Chapter 26 Liability, Defenses, and Discharge. All Answers

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N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N A question new to this edition of the Test Bank. + A question modified from the previous edition of the Test Ban... k. = A question included in the previous edition of the Test Bank. TRUE/FALSE QUESTIONS A1. A signature can be made by use of any device or machine. T PAGE: 498 TYPE: N NAT: AACSB Reflective AICPA Legal A2. A maker is secondarily liable on an instrument. F PAGE: 498 TYPE: = NAT: AACSB Analytic AICPA Legal A3. Signature liability is contingent liability. T PAGE: 499 TYPE: N NAT: AACSB Analytic AICPA Legal A4. A drawer’s liability does not arise until presentment and notice of dishonor. T PAGE: 499 TYPE: = NAT: AACSB Analytic AICPA Legal A5. To properly present a draft for payment, the holder must present it to the drawer. F PAGE: 499 TYPE: + NAT: AACSB Analytic AICPA Legal A6. Dishonor occurs if payment of an instrument is refused with the prescribed time. T PAGE: 500 TYPE: + NAT: AACSB Analytic AICPA Legal A7. Failure to present an instrument on time is not improper presentment. F PAGE: 500 TYPE: N NAT: AACSB Reflective AICPA Legal A8. An authorized agent binds a principal on an instrument if the agent clearly names the principal in the signature. T PAGE: 501 TYPE: N NAT: AACSB Analytic AICPA Legal A9. An authorized agent is never personally liable on a negotiable instrument. F PAGE: 501 TYPE: N NAT: AACSB Analytic AICPA Legal A10. An unauthorized signature binds the person whose name is signed. F PAGE: 503 TYPE: = NAT: AACSB Analytic AICPA Legal A11. An imposter’s indorsement on an instrument can be effective against its drawer or maker. T PAGE: 504 TYPE: N NAT: AACSB Analytic AICPA Legal A12. Warranty liability is subject to the conditions of proper presentment, dishonor, and notice of dishonor. F PAGE: 505 TYPE: N NAT: AACSB Analytic AICPA Legal A13. Transfer of an order instrument by indorsement and delivery extends warranty liability to any subsequent holder who takes the instrument in good faith. T PAGE: 506 TYPE: N NAT: AACSB Analytic AICPA Legal A14. Presentment war¬ranties protect the person to whom an instrument is presented for payment. T PAGE: 507 TYPE: = NAT: AACSB Reflective AICPA Legal A15. A person whose name is forged on an instrument is liable to pay only a holder in due course the value of the forged instrument. F PAGE: 508 TYPE: = NAT: AACSB Reflective AICPA Legal A16. An ordinary holder can recover nothing on an instrument that has been materially altered. T PAGE: 509 TYPE: N NAT: AACSB Analytic AICPA Legal A17. Personal defenses are used to avoid payment to an ordinary holder of a negotiable instrument, but not to an HDC or a holder through an HDC. T PAGE: 511 TYPE: N NAT: AACSB Analytic AICPA Legal A18. Discharge in bankruptcy is no defense on any instrument regardless of the status of the holder. F PAGE: 511 TYPE: N NAT: AACSB Analytic AICPA Legal A19. All parties to a negotiable instrument will be discharged when the party primarily liable on it pays to a holder the full amount due. T PAGE: 513 TYPE: + NAT: AACSB Reflective AICPA Legal A20. Destruction or mutilation of a negotiable instrument by accident discharges it. F PAGE: 513 TYPE: + NAT: AACSB Reflective AICPA Legal MULTIPLE CHOICE QUESTIONS A1. Ethel signs a note “payable to the order of Fidelity Bank.” Fidelity indorses the note in blank and negotiates it to Ghani, who sells it to Huck. Liability associated with the transfer of the note from Ghani to Huck is a. fitness. b. quality. c. signature. d. warranty. D PAGE: 498 TYPE: = NAT: AACSB Reflective AICPA Legal A2. Puck signs a check “pay to the order of Quik Mart” drawn on Puck’s account in Regional Bank. Puck shows the check to Silky, who agrees that the signature is Puck’s and that Quik Mart is owed the amount that the check represents. Quik Mart signs the back of the check. Liability on this check extends to a. Puck, Quik Mart, and Regional Bank. b. Puck and Quik Mart only. c. Puck and Silky only. d. Silky only. B PAGE: 498 TYPE: = NAT: AACSB Reflective AICPA Legal A3. Toby signs a note “payable to the order of United Credit Union.” Unless Toby has a valid defense against payment, Toby’s liability on this note is a. immediate. b. imposed only after payment is demanded. c. postponed until the note is dishonored by United Credit Union. d. suspended until payment is due. A PAGE: 498 TYPE: = NAT: AACSB Reflective AICPA Legal A4. Derby Stables writes a check to Extendo Credit, Inc., that is drawn on Derby’s account at Farm & Ranch Bank. If the bank does not accept the check, liability for its amount is on a. Derby. b. Extendo. c. Farm & Ranch. d. the holder of the check. A PAGE: 499 TYPE: N NAT: AACSB Reflective AICPA Legal A5. Nero signs a check “pay to the order of Olive” drawn on Nero’s account in Peachtree Bank. Olive signs the back of the check. Secondary liability on this check extends to a. Nero and Olive only. b. Nero and Peachtree Bank only. c. Nero only. d. Peachtree Bank only. A PAGE: 499 TYPE: = NAT: AACSB Reflective AICPA Legal A6. Dirk is the maker of a note, on which Erv is secondarily liable. Friendly Credit Company is the current holder of the note. Erv will be obli¬gated to pay the note if a. Dirk defaults on the note. b. Friendly Credit breaches a transfer warranty. c. Friendly Credit negotiates the note to a third party. d. Friendly Credit presents the note for payment. A PAGE: 499 TYPE: = NAT: AACSB Reflective AICPA Legal Fact Pattern 26-1A (Questions A7–A8 apply) Seymour writes a check on his account at Platinum Bank to Teri to pay a debt. Teri negotiates the check by indorsement to Rosanna, who presents it for payment to Onyx Bank. A7. Refer to Fact Pattern 26-1A. Teri is a. not liable for payment under any circumstances. b. primarily liable. c. secondarily liable. d. simultaneously liable. C PAGE: 499 TYPE: = NAT: AACSB Reflective AICPA Legal A8. Refer to Fact Pattern 26-1A. If Onyx Bank dishonors the check, Rosanna can obtain payment from Teri a. if Rosanna timely notifies Teri. b. only if Seymour refuses to pay the check. c. under any circumstances. d. under no circumstances. A PAGE: 500 TYPE: = NAT: AACSB Reflective AICPA Legal A9. To borrow the money to buy a car, Klaus signs a note “payable to the order of Lake City Auto Financing.” Minnie cosigns the note to guarantee the repayment of the loan. Minnie’s liability on this note is a. lateral. b. primary. c. secondary. d. tertiary. B PAGE: 500 TYPE: = NAT: AACSB Reflective AICPA Legal A10. Audio Science Company’s agent Bailey is authorized to draw checks on Audio Science’s account in Citizen Bank. The checks are preprinted with the company name. Bailey writes a check “pay to the order of Darlene [signed] Bailey.” Darlene presents the check for payment. If Citizen Bank dishonors it, liability extends to a. no one. b. Audio Science and Bailey. c. Audio Science only. d. Bailey only. C PAGE: 502 TYPE: N NAT: AACSB Reflective AICPA Legal A11. Celia, an employee of Delite Dairy Company, forges the signa¬ture of Elin, Delite’s president, on a Delite check and cashes it at First Federal Bank. Elin would ratify Celia’s actions by a. asking First Federal to prosecute Celia for forgery. b. discharging Celia from Delite ‘s employment. c. entering into a repayment agreement with Celia. d. filing criminal charges against Celia herself. C PAGE: 503 TYPE: = NAT: AACSB Reflective AICPA Legal A12. Birdie, an accountant for Country Custom Furniture, Inc., issues company checks payable to nonexistent persons drawn on Country’s ac¬count at Debit Bank. Birdie indorses the checks and deposits them in her account. Country discovers the theft and demands that Debit recredit its account. Debit’s best defense is that a. Birdie was not authorized to issue the checks. b. Country was in a better position than Debit to prevent the theft. c. Debit did not know that the checks were not to be paid. d. the checks were the property of Country, not Debit. B PAGE: 504 TYPE: = NAT: AACSB Reflective AICPA Legal A13. Rodeo Ranch’s agent Slim is authorized to write checks on Rodeo Ranch’s account in Town Bank. Upper Range Corporation is a Rodeo Ranch supplier. Slim writes a check on Rodeo Ranch’s account “pay to the order of Upper Range [signed] Slim,” indorses it in Upper Range’s name, and deposits it in his own account in Verity Bank. If Verity Bank collects payment, the ultimate party most likely to suffer the loss is a. no one. b. Rodeo Ranch. c. Town Bank. d. Upper Range. B PAGE: 505 TYPE: = NAT: AACSB Reflective AICPA Legal A14. Cash National Bank is an HDC of a note for $1,000 on which there is the forged signature of “Dudley.” If sued on the note by Cash a. Dudley must pay the note. b. Dudley’s best defense would be fraud in the execution. c. Dudley’s best defense would be material alteration. d. Dudley’s best defense would be forgery. D PAGE: 508 TYPE: N NAT: AACSB Reflective AICPA Legal A15. Opalina asks Paolo, who does not understand English, to sign what Opalina says is an application to open a bank account. In fact, the “application” is a note. If sued on the note by an HDC a. Paolo must pay the note. b. Paolo’s best defense would be fraud in the execution. c. Paolo’s best defense would be fraud in the inducement. d. Paolo’s best defense would be mistake. B PAGE: 509 TYPE: + NAT: AACSB Reflective AICPA Legal A16. Chris convinces Dion, who does not understand English, to sign a $1,000 note that Dion believes is an application for a credit card. Chris negotiates the note to EZ Finance Company. Dion a. can avoid payment on the note even if EZ is an HDC. b. can avoid payment on the note only if EZ is a holder. c. must pay EZ the amount that it paid for the note. d. must pay the note in full. A PAGE: 509 TYPE: = NAT: AACSB Reflective AICPA Legal A17. Dandy Lyin’ Furniture Store borrows $100,000 at 6 percent interest from Easy Loan Company and signs a promissory note for that amount. Easy changes the amount of the note to $120,000 and increases the rate to 8 per-cent. Easy materially altered the note when it changed a. neither the amount nor the interest rate b. the amount and the interest rate. c. the amount only. d. the interest rate only. B PAGE: 509 TYPE: = NAT: AACSB Reflective AICPA Legal A18. Quincy signs a check payable to Richland Investors, Inc., and gives it to Richland, leaving the amount blank but authorizing Richland to fill in the check for $1,000. Richland fills in $1,500 and negotiates the check to Silverado Bank, to whom Richland owes $1,500. Silverado Bank, an HDC, can enforce the check for a. $0. b. $500. c. $1,000. d. $1,500. D PAGE: 510 TYPE: = NAT: AACSB Reflective AICPA Legal A19. Laptop Assembly Company gives a $3,000 promissory note to My-T-Fast Delivery Service to de¬liver a load of computer chips to Laptop’s plant. The chips are contami¬nated during transit, and are useless to Laptop on delivery. If My-T-Fast presents the note for payment a. Laptop’s best defense would be breach of warranty. b. Laptop must pay the note. c. Laptop’s best defense would be nondelivery of an instrument. d. Laptop’s best defense would be failure of consideration. A PAGE: 511 TYPE: + NAT: AACSB Reflective AICPA Legal A20. Bing signs a note payable to the order of Cameron. Cameron indorses the note and gives it to Daphne as payment for a debt. Daphne presents it to Bing, who pays it. Bing’s payment discharges a. all of the parties. b. only Bing. c. only Cameron. d. only Daphne. A PAGE: 513 TYPE: N NAT: AACSB Reflective AICPA Legal ESSAY QUESTIONS A1. Dale issues a check for $4,000, dated June 1, to Evelyn. The check is drawn on First Federal Bank. Evelyn indorses the check and transfers it to Gene. What will trigger the liability of Dale and Evelyn on the check? A2. Ian transfers a note, for consideration, to Jock by blank indorsement and delivery. Jock transfers the note to Kelly, who takes it in good faith. What does Ian warrant to Kelly? [Show More]

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