopted.
Choice “b” is incorrect. Under ERISA, employers can manage retirement plans.
Choice “a” is incorrect. ERISA does not give employees an absolute right to make investment decisions.
For the entire year year 3, Ral Supermarket, Inc. conducted its business operations without any permanent or full-time employees. Ral employed temporary and part-time workers during each of the 52 weeks in the year. Under the provisions of the Federal Unemployment Tax Act (FUTA), which of the following statements is correct regarding Ral’s obligation to file a federal unemployment tax return for year 3?
a.
Ral must file a year 3 FUTA return only if aggregate wages exceeded $100,000 during year 3.
b.
Ral does not have to file a year 3 FUTA return because it had no permanent or full-time employees in year 3.
c.
Ral must file a year 3 FUTA return because it had at least one employee during at least 20 weeks of year 3.
d.
Ral is obligated to file a year 3 FUTA return only if at least one worker earned $50 or more in any calendar quarter of year 3.
Choice “c” is correct. All employers who have quarterly payrolls of at least $1,500 or who employ at least one person one day a week for twenty weeks in a year must participate in FUTA.
Which of the following statements correctly describes the funding of noncontributory pension plans?
a.
All of the funds are provided by the employer.
b.
The employer provides 90% of the funds, and each employee contributes 10%.
c.
All of the funds are provided by the employees.
d.
The employer and employee each provide 50% of the funds.
Choice “a” is correct. A noncontributory pension plan is one where the employer makes all of the contributions to the plan; the employee makes no contributions.
Which of the following statements is correct regarding the scope and provisions of the Occupational Safety and Health Act (OSHA)?
a.
OSHA prohibits an employer from discharging an employee for revealing OSHA violations.
b.
OSHA may inspect a workplace at any time regardless of employer objection.
c.
OSHA preempts state regulation of workplace safety.
d.
OSHA requires employers to provide employees a workplace free from risk.
Choice “a” is correct. OSHA contains a “whistleblower” protection provision.
Choice “d” is incorrect. OSHA does not require a risk-free work environment; that would be impossible. Rather, OSHA regulations generally try to make workplaces as safe as they reasonably can be.
Choice “b” is incorrect. OSHA does not allow inspection at any time, for example, inspections generally must be during normal hours of operation.
Choice “c” is incorrect. OSHA allows states to adopt other safety regulations.
Under Title VII of the 1964 Civil Rights Act, which of the following forms of discrimination is not prohibited? a. Age. b. Religion. c. Race. d. Sex.
Choice “a” is correct. Title VII prohibits discrimination on the basis of race, religion, sex, national origin, etc., but it does not prohibit age discrimination. There is another federal statute for that.
Choice “d” is incorrect. Title VII prohibits discrimination in the basis of sex.
Choice “c” is incorrect. Title VII prohibits discrimination on the basis of race.
Choice “b” is incorrect. Title VII prohibits discrimination on the basis of religion.
Which of the following statements is correct under the Federal Fair Labor Standards Act?
a.
All workers are required to be included within both the minimum wage provisions and the overtime provisions.
b.
Some workers may be included within the overtime provisions but exempt from the minimum wage provisions.
c.
Possible exemptions from the minimum wage provisions and the overtime provisions must be determined by the union contract in effect at the time.
d.
Some workers may be included within the minimum wage provisions but exempt from the overtime provisions.
Choice “d” is correct. Some workers, for example cab drivers, must be paid at least minimum wage but need not be paid overtime. These are generally described as exempt workers.
Choice “b” is incorrect. If workers are within the overtime provisions, they also are within the minimum wage provisions.
Choice “a” is incorrect. Not all workers are subject to the minimum wage requirements. For example, farm workers need not be paid minimum wage.
Choice “c” is incorrect. The exemptions do not depend on a union contract.
Under the Federal Consolidated Budget Reconciliation Act of 1985 (COBRA), when an employee voluntarily resigns from a job, the former employee’s group health insurance coverage that was in effect during the period of employment with the company:
a.
May be retained by the former employee at the former employee’s expense for at least 18 months after leaving the company, but must be terminated for the former employee’s spouse.
b.
May be retained for the former employee and spouse for at least 18 months after leaving the company.
c.
Automatically ceases for the former employee’s spouse, but continues for the former employee for an 18-month period at the former employer’s expense.
d.
Automatically ceases for the former employee and spouse, if the resignation occurred before normal retirement age.
Choice “b” is correct. COBRA requires employers to provide former employees and their spouses and dependents insurance for 18 months after the employee resigns. The employer may charge the employee up to 102% of the cost of the insurance.
Choice “d” is incorrect. COBRA requires the insurance to be made available to the employee for 18 months.
Choice “c” is incorrect. COBRA requires the insurance to be available to the former employee’s spouse as well as the former employee.
Choice “a” is incorrect. COBRA requires the insurance to be available to the former employee’s spouse as well as to the former employee.
After serving as an active director of Lee Corp. for 20 years, Ryan was appointed an honorary director with the obligation to attend directors’ meetings with no voting power. In 1992, Ryan received an honorary director’s fee of $5,000. This fee is:
a.
Taxable as “Other income” by Ryan, not subject to any social security tax.
b.
Reportable by Lee as employee compensation subject to social security tax.
c.
Reportable by Ryan as self-employment income subject to social security self-employment tax.
d.
Considered to be a gift not subject to social security self-employment or income tax.
Choice “c” is correct. Directors are treated as independent contractors. Thus, their compensation is self-employment income.
Choice “b” is incorrect. Only wages are taxable as employee income. A director does not receive wages from his corporation, but rather stands as an independent contractor.
Choice “a” is incorrect. Income derived from performing services for an employer constitutes wages, not other income.
Choice “d” is incorrect. Since Ryan is obligated to attend meetings to receive the $5,000, it is not a gift.
Which one of the following statements concerning workers’ compensation laws is generally correct?
a.
Workers’ compensation awards are not reviewable by the courts.
b.
Workers’ compensation benefits are not available if the employee is negligent.
c.
Employers are strictly liable without regard to whether or not they are at fault.
d.
The amount of damages recoverable is based on comparative negligence.
Choice “c” is correct. Under workers’ compensation laws, employers are generally strictly liable for injuries to employees.
Choice “b” is incorrect. Workers’ compensation is available for injuries incurred on the job as long as they were not purposely self-inflicted.
Choice “a” is incorrect. Decisions of all government agencies are reviewable by the courts as a matter of due process.
Choice “d” is incorrect. The amount recoverable under workers’ compensation is based on the nature of the injury and has nothing to do with contributory negligence.
Which of the following forms of income, if in excess of the annual exempt amount, will cause a reduction in a retired person's social security benefits? a. Closely held corporation stock dividends. b. Annual proceeds from an annuity. c. Director's fees. d. Pension payments.
Choice “c” is correct. Social security benefits will be reduced if a person earns income from labor beyond the exempt amount. Income for working as a director constitutes income from labor.
Choice “b” is incorrect. Social security benefits will be reduced if a person earns income from labor beyond the exempt amount. Proceeds from an annuity do not constitute income from labor.
Choice “d” is incorrect. Social security benefits will be reduced if a person earns income from labor beyond the exempt amount. Pension benefits do not constitute income from labor.
Choice “a” is incorrect. Social security benefits will be reduced if a person earns income from labor beyond the exempt amount. Dividends from stock do not constitute income from labor.
Under the provisions of the Employee Retirement Income Security Act of 1974 (ERISA), which of the following statements is(are) correct regarding employee rights? I. Employers are required to establish either a contributory or noncontributory employee pension plan. II. Employers are required to include employees as pension-plan managers. a. Neither I nor II. b. Both I and II. c. II only. d. I only.
Choice “a” is correct. The Employment Retirement Income Security Act (ERISA) does not require employers to have retirement plans or require contributions to existing retirement plans. ERISA does not mandate that employers are required to include employees as pension-plan managers. ERISA does establish standards for funding and investing and imposes fiduciary duties on pension fund managers.
Only choice “a” reflects that employers are not required to establish a pension plan and employees do not need to be included as pension-plan managers.
Worker’s compensation benefits are available to which of the following parties?
a.
Only those employees injured while working on workplace premises.
b.
All agents injured while using the employer’s automobile for personal use.
c.
Only those employees injured while working within the scope of employment.
d.
All agents injured while commuting to and from work.
Choice “c” is correct. Worker’s compensation benefits are available if the employee is injured within the scope of employment.
Choice “a” is incorrect. The injury need not occur on workplace premises; it need only occur within the scope of employment. Thus, if an employee is injured off-site but while working for an employer, the employee is covered.
Choice “d” is incorrect. This choice is wrong for two reasons: worker’s compensation covers only employees (“agent” is broader) and, in most cases, commuting to and from work is not within the scope of employment.
Choice “b” is incorrect. This choice also is wrong for two reasons: again, not all agents are employees and so not all agents are covered, and use of one’s automobile for personal purposes is not within the scope of employment.
Taxes payable under the Federal Unemployment Tax Act (FUTA) are:
a.
Partially deductible by the covered employee for federal income tax purposes.
b.
Deductible by the employer as a business expense for federal income tax purposes.
c.
Calculated as a fixed percentage of all compensation paid to an employee.
d.
Payable by all employers regardless of the total amount of compensation paid to individual employees.
Choice “b” is correct. Taxes paid under “FUTA” are deductible by the employer as a business expense for federal income tax purposes.
Choice “a” is incorrect. The employee does not get a deduction since the employee has not paid the tax.
Choice “c” is incorrect. Only the first $7,000 of a covered employee’s wages is taxable.
Choice “d” is incorrect. An employer does not have to pay the tax unless the employer has a quarterly payroll of at least $1,500.
Under the Federal Insurance Contributions Act (FICA), all of the following are considered wages, except: a. Bonuses. b. Contingent fees. c. Reimbursed travel expenses. d. Commissions.
Choice “c” is correct. Under FICA, wages are compensation for labor. Reimbursed travel expenses are not considered wages and are not in gross income; therefore they are not subject to FICA.
Choice “b” is incorrect. Under FICA, wages are compensation for labor. Thus, contingent fees would be considered as wages.
Choice “a” is incorrect. Under FICA, wages are compensation for labor. Thus, bonuses would be considered as wages.
Choice “d” is incorrect. Under FICA, wages are compensation for labor. Thus, commissions would be considered as wages.
Social security benefits may include all of the following, except: a. Payments to disabled children. b. Payments to divorced spouses. c. Medicaid payments. d. Medicare payments.
Choice "c" is correct. Social security benefits do not include Medicaid payments. Medicaid is a state run program. The federal social security system contains four major benefit programs: (OASI) old age and survivors insurance. (DI) disability insurance. (Medicare). (SSI) supplemental security income. Choices "b", "a", and "d" are incorrect, since social security benefits may include: b. Payments to divorced spouses. a. Payments to disabled children. d. Medicare.
An employer having an experience unemployment tax rate of 3.2% in a state having a standard unemployment tax rate of 5.4% may take a credit against a 6.0% federal unemployment tax rate of:
a. 3. 0% b. 3. 2% c. 5. 4% d. 6. 2%
Choice “c” is correct. The employer may take a credit against the federal unemployment tax in an equal amount to the state rate. Here the state rate of 5.4% will be used since it is less than the federal rate.
Which of the following types of income is subject to taxation under the provisions of the Federal Insurance Contributions Act (FICA)? a. Interest earned on municipal bonds. b. Car received as a productivity award. c. Capital gains of $3,000. d. Dividends of $2,500.
Choice "b" is correct. (Wages are subject to FICA) Since a car received as a productivity award would be considered a substitute for wages/salary, the fair market value of the car would be subject to FICA taxation. Choices "a", "c", and "d" are incorrect, since the following forms of income would not be subject to taxation under FICA. a. Interest on municipal bonds c. Capital gains d. Dividends
An unemployed CPA generally would receive unemployment compensation benefits if the CPA:
a.
Was fired for embezzling from a client.
b.
Left work voluntarily without good cause.
c.
Refused to accept a job as an accountant while receiving extended benefits.
d.
Was fired as a result of the employer’s business reversals.
Choice “d” is correct. Unemployment compensation benefits are available to an unemployed CPA (or anyone else) who was discharged (fired) as a result of the employer’s business reversals.
Choice “c” is incorrect. Unemployment benefits are not available where an unemployed individual refuses to accept similar work while receiving extended benefits.
Choice “a” is incorrect. Unemployment benefits are not available where the unemployed CPA was fired for embezzling.
Choice “b” is incorrect. Unemployment benefits are not available where the unemployed CPA left work voluntarily without good cause.
Workers' Compensation laws provide for all of the following benefits, except: a. Full pay during disability. b. Burial expenses. c. Monthly payments to surviving dependent children. d. The cost of prosthetic devices.
Choice “a” is correct. Workers’ compensation laws do not provide for “full” pay during a disability. With disability benefits the employee may receive a percentage of his/her wages, but not “full” wages.
Choice “b” is incorrect. Workers’ compensation laws can provide for burial expenses.
Choice “d” is incorrect. Workers’ compensation laws can provide for the cost of a prosthetic device.
Choice “c” is incorrect. Workers’ compensation laws can provide for payments to surviving dependent children.
An employer who fails to withhold Federal Insurance Contributions Act (FICA) taxes from covered employees’ wages, but who pays both the employer and employee shares would:
a.
Be entitled to a refund from the IRS for the employees’ share.
b.
Be allowed no federal tax deduction for any payments.
c.
Have a right to be reimbursed by the employees for the employees’ share.
d.
Owe penalties and interest for failure to collect the tax.
Choice “c” is correct. An employer who fails to withhold FICA taxes from an employee’s wages is liable for the employee’s portion. Once the employer pays both shares to the government, he/she has the right to be reimbursed by the employee for the employee’s share.
Choice “a” is incorrect. Where the employer fails to withhold, the employer becomes primarily liable for the employee’s share.
Choice “b” is incorrect. Employers are allowed a deduction for the employer’s portion.
Choice “d” is incorrect. The penalties are based on the failure to pay and not on the failure to collect the tax.
Unemployment tax payable under the Federal Unemployment Tax Act (FUTA), is: a. Deducted from employee wages. b. A tax-deductible employer's expense. c. Paid to the Social Security Administration. d. Payable by all employers.
Choice “b” is correct. An employer’s payment under the Federal Unemployment Tax Act (FUTA) is a tax-deductible employer expense.
Choice “d” is incorrect. An employer that does not have a quarterly payroll of at least $1,500 or does not employ at least one person one day a week for 20 weeks in a year does not have to pay.
Choice “a” is incorrect. The federal unemployment tax is paid by the employer and not deducted from the employee’s wages.
Choice “c” is incorrect. The federal unemployment tax is paid to the Internal Revenue Service and not to the Social Security Administration.
Workers’ Compensation Acts require an employer to:
a.
Pay an employee the difference between disability payments and full salary.
b.
Withhold employee contributions from the wages of eligible employees.
c.
Provide coverage for all eligible employees.
d.
Contribute to a federal insurance fund
Choice “c” is correct. Workers’ compensation laws require that employers provide coverage for all eligible employees.
Choice “b” is incorrect. Workers’ compensation contributions are made by the employer.
Choice “a” is incorrect. No such rule! Employees are paid a percentage of their wage subject to established limitations.
Choice “d” is incorrect. There is no federal insurance fund. Workers’ compensation laws are administered at the state level.
When verifying a client's compliance with statutes governing employees' wages and hours, an auditor should check the client's personnel records against relevant provisions of which of the following statutes? a. Americans With Disabilities Act. b. National Labor Relations Act. c. Fair Labor Standards Act. d. Taft-Hartley Act.
Choice “c” is correct. The Fair Labor Standards Act governs wages and hours.
Choice “b” is incorrect. The National Labor Relations Act governs collective bargaining (i.e., unions) activities.
Choice “d” is incorrect. The Taft-Hartley Act governs labor relations.
Choice “a” is incorrect. The ADA prohibits discrimination; it does not govern wages and hours.
Under the federal Age Discrimination in Employment Act, which of the following practices is prohibited?
a.
Unintentional age discrimination.
b.
Termination of employees as part of a rational business decision.
c.
Termination of employees between the ages of 65 and 70 for cause.
d.
Mandatory retirement of any employee.
Choice “a” is correct. The age discrimination in employment act (“ADEA”) prohibits age discrimination, whether intentional or unintentional.
Choice “c” is incorrect, because the ADEA does not prohibit termination for cause at any age.
Choice “d” is incorrect, because the ADEA does not prohibit mandatory retirement for employees over 40 if, for example, there is a bona fide occupational qualification.
Choice “b” is incorrect, because the ADEA does not prohibit termination of employees as part of a rational business decision.
Steve works as a countertop installer for Mica Distributors, Inc. While cutting the countertop with an electric circular saw, Steve cut his hand. The wound was deep and required stitches. Steve will be compensated under state workers’ compensation laws only if:
a.
Steve successfully sues Mica Distributors.
b.
Steve’s injury was accidental and occurred on the job or in the course of employment.
c.
Steve does not have private health or disability insurance.
d.
Steve is completely disabled.
Choice “b” is correct. Steve will not need to sue his employer to collect worker’s compensation. Employers are strictly liable regardless of fault for injuries incurred by employees while in the performance of their jobs.
Choice “c” is incorrect. Steve is eligible for workers compensation regardless of whether he has private health or disability insurance.
Choice “d” is incorrect. Steve does not need to be completely disabled to collect workers compensation.
Choice “a” is incorrect. Steve will not need to sue his employer to collect worker’s compensation. Employers are strictly liable.
Which of the following statements is correct regarding the Bank Secrecy Act of 1970, as amended?
a.
It generally requires the filing of a currency transaction report for any deposit, withdrawal, or exchange of currency of $5,000 or more.
b.
It applies to banks only.
c.
It requires private citizens to file reports in some cases.
d.
It generally requires records to be kept for three years.
Choice “c” is correct. Any person, including an ordinary citizen, must file a report when transporting or shipping more than $10,000 into or out of the United States or if the person has an interest in one or more financial accounts in a foreign country if the aggregate value at any point in the calendar year exceeds $10,000 (a Report of International Transportation of Currency or Monetary Instruments and a Report of Foreign Bank and Financial Accounts, respectively).
If a financial institution receives a deposit of $20,000 from a customer for whom the bank has not filed a designation of exempt person form, within how many days must the bank file a currency transaction report if the bank does not file electronically? a. 10 days. b. 30 days. c. 15 days. d. 20 days.
Choice “c” is correct. A CTR must be filed within 15 days after the date of a qualifying transaction (i.e., a deposit or withdrawal of more than $10,000).
If a bank sells a $3,000 traveler’s check, which of the following statements is true?
a.
The bank must obtain and retain any required identification for five years.
b.
The bank has no obligations with respect to the transaction because it does not exceed $10,000.
c.
The bank must obtain identification information from the buyer but need not retain the information if the buyer is a customer.
d.
The bank must report the transaction on a currency transaction report form.
Choice “a” is correct. When a bank sells a monetary instrument for $3,000 to $10,000, inclusive, it must obtain information regarding the identity of the purchaser and retain the information for at least five years.
Which of the following customers cannot be designated an exempt person for purposes of filing currency transaction reports under the Bank Secrecy Act of 1970, as amended? a. A payroll customer who regularly withdraws more than $10,000 in order to pay its U.S. employees. b. A state. c. A car dealer. d. A bank.
Choice “c” is correct. A car dealer may not be designated an exempt person for purposes of filing currency transaction reports under the Bank Secrecy Act. Criminals often try to launder money by purchasing and selling cars.
Choices “d”, “b” and “a” are incorrect because all three types of customers may be designated exempt persons for purposes of filing currency transaction reports under the Bank Secrecy Act.
Under the Bank Secrecy Act of 1970, as amended, if a bank’s customer engages in a transaction that is not the type of transaction that the bank would normally expect the customer to engage in, which of the following is not a duty of the bank?
a.
File a suspicious transaction report.
b.
None of the answer choices are correct.
c.
Inform the customer of the unusual transaction.
d.
Inform its board of directors if it files a suspicious activity report.
Choice “c” is correct. If a customer engages in a transaction that is not the type of transaction that the bank would normally expect the customer to engage in, the bank must file a suspicious activity report and must not inform the customer that the report was filed. Therefore, choice “d” is incorrect.
Choice “a” is incorrect. If a customer engages in a transaction that is not the type of transaction that the bank would normally expect the customer to engage in, the bank has a duty to file a suspicious activity report.
Choice “d” is incorrect. If a customer engages in a transaction that is not the type of transaction that the bank would normally expect the customer to engage in and the bank files a suspicious activity report, the bank must inform its board of directors.
Which of the following is not a report that must be filed under the Bank Secrecy Act of 1970, as amended? a. Currency Transaction Report. b. Report of International Transportation of Currency or Monetary Instruments. c. Report of Sale of Monetary Instrument. d. Suspicious Activity Report.
Choice “c” is correct. Under the BSA, a financial institution must make a record of the identity of anyone purchasing monetary instruments (such as money orders) of between $3,000 and $10,000, inclusive. The record must be kept for at least five years, but no filing of a report is required for such sales.
Choice “d” is incorrect. A suspicious activity report must be filed under the BSA whenever a customer enters into a suspicious transaction (e.g., one that the bank would not expect the customer to engage in based on the nature of the customer’s business, previous dealings, etc.).
Choice “a” is incorrect. The BSA requires a currency transaction report to be filed whenever a person engages in a transaction in currency exceeding $10,000.
Choice “b” is incorrect. The BSA requires a report of international transportation of currency or monetary instruments to be filed whenever a person transports or receives currency or certain monetary instruments to or from a foreign country.
The term “illegal per se” as it is frequently used in antitrust law:
a.
Must be established by the Justice Department in order to impose criminal sanctions under the Federal Trade Commission Act.
b.
Applies exclusively to illegal anticompetitive activities by competitors.
c.
Represents anticompetitive conduct or agreements which are inherently illegal and without legal justification.
d.
Applies exclusively to illegal price fixing and other related activities by competitors.
Choice “c” is correct. By definition, an “illegal per se” act is one that is inherently illegal and without legal justification.
Choice “d” is incorrect. Tying arrangements may be illegal per se when the seller has considerable economic power in the tying product.
Choice “a” is incorrect. The Federal Trade Commission Act does not provide for criminal penalties. Additionally, it provides for action by the FTC, not the Justice Department.
Choice “b” is incorrect. Tying arrangements are not between competitors and may be illegal per se.
Section 7 of the Clayton Act is the primary statutory provision used by the Department of Justice in controlling anticompetitive mergers and acquisitions. In general, the Clayton Act is invoked because:
a.
It provides for harsher criminal penalties than does the Sherman Act.
b.
The Sherman Act applies to asset mergers or acquisitions only and not to stock mergers or acquisitions.
c.
It enables the Department of Justice to proscribe mergers and acquisitions in their incipiency.
d.
It provides for exclusive jurisdiction over such activities.
Choice “c” is correct. Section 7 of Clayton prohibits the merger or acquisition of a company if the effect is to substantially lessen competition. It allows the Department of Justice to proscribe mergers and acquisitions in their incipiency, before they develop monopoly power.
Choice “b” is incorrect. The Sherman Act prohibits restraints on trade and monopolies. Under the Sherman Act, a stock merger could be opposed if it could be demonstrated that the effect unreasonably restrained trade. Under the Clayton Act, the government does not have to wait until the merger has that effect, the merger can be opposed at the outset.
Choice “a” is incorrect. Only the Sherman Act provides for criminal penalties, the Clayton Act does not.
Choice “d” is incorrect. As indicated above, a merger could violate both the Sherman Act and the Clayton Act. Thus, the Clayton Act does not provide for exclusive jurisdiction.
Loop Corp. has made a major breakthrough in the development of a micropencil. Loop has patented the product and is seeking to maximize the profit potential. In this effort, Loop can legally:
a.
Require its retailers to sell only Loop’s products, including the micropencils, and not sell similar competing products.
b.
Sell the product at whatever price the traffic will bear even though Loop has a monopoly.
c.
Sell the product to its retailers upon condition that they do not sell the micropencils to the public for less than a stated price.
d.
Require its retailers to take stipulated quantities of its other products in addition to the micropencils.
Choice “b” is correct. By its very nature a patent grants a limited monopoly to the patent holder. The patent holder may sell the item at whatever price it desires.
Choice “a” is incorrect. Requiring retailers to sell only Loop’s products and not competitors would violate the exclusive dealing provisions of the Clayton Act if the effect were to substantially lessen competition.
Choice “d” is incorrect. Requiring retailers to take stipulated quantities of its other products would violate the tying arrangements section of the Sherman and Clayton Acts if the effect were to substantially lessen competition.
Choice “c” is incorrect. Requiring retailers to sell at not less than a stated price is a form of vertical price fixing and could be a violation of the Sherman Act.
Certain members of the Tri-State Railway Construction Association decided that something must be done about the disastrous competition, which, when coupled with the depressed status of the industry and economy, was causing financial chaos for many of its members. They met privately after one of the association meetings and decided to allocate construction projects among themselves based upon an historical share of the market. Under the arrangement, a certain designated company would submit the low bid, thereby ensuring that the company would obtain the job. Such an arrangement is:
a.
Illegal per se, and a criminal violation of the antitrust law.
b.
Legal under antitrust law since it does not fix prices.
c.
Legally justifiable due to the economic conditions in the marketplace.
d.
Illegal under the rule of reason, but not a criminal violation of the antitrust law.
Choice “a” is correct. This is an agreement between competitors to fix prices (horizontal price fixing and/or to allocate the market). Horizontal price fixing (i.e., agreements among competitors to fix prices) and/or market allocations are per se violations of the Sherman Act.
Choice “d” is incorrect. Horizontal price fixing (i.e., agreements among competitors to fix prices) and/or market allocations are per se violations of the Sherman Act. They are not judged under the rule of reason.
Choices “c” and “b” are incorrect. This activity is illegal, not legal.
In a pure conglomerate merger:
a.
The merger is prima facie valid unless the government can prove the acquiring corporation had an intent to monopolize.
b.
Some form of additional anticompetitive behavior must be established (e.g., price fixing) in order to provide the basis for the government’s obtaining of injunctive relief.
c.
The government must establish an actual restraint on competition in the marketplace in order to prevent the merger.
d.
The acquiring corporation neither competes with nor sells to or buys from the acquired corporation.
Choice “d” is correct. In a conglomerate merger, a firm acquires a company in a completely different business (i.e., a merger between firms that neither compete nor have a customer/supplier relationship).
Choice “c” is incorrect. The government does not have to establish an actual restraint on competition. They have been challenged when it is highly likely that one of the firms will enter the market of the other.
Choice “a” is incorrect. The government does not have to prove an intent to monopolize.
Choice “b” is incorrect. The government does not have to prove some additional form of anticompetitive behavior. They have been challenged when it is highly likely that one of the firms will enter the market of the other or where the merged company would become substantially large. No additional anticompetitive behavior is required.
The United States Department of Justice has alleged that Variable Resources, Inc., the largest manufacturer and seller of variable speed drive motors, is a monopolist. It is seeking an injunction ordering divestiture by Variable of a significant portion of its manufacturing facilities. Variable denies it has monopolized the variable speed drive motor market. Which of the following statements is correct insofar as the government’s action against Variable is concerned?
a.
As long as Variable has not been a party to a contract, combination, or conspiracy in restraint of trade, it can not be found to be guilty of monopolization.
b.
In order to establish monopolization, the government must prove that Variable has at least 75% of the market.
c.
The government must prove that Variable is the sole source of a significant portion of the market.
d.
If Variable has the power to control prices or exclude competition, it has monopoly power.
Choice “d” is correct. Monopoly power exists when a firm has sufficient market power to control prices or exclude competition.
Choice “c” is incorrect. The government does not have to prove Variable is the sole source of a significant portion of the market.
Choice “b” is incorrect. Companies with market shares of between 40% and 70% may or may not be monopolies. Companies with a market share of 70% or more are generally considered a monopoly. 75% market share is not required.
Choice “a” is incorrect. The Sherman Act has two prominent sections. Section 1 prohibits contracts, combinations and conspiracies that restrain trade. Section 2 prohibits monopolies and attempts to monopolize. Variable can violate section 2 without entering into a contract or conspiracy in restraint of trade.
Gould Machinery builds bulldozers. Over the past few years, it sold on credit a substantial amount of equipment to Mace Contractors. Mace went into bankruptcy. In order to protect its investment, Gould took over the business of Mace. Erhart Contractors now complains that the acquisition harms its business, on the ground that its business would have improved had not Gould entered the market as a competitor. Erhart can:
a.
Not recover damages under the antitrust laws.
b.
Recover only its actual damages.
c.
Recover treble damages.
d.
Obtain injunctive relief ordering divestiture.
Choice “a” is correct. Since Mace became insolvent, the “Failing Company” exception applies. Under this exception, if the acquired firm is in danger of becoming insolvent and no other purchasers are interested in acquiring it, a merger can be lawful even if the effect is to lessen competition.
Choices “c”, “b”, and “d” are incorrect. All of these choices indicated there was a violation of antitrust law.
Smackey Incorporated requires all of their operating software buyers to purchase another Smackey product, an Internet browser. Such a requirement is an example of: a. A horizontal merger. b. A vertical restraint. c. An exclusive-dealing contract. d. A tying arrangement.
Choice “d” is correct. A tying arrangement is one in which a seller requires the buyer to purchase one product to obtain another.
Choice “c” is incorrect. In an exclusive dealing contract a seller of goods requires the buyer to promise not to deal in goods of a competitor.
Choice “a” is incorrect. A horizontal merger occurs when one competitor merges with another competitor to establish market power or restrict competition.
Choice “b” is incorrect. Vertical restraints are agreements between industry players that are on different marketing levels.
Under the Documents of Title Article of the UCC, which of the following statements is(are) correct regarding a common carrier's duty to deliver goods subject to a negotiable, bearer bill of lading? I. The carrier may deliver the goods to any party designated by the holder of the bill of lading. II. A carrier who, without court order, delivers goods to a party claiming the goods under a missing negotiable bill of lading is liable to any person injured by the misdelivery. a. Neither I nor II. b. Both I and II. c. I only. d. II only.
Choice “b” is correct.
The carrier may deliver goods to any party designated by the holder of the bill of lading. If a carrier delivers goods to a party who claims to be entitled to them under the terms of a missing negotiable bill of lading, the common carrier is liable to any injured party if the delivery of goods results in injury.
Under the Documents of Title Article of the UCC, which of the following acts may excuse or limit a common carrier's liability for damage to goods in transit? a. Power outage. b. Willful acts of third parties. c. Vandalism. d. Providing for a contractual dollar liability limitation.
Choice “d” is correct. A common carrier may limit liability within the contract if it is reasonable and agreed to.
Choice “c” is incorrect. Common carriers are generally held to be insurers of the goods during delivery and are liable for vandalism.
Choice “a” is incorrect. Because common carriers are generally held to be insurers of the goods they deliver, they are liable for damages arising from power outages.
Choice “b” is incorrect. Because common carriers are generally held to be insurers of the goods they carry, they are liable for damages to goods in transit, even if the damage was caused by the willful act of a third party.
Under the Documents of Title Article of the UCC, which of the following terms must be contained in a warehouse receipt? I. A statement indicating whether the goods received will be delivered to the bearer, to a specified person, or to a specified person or his/her order. II. The location of the warehouse where the goods are stored. a. I only. b. Both I and II. c. Neither I nor II. d. II only.
Choice “b” is correct. Under the UCC, a document of title must include a statement of whether the goods received will be delivered to the bearer, to a specified person, or to a specified person or that person’s order, and the document must include the location of the goods. This is so that the warehouse operator knows what is required to release the goods, and so that the holder of the receipt knows where the goods are located.
Field Corp. issued a negotiable warehouse receipt to Hall for goods stored in Field’s warehouse. Hall’s goods were lost due to Field’s failure to exercise such care as a reasonably careful person would under like circumstances. The state in which this transaction occurred follows the UCC rule with respect to a warehouseman’s liability for lost goods. The warehouse receipt is silent on this point. Under the circumstances, Field is:
a.
Not liable because the warehouse receipt was negotiable.
b.
Liable because it is strictly liable for any loss.
c.
Not liable unless Hall can establish that Field was grossly negligent.
d.
Liable because it was negligent.
Choice “d” is correct. A warehouseman has a duty to use reasonable care with respect to goods stored. Negligence breaches this duty, and makes the warehouseman liable for resulting losses. UCC 7-204
Choice “b” is incorrect. A warehouseman must use reasonable care with respect to stored goods; he is not strictly liable.
Choice “a” is incorrect. A warehouseman must use reasonable care with respect to stored goods whether the goods are stored pursuant to a negotiable or nonnegotiable warehouse receipt.
Choice “c” is incorrect. A warehouseman must use ordinary care with respect to stored goods. Thus, he can be liable for ordinary negligence; gross negligence need not be proved.
Which of the following statements is correct concerning a bill of lading in the possession of Major Corp. that was issued by a common carrier and provides that the goods are to be delivered “to bearer?”
a.
The carrier may require Major to endorse the bill of lading prior to delivering the goods.
b.
The carrier will not be liable for delivering the goods to a person other than Major.
c.
The bill of lading can be negotiated by Major by delivery alone and without endorsement.
d.
The carrier’s lien for any unpaid shipping charges does not entitle it to sell the goods to enforce the lien.
Choice “c” is correct. Since the bill of lading is deliverable to bearer, it may be negotiated by delivery alone; no endorsement is necessary. UCC 7-104
Choice “d” is incorrect. The carrier does have a right to sell the goods to recover unpaid shipping charges. UCC 7-308.
Choice “b” is incorrect. The carrier must deliver the goods to the person who has the bill of lading. Since Major possesses the bill, the carrier would be liable for delivery to anyone else.
Choice “a” is incorrect. The carrier has no right to require endorsement of a bearer bill of lading.
