Chapter 24Form and Content

TRUE/FALSE 1. Promissory notes serve an essential business purpose only in areas of high finance. ANS: F PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

2. Notes and certificates of deposit are orders to pay money. ANS: F PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

3. A signed promissory note stating I promise to pay to Bonnie Ramcell $600 on December 15, 2010 is not covered by Article 3 of the UCC. ANS: T PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

4. A draft involves three parties: a drawer, a drawee, and a payee. ANS: T PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

5. Negotiability invests negotiable instruments with a high degree of marketability and commercial utility by allowing them to be freely transferable and enforceable by a holder in due course. ANS: T PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

6. A promissory note is an instrument that involves three parties in three capacities. ANS: F PTS: 1 MSC: AACSB Analytic 7. A check is a draft payable on demand. ANS: T PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal TOP: AICPA BB-Legal

8. Paper payable "on demand" fails the test of negotiability in that it does not contain a specific time. ANS: F PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

9. Handwritten words supersede typewritten words contained in negotiable instruments. ANS: T PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

10. The vital importance of negotiable instruments as a method of payment is frequently overstated.

ANS: F PTS: 1 MSC: AACSB Analytic

TOP: AICPA BB-Legal

11. Only a bank may serve as the maker of a certificate of a deposit. ANS: T PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

12. Jake signed and delivered a promissory note payable to Nancy. Nancy negotiated the note to Fred. Fred now has the same legal status as an assignee of a contract. ANS: F PTS: 1 MSC: AACSB Reflective Thinking TOP: AICPA BB-Critical Thinking

13. To be negotiable, an instrument must be in writing. ANS: T PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

14. A reference in a negotiable instrument to the existence of a separate agreement to which it is subject destroys the negotiability of the instrument. ANS: T PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

15. An assignee of contractual rights acquires only the same rights as the assignor. ANS: T PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

16. The Revised Article 3 of the UCC provides that a check which meets all requirements of being a negotiable instrument, except that it is not payable to bearer or order, is nevertheless a negotiable instrument. ANS: T PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

17. A maker must sign in the lower right-hand corner of the instrument. ANS: F PTS: 1 MSC: AACSB Analytic 18. Negotiability is wholly a matter of form. ANS: T PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal TOP: AICPA BB-Legal

19. An instrument payable at a definite time is time paper. ANS: T PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

20. An incomplete instrument is non-negotiable. However, when it is completed, it may become negotiable.

ANS: T PTS: 1 MSC: AACSB Analytic

TOP: AICPA BB-Legal

21. Revised Article 3 eliminates the particular fund doctrine by providing that a promise or order is not made conditional because payment is to be made only out of a particular fund. ANS: T PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

22. Jones signed a 90-day note promising to pay $1,000 plus interest. The note states that interest is to be based on a variable, published rate external to the note. The sum the borrower must repay is uncertain, so the note is not negotiable under Revised Article 3. ANS: F PTS: 1 MSC: AACSB Reflective Thinking TOP: AICPA BB-Critical Thinking

23. An "X" or a thumbprint could constitute a signature within the meaning of the term in the Code. ANS: T PTS: 1 MSC: AACSB Analytic 24. An "I.O.U." is a negotiable instrument. ANS: F PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal TOP: AICPA BB-Legal

25. Postdating an instrument will destroy its negotiability. ANS: F PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

26. A cashier's check is a check drawn by a bank upon itself to the order of a named payee. ANS: T PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

27. A provision in a promissory note payable one year from its date that the maker may extend the maturity date six months impairs the notes negotiability. ANS: F PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

28. The person who signs a note and promises to pay it is the maker. ANS: T PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

29. The drawee is the individual who signs a check and promises to pay. ANS: F PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

30. An authorization to confess judgment on the instrument destroys its negotiability.

ANS: F PTS: 1 MSC: AACSB Analytic MULTIPLE CHOICE

TOP: AICPA BB-Legal

1. Which of the following is not a negotiable instrument? a. A check. b. A draft. c. A certificate of deposit. d. A stock certificate. ANS: D PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

2. Sam writes a check drawn on his account at First Bank to State University to pay his tuition. a. Sam is the drawer. b. The university is the drawee. c. The bank is the payee. d. Sam is the maker. ANS: A PTS: 1 MSC: AACSB Reflective Thinking TOP: AICPA BB-Critical Thinking

3. A certificate of deposit differs from a promissory note in that: a. the maker is always a bank. b. there are three parties to the transaction. c. the payee of a CD must be paid on demand. d. Both (a) and (b). ANS: A PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

4. To be negotiable, the instrument must satisfy all except which one of the following requirements? a. It must contain a promise or order to pay. b. It must be for a certain amount. c. It must be payable on demand. d. It must be signed. ANS: C PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

5. To have the full benefit of negotiability, negotiable instruments must: a. meet the requirements of negotiability. b. meet the requirements of negotiability and be acquired by a party who notified the maker or drawer of the transfer. c. be acquired by a holder in due course. d. Both (a) and (c). ANS: D PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

6. Carol buys some items at the drugstore and writes a check to the store on her account at First Bank. Who is the drawee? a. Carol.

b. The drugstore. c. First Bank. d. There is none. ANS: C PTS: 1 MSC: AACSB Reflective Thinking TOP: AICPA BB-Critical Thinking

7. A __________ is a specialized form of promise to pay money given by a maker in which the bank is the maker. a. note b. certificate of deposit c. trade acceptance d. cashier's check ANS: B PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

8. Under the Check 21 Act: a. banks must accept checks in electronic form. b. banks are permitted to truncate original checks and process check information electronically. c. banks must create substitute checks which are the legal equivalent of the original checks. d. All of the above. ANS: B PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

9. Bill goes to First Bank to get a loan. He signs a note and agrees to repay the bank. What is the legal term for Bill's status regarding the note? a. Payee. b. Maker. c. Payor. d. Drawer. ANS: B PTS: 1 MSC: AACSB Reflective Thinking TOP: AICPA BB-Critical Thinking

10. An order to pay money drawn on a bank and payable on demand is a: a. check. b. trade acceptance. c. certificate of deposit. d. promissory note. ANS: A PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

11. X signs a negotiable instrument ordering Y to pay Z the sum of $500. Y is the: a. maker. b. drawee. c. payee. d. drawer. ANS: B PTS: 1 MSC: AACSB Reflective Thinking TOP: AICPA BB-Critical Thinking

12. Which of the following would be a bearer instrument?

a. b. c. d.

A check payable to "cash." A check that says "pay to the order of John Jones." A check that says "pay to the order of bearer." Two of the above, (a) and (c). TOP: AICPA BB-Legal

ANS: D PTS: 1 MSC: AACSB Analytic

13. Which of the following has been held to destroy the negotiability of an instrument and to render its transfer a contractual assignment? a. "I wish you would pay." b. "Pay to the order of John Jones." c. "Pay bearer." d. None of the above. ANS: A PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

14. Which of the following will destroy negotiability? a. Making the instrument subject to the terms of another agreement. b. Making the instrument payable in German marks. c. Signing a check in pencil. d. Signing a check with an "X." ANS: A PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

15. Which of the following notes would not be negotiable? A written, signed promise to pay: a. $50,000 to the order of Crouch, and the maker of the note orally stated to Crouch that the money would only be paid if all contractual specifications were met. b. $500 and a rick of firewood on or before September 10. c. which includes a statement that, This note is given in partial payment for a piano to be delivered in one week from date in accordance with a contract of this date between the maker and the payee. d. All of the above. ANS: B PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

16. Which article of the UCC governs "negotiable instruments"? a. Article 1. b. Article 2. c. Article 3. d. Article 9. ANS: C PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

17. A promise or order is unconditional unless it states that: a. there is an express condition to payment. b. the promise or order is subject to or governed by another writing. c. rights or obligations concerning the order or promise are stated in another writing. d. All of the above. ANS: D PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

18. References to other agreements in negotiable instruments: a. destroy negotiability unless the recital makes the instrument subject to, or governed by, the terms of another agreement. b. do not destroy negotiability in any circumstances. c. do not destroy negotiability unless the recital makes the instrument subject to or governed by the terms of another agreement. d. None of the above. ANS: C PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

19. A promise or order is payable at a definite time if it is payable: a. at a time readily ascertainable at the time the promise or order is issued. b. at a fixed date or dates. c. at a definite period of time after sight or acceptance. d. All of the above. ANS: D PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

20. Negotiable instruments: a. include drafts, promissory notes, assignments, and promissory notes. b. are used primarily for smaller transactions. c. in the form of checks have decreased in use since 1995. d. have increased in usage to the point where they are now approximately equal to usage of cash for payments. ANS: C PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

21. Bill's car broke down on a dark, rainy night. Along came Andy in his service station's four-wheel drive truck with tools and supplies in the back. Bill didn't have any credit cards and only $3.25 cash, so Andy told him to write a check or an IOU. Neither Andy nor Bill had any paper, so Bill wrote on the cover of Andy's lunchbox: "If my car is fixed right by Andy Walcott, I will pay him $150. (Signed) Bill Boyd." Andy indorses the note and takes it to a commercial factor for negotiation. The factor refuses, saying it is non-negotiable because it: a. is written on a lunchbox. b. is conditional on satisfactory repair of the car. c. mentions the existence of a contract to repair the car. d. All of the above. e. None of the above. ANS: B PTS: 1 MSC: AACSB Reflective Thinking TOP: AICPA BB-Critical Thinking

22. Would an instrument containing the following language be negotiable? "Harold T. Stone, as President, hereby promises to pay $12,348 to the order of Joe Jones Furniture for office equipment for Redtyn Corporation, payable from its corporate assets. (Signed) Harold T. Stone as President, Redtyn Corporation." a. No, because the promise refers to another contract. b. No, because its payment is limited to a particular fund. c. Yes, because Redtyn is a business entity. d. Yes, because it meets all the requirements of negotiability.

ANS: D PTS: 1 MSC: AACSB Reflective Thinking

TOP: AICPA BB-Critical Thinking

23. An instrument is payable to order if it is payable: a. to the order of an identified person. b. to an identified person or order. c. Both of the above. d. None of the above. ANS: C PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

24. Elmore purchases goods from Grady, and Elmore executes and delivers a negotiable note to Grady for $1,200, payable to Gradys order in 30 days. Two weeks later, Grady negotiates the note to McDaniel. Which of the following is true? a. McDaniel is required to notify Elmore that he acquired the note. b. If the goods are defective, Elmores defense will necessarily be available against McDaniel. c. Whether Elmores defense is available against McDaniel will depend on whether McDaniel acquired the note in good faith and for value, had no knowledge of the defense, and took the note without reason to question its authenticity. d. McDaniel can acquire no greater rights than Grady had in the note. ANS: C PTS: 1 MSC: AACSB Reflective Thinking TOP: AICPA BB-Critical Thinking

25. A definite time required for negotiability would NOT be satisfied in which instance? a. Payable on or before January 2, 2011. b. Payable one year from the completion of the building c. Payable one week after demand is made. d. Payable on June 15, 2010 or, if the building is not complete on that date, one year from that date. ANS: B PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

26. A draft is payable "to the order of Joe Jones or to bearer." Sally finds it and demands payment. Should the drawer pay Sally? a. No, unless Joe Jones's name is crossed off. b. No, unless "bearer" is handwritten. c. Yes, since the word "or" is contained in the instrument, either will do. d. No, the terminology is ambiguous and therefore must be paid only to the order of Joe Jones. ANS: C PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

27. The UCC states that an instrument fulfills the requirements of being payable to bearer if it: a. states it is payable to bearer or the order of bearer. b. does not state a payee. c. states it is payable to "cash" or to the order of "cash." d. All of the above. ANS: D PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

28. The court in Cooperative Centrale Raiffeisen-Boerenleenbank B.A. v. Bailey found:

a. whether an instrument is negotiable is a question of fact. b. whether an instrument is negotiable is to be determined without reference to the intent of the parties. c. the wording of the note was unclear and therefore it did not fall within the UCC Article 3 requirements of negotiability. d. the question of whether the promissory note was negotiable had to be determined by questioning the parties to the transaction as to their intent. ANS: B PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

29. Which of the following would be an unconditional promise or order to pay? a. "I hereby acknowledge my debt to John Jones." b. "I hereby assign all my rights under this instrument to John Jones." c. "Pay to the order of bearer ten dollars." d. "IOU fifty dollars." ANS: C PTS: 1 MSC: AACSB Analytic TOP: AICPA BB-Legal

30. All but which one of the following is required of a negotiable instrument? a. It must be payable only out of a particular fund. b. It must contain an unconditional promise or order to pay a fixed amount in money. c. It must be payable on demand or at a definite future date. d. It must be in writing and signed by the maker or drawer. ANS: A PTS: 1 MSC: AACSB Analytic ESSAY 1. Explain the effect that a reference to other agreements has on negotiable instruments and the difference between a mere reference and a negotiable instrument's being subject to the terms of another agreement. ANS: A reference to the mere existence of another agreement does not affect negotiability because it merely describes the consideration and transaction giving rise to the instrument. However, if a right to payment is made subject to the terms of another agreement, the instrument is non-negotiable. This restriction against making an instrument subject to another agreement is to enable any person to determine the right to payment provided by the instrument without having to look beyond its four corners. PTS: 1 TOP: AICPA BB-Critical Thinking | AICPA FN-Decision Modeling MSC: AACSB Communication | AACSB Reflective Thinking 2. What are the requirements of negotiability under the Code? List and briefly summarize them. ANS: TOP: AICPA BB-Legal

(1) Be in writing-the instrument must be written, which includes printing, typewriting, handwriting, or other intentional tangible expression and need not be on paper. (2) Be signed by the maker or drawer-"signed" can be a signature, "x," thumbprint, rubber stamp, or "any symbol executed or adopted by a party with present intention to authenticate a writing." (3) Be an unconditional promise or order to pay-cannot be based on the occurrence or non-occurrence of some other event. It must be more than a mere acknowledgment of an existing debt or an authorization or request for payment. (4) State a specific sum of money-must be for an amount that is "ascertainable from the instrument itself without reference to an outside source." (5) Be payable on demand or at a definite time-on demand is "on sight" or "on presentment." At a definite time can be (a) on a stated date or a fixed period after that date, (b) at a fixed period after sight or acceptance, (c) at a definite time subject to any acceleration, (d) at a definite time subject to extension at the option of the holder, or to extension to a further definite time at the option of the maker or acceptor or upon or after a specified act or event. (6) Payable to order or to the bearer-to order is to a specific person, to bearer is the person in possession of the instrument. (7) It must contain no other undertaking or instruction. PTS: 1 TOP: AICPA BB-Critical Thinking | AICPA FN-Decision Modeling MSC: AACSB Communication | AACSB Reflective Thinking 3. Distinguish between a note and a certificate of deposit. How are they alike? How are they different? Explain your answer. ANS: Notes and CD's are two-party instruments involving a maker and a payee. They are alike in that in each case one party promises to pay the other party money. They are different in that with a certificate of deposit, a bank is receiving money, acknowledging it, and promising to repay it. A CD is a specialized form of promissory note. PTS: 1 TOP: AICPA BB-Critical Thinking | AICPA FN-Decision Modeling MSC: AACSB Communication | AACSB Reflective Thinking 4. Who are the parties to checks and notes? ANS: A check involves three parties. The drawer of a check is the person who issues it. The drawee is the party who is ordered to pay a fixed amount of money to the payee. In the case of a check, the drawee is a bank. A note involves two parties: the maker, who promises to pay, and the payee, the person to whose order the instrument is made payable. PTS: 1 TOP: AICPA BB-Critical Thinking | AICPA FN-Decision Modeling MSC: AACSB Communication | AACSB Reflective Thinking 5. Which of the following would NOT be negotiable? Explain. a. A check with the amount payable omitted. b. A draft for 3,000 bushels of corn. c. A check written in pencil on a paper towel. d. A note stating that it is secured by a mortgage on a specified parcel of land. e. A note stating "IOU fifty dollars." ANS: a. The incomplete check is not negotiable, but it becomes negotiable as soon as it is completed.. b. The draft is non-negotiable, because 3,000 bushels of corn is not a fixed amount in money as required by the Code.

c. d. e.

This is negotiable under the UCC, because it meets the requirements of a writing as an intentional tangible expression. The reference to the mortgage does not destroy negotiability. The IOU is a mere acknowledgment of an obligation. The note is non-negotiable, because it does not contain an unconditional promise or order to pay within the meaning of the Code.

PTS: 1 TOP: AICPA BB-Critical Thinking | AICPA FN-Decision Modeling MSC: AACSB Communication | AACSB Reflective Thinking 6. Carlos wrote a check with the numbers $4500 and the written amount as forty-five dollars. Explain how the ambiguity will be resolved. ANS: Revised Article 3 of the UCC establishes rules to resolve common ambiguities so that parties do not have to use parol evidence to establish the interpretation of an instrument. This promotes negotiability by providing added certainty to the holder. If the amount payable is set forth on the face of the instrument in both figures and words and the amounts differ, the words control the figures. It is presumed that the drawer would be more careful with words. PTS: 1 TOP: AICPA BB-Critical Thinking | AICPA FN-Decision Modeling MSC: AACSB Communication | AACSB Reflective Thinking 7. Identify which of the following meet the Article 3 negotiability requirement of being payable at a definite time: (a) A note payable on or before June 14, 2010. (b) A dated instrument payable 30 days after date. (c) An undated instrument payable 30 days after date. (d) An instrument payable when Baxter is promoted to plant manager. (e) A note payable on December 31, subject to acceleration by the holder. (f) A note granting the holder the option to extend maturity of the instrument for an indefinite period. ANS: Illustrations (a), (b), (e), and (f) are instruments payable at a definite time. In (a), the instrument is payable at a definite time since it is payable on or before a stated date. In (b), the instrument is payable at a definite time since its exact maturity date can be determined by simple math. In (c), the instrument is not payable at a definite time because the date of payment cannot be determined from the instruments face. In (d), the instrument is payable only upon an event whose time of occurrence is uncertain, so it is not payable at a definite time. In (e), an instrument payable at a fixed time subject to acceleration by the holder satisfies the requirement of being payable at a definite time. In (f), a provision in an instrument granting the holder an option to extend the maturity of the instrument for a definite or an indefinite period does not impair its negotiability. PTS: 1 TOP: AICPA BB-Critical Thinking | AICPA FN-Decision Modeling MSC: AACSB Communication | AACSB Reflective Thinking