Chapter 36 Sole Proprietorships and Franchises. All Answers

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 Bank. = A question inc ...

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 Bank. = A question included in the previous edition of the Test Bank. TRUE/FALSE QUESTIONS A1. The simplest form of business is a sole proprietorship. T PAGE: 706 TYPE: N NAT: AACSB Analytic AICPA Legal A2. A franchise contract may use only one type of business organization—the sole proprietorship. F PAGE: 706 TYPE: N NAT: AACSB Reflective AICPA Critical Thinking A3. A franchise is a contractual arrangement. T PAGE: 706 TYPE: N NAT: AACSB Analytic AICPA Legal A4. In a sole proprietorship, the proprietor shares the burden of any losses or liabilities incurred by the business enterprise with the government. F PAGE: 707 TYPE: N NAT: AACSB Analytic AICPA Legal A5. A sole proprietorship lacks continuity on the death of the proprietor. T PAGE: 707 TYPE: N NAT: AACSB Analytic AICPA Legal A6. A franchisor is the purchaser of a franchise. F PAGE: 708 TYPE: N NAT: AACSB Analytic AICPA Legal A7. A franchisee can operate as an independent businessperson but cannot then obtain the advantages of a national organization. F PAGE: 708 TYPE: N NAT: AACSB Analytic AICPA Legal A8. A manufacturer’s license to a dealer to sell a product is a chain-style business operation. F PAGE: 709 TYPE: + NAT: AACSB Reflective AICPA Critical Thinking A9. A franchise relationship may be governed by the law covering sales con-tracts as expressed in Article 2 of the Uniform Commercial Code. T PAGE: 709 TYPE: N NAT: AACSB Reflective AICPA Critical Thinking A10. Laws governing franchising are designed in part to prevent franchisors from terminating franchises without good cause. T PAGE: 709 TYPE: N NAT: AACSB Analytic AICPA Legal A11. Some states require franchisors to provide presale disclosures to pro¬spective franchisees. T PAGE: 710 TYPE: N NAT: AACSB Analytic AICPA Legal A12. If a party to a franchise contract fails to perform its contractual duties, the other party may be subject to a lawsuit for breach of contract. F PAGE: 711 TYPE: + NAT: AACSB Analytic AICPA Legal A13. A franchisee ordinarily pays an initial fee or lump sum price for a fran¬chise license. T PAGE: 711 TYPE: + NAT: AACSB Analytic AICPA Legal A14. Typically, the franchisee determines the territory to be served by the franchise. F PAGE: 711 TYPE: N NAT: AACSB Analytic AICPA Legal A15. The day-t-day operation of franchise business normally is left up to the franchisee. T PAGE: 711 TYPE: N NAT: AACSB Analytic AICPA Legal A16. A franchisor can require a franchisee to purchase certain supplies from the franchisor at an established price. T PAGE: 712 TYPE: N NAT: AACSB Analytic AICPA Legal A17. The duration of a franchise is a matter to be determined between the parties. T PAGE: 712 TYPE: N NAT: AACSB Analytic AICPA Legal A18. Normally, a franchisee receives a windfall on the termination of a franchise. F PAGE: 713 TYPE: N NAT: AACSB Reflective AICPA Critical Thinking A19. Good faith and fair dealing are not important in terminating a franchise relationship. F PAGE: 713 TYPE: N NAT: AACSB Analytic AICPA Legal A20. A franchisor’s decision to terminate a franchise may be made in the normal course of business operations. T PAGE: 715 TYPE: N NAT: AACSB Analytic AICPA Legal MULTIPLE CHOICE QUESTIONS A1. Hermione starts up, and assumes the financial risk of, Graphic Ads, a new enterprise. Hermione is a. a franchisee. b. a franchisor. c. an agent. d. a sole proprietor. D PAGE: 706 TYPE: = NAT: AACSB Reflective AICPA Legal A2. Carl sells Direct Marketing Enterprises, a sole proprietorship, to Eve. This is a transfer of a. a license. b. a trade name. c. the formula to make a product. d. the ownership of the business. D PAGE: 706 TYPE: = NAT: AACSB Reflective AICPA Legal A3. Jim organized, and owns and operates, Jim’s Landscaping Service in the simplest form of business organization. This is a. a corporation. b. a limited liability company. c. a partnership. d. a sole proprietorship. D PAGE: 706 TYPE: = NAT: AACSB Reflective AICPA Legal A4. Jody owns KuppaJava Kiosks, a sole proprietorship. Jody’s liability is a. limited by state statute and varies from state to state. b. limited to the extent of capital expenditures. c. limited to the extent of his or her original investment. d. unlimited. D PAGE: 707 TYPE: = NAT: AACSB Reflective AICPA Legal A5. Real Events Promotion Corporation licenses trademarks to Stadium Souvenirs, Inc., to use in selling caps, sweatshirts, and similar goods. This is a. a franchise. b. an entrepreneur. c. a principal-agent relationship. d. a sole proprietorship. A PAGE: 708 TYPE: = NAT: AACSB Reflective AICPA Legal A6. Otis is interested in buying a franchise from Plentiful Markets Inc. This transaction, like other franchise deals, is regulated to protect a. certain types of anticompetitive agreements. b. franchisors from dishonest prospective franchisees. c. prospective franchisees from dishonest franchisors. d. the government’s power to restrict freedom of contract. C PAGE: 709 TYPE: = NAT: AACSB Reflective AICPA Legal A7. Pilar is interested in buying a franchise from Quixotic Bike Corporation. Quixotic must disclose material facts that Pilar needs to make an in¬formed decision concerning this purchase, according to a. no law. b. the Petroleum Marketing Practices Act of 1979. c. the Federal Trade Commission’s Franchise Rule. d. the Uniform Commercial Code. C PAGE: 709 TYPE: + NAT: AACSB Reflective AICPA Legal A8. Burger Heaven, Inc., conducts a chain-style franchise. This involves the transfer to Chester, one of its franchisees, of a. a license. b. a trade name. c. the formula to make a product. d. the ownership of the business. B PAGE: 709 TYPE: = NAT: AACSB Reflective AICPA Legal A9. Effervescent Soda Bottling Company is a. a chain-style franchise. b. a distributorship franchise. c. a manufacturing franchise. d. no franchise. C PAGE: 709 TYPE: = NAT: AACSB Reflective AICPA Critical Thinking A10. In-Home Maid Service Company uses a Web site to provide downloadable in-formation to prospective franchises. This online information is the equivalent of an offer that must comply with a. the Automobile Dealers’ Franchise Act of 1965. b. the Petroleum Marketing Practices Act of 1979. c. the Federal Trade Commission’s Franchise Rule. d. the state Franchise Disclosure Document, or FDD. C PAGE: 709 TYPE: N NAT: AACSB Reflective AICPA Legal A11. Leo buys an exclusive territory in which he is authorized to set up a plant to make Midwest Dairy, Inc., products. After receiving the formula, Leo begins making Nice Ice-brand ice cream and other Midwest prod¬ucts. This is a. a chain-style franchise. b. a distributorship franchise. c. a manufacturing franchise. d. no franchise. C PAGE: 709 TYPE: = NAT: AACSB Reflective AICPA Critical Thinking A12. Echo enters into an agreement with Deep Pan Pies, Inc., to operate a franchise in Centre City. Later, Deep grants franchises to others within the city. Echo files a suit to close them. If the court rules in Echo’s favor it will most likely be on the ground that a. Deep violated the an¬titrust laws. b. Deep violated the implied covenant of good faith and fair dealing. c. Echo paid a franchise fee. d. Echo was the first Deep franchisee in Centre City. B PAGE: 711 TYPE: N NAT: AACSB Reflective AICPA Legal A13. Flip Gymnastics & Karate, Inc., grants a franchise to Gibby to operate a Flip gym. Flip may require Gibby to pay the franchisor a percentage of his a. annual sales or volume of business. b. weekly payroll expense. c. monthly overhead savings. d. none of the choices. A PAGE: 711 TYPE: N NAT: AACSB Reflective AICPA Legal A14. Stacy contracts to buy a franchise from Tender Steak House Company. In this contract, as in most franchise contracts, the determination of the territory to be served is made by a. a court. b. Stacy. c. Tender Steak House. d. the Federal Trade Commission. C PAGE: 711 TYPE: = NAT: AACSB Reflective AICPA Legal A15. Dominique buys a franchise from Cheyenne Artisans, Inc. This provides Cheyenne with an outlet for the firm’s goods, some of which Dominique is required to buy at an established price. In their agree¬ment, Cheyenne may also specify a. the franchisor’s non-culpability for any breach of the agreement. b. the franchise’s business organizational form. c. the retail prices at which Dominique must resell the goods she buys. d. none of the choices. B PAGE: 711 TYPE: N NAT: AACSB Reflective AICPA Legal A16. Inger is a franchisee of Honey Bear Restaurants, LLC Their contract gives Honey Bear the right to control virtually all aspects of Inger’s op¬eration, including the hiring of employees. One of the employees, Joris commits a tort against Kiley, one of Inger’s customers. Kiley files a suit against Honey Bear. Honey Bear is most likely a. liable because Honey Bear exercises control over Inger’s operation. b. liable because Kiley was Honey Bear’s customer. c. not liable because Inger is responsible for the employees. d. not liable because Kiley was Inger’s customer. A PAGE: 711 TYPE: N NAT: AACSB Reflective AICPA Legal A17. Sweet Styles, Inc., a franchisor of clothing stores, wishes to standardize the pricing practices of its franchisees that have engaged in price-cutting to increase their respective shares of the market. The most pru¬dent action might be for Sweet to a. mandate the prices at which its franchisees sell their products. b. suggest the prices at which its franchisees sell their products. c. require its franchisees to buy inventory exclusively from Sweet. d. threaten its franchisees with a material breach of contract. B PAGE: 712 TYPE: N NAT: AACSB Reflective AICPA Legal A18. Star Resorts Corporation wants to terminate its franchise arrangement with Tony. Their contract does not provide for notice of termination or set a time for winding up the business. This means that to wind up, Tony a. has a reasonable time, with notice. b. has whatever time A determines, with or without notice. c. is entitled to notice, but nothing more. d. must close immediately. A PAGE: 712 TYPE: = NAT: AACSB Reflective AICPA Legal A19. Bret buys a franchise from Comida Mexicano Ltd. If their agreement is like most franchise agree¬ments, it will specify that Comida can ter¬mi¬nate the franchise a. at will. b. for any reason. c. for cause only. d. for no reason. C PAGE: 712 TYPE: = NAT: AACSB Reflective AICPA Legal A20. Mika buys a Nuance Cabinets, Inc., franchise, which the franchisor later termi¬nates. In determining whether the termination was proper, a court will generally a. balance the rights of both parties. b. emphasize the right of Nuance to its business operation. c. focus on the right of Mika to be dealt with fairly. d. underscore the interest of consumers in affordability. A PAGE: 715 TYPE: = NAT: AACSB Reflective AICPA Legal ESSAY QUESTIONS A1. Owen plans to open Owen’s Pets Store, a pet supplies outlet, and to hire Quinn and Ruth. Owen will invest only his own money. He does not ex¬pect to make any profit for at least two years and to make almost no profit for the first three years, but he hopes to expand eventually. Which form of business organization would be most appropriate? A2. Doc’s Sports Club and Elite Fitness Corporation enter into a franchise agreement that provides for its termination at any time for “cause.” Doc’s fails to meet Elite’s membership sales quota. Is this “cause” for termination? Explain.