10
Nature Chapter and Terminology
TRUE/FALSE QUESTIONS
A1.
Some promises are not binding.
ANSWER: T
PAGE:
NAT: AACSB Analytic
B1.
216
AICPA Legal
TYPE:
N
216
AICPA Legal
TYPE:
N
A contract is an agreement only between parties who are not
members of the same family.
ANSWER: F
PAGE:
NAT: AACSB Analytic
B3.
N
Tort law governs contracts.
ANSWER: F
PAGE:
NAT: AACSB Analytic
A3.
216
TYPE:
AICPA Critical Thinking
Contract law ensures that certain promises are legally binding.
ANSWER: T
PAGE:
NAT: AACSB Analytic
B2.
N
Contract law ensures that one party does not threaten another.
ANSWER: F
PAGE:
NAT: AACSB Analytic
A2.
216
TYPE:
AICPA Critical Thinking
217
TYPE:
AICPA Critical Thinking
N
217
N
A contract is a promise to act.
ANSWER:
F
PAGE:
97
TYPE:
98
TEST BANK AUNIT THREE: CONTRACTS AND E-CONTRACTS
NAT: AACSB Analytic
A4.
Under the objective theory of contracts, the intention to enter into a
contract is judged by outward, objective facts as interpreted by a
reasonable person.
ANSWER: T
PAGE:
NAT: AACSB Analytic
B4.
=
217
AICPA Legal
TYPE:
N
217
AICPA Legal
TYPE:
N
Consideration refers to the legality of the subject matter of a
contract.
ANSWER: F
PAGE:
NAT: AACSB Analytic
A6.
TYPE:
One of the requirements for a valid contract is its acceptance.
ANSWER: T
PAGE:
NAT: AACSB Analytic
B5.
217
AICPA Legal
One of the elements of a valid contract is a fair price.
ANSWER: F
PAGE:
NAT: AACSB Analytic
A5.
AICPA Legal
217
AICPA Legal
TYPE:
N
Consideration refers to the genuine assent of all of the parties to a
contract.
ANSWER: F
PAGE:
NAT: AACSB Analytic
217
AICPA Legal
TYPE:
N
99
CHAPTER 10: NATURE AND TERMINOLOGY
B6.
An offer to form a unilateral contract is accepted by a promise to
perform.
ANSWER: F
PAGE:
NAT: AACSB Analytic
A7.
=
218
AICPA Legal
TYPE:
=
218
AICPA Legal
TYPE:
=
218
AICPA Legal
TYPE:
=
TYPE:
=
TYPE:
=
No offer may be revoked before it is accepted.
ANSWER: F
PAGE:
NAT: AACSB Analytic
B9.
TYPE:
A contract can be created only when a promise is given in exchange
for another promise.
ANSWER: F
PAGE:
NAT: AACSB Analytic
A9.
218
AICPA Legal
A unilateral contract is formed when the one receiving the offer completes the requested act or performance.
ANSWER: T
PAGE:
NAT: AACSB Analytic
B8.
=
An offer to form a bilateral contract is accepted by a promise to
perform.
ANSWER: T
PAGE:
NAT: AACSB Analytic
A8.
TYPE:
An offeree is a person who makes an offer.
ANSWER: F
PAGE:
NAT: AACSB Analytic
B7.
218
AICPA Legal
220
AICPA Legal
A promisee is a person who makes a promise.
ANSWER: F
PAGE:
NAT: AACSB Analytic
220
AICPA Legal
A10. Except for certain types of contracts that must in writing, no special
form is required for informal contracts.
ANSWER: T
PAGE:
NAT: AACSB Analytic
220
AICPA Legal
TYPE:
=
100
TEST BANK AUNIT THREE: CONTRACTS AND E-CONTRACTS
B10. A contract under seal is a formal contract.
ANSWER: T
PAGE:
NAT: AACSB Reflective
220
TYPE
=
AICPA Legal
A11. Informal contracts are usually based on their substance rather than
their form.
ANSWER: T
PAGE:
NAT: AACSB Analytic
220
TYPE:
AICPA Critical Thinking
=
B11. In an express contract, the terms are fully stated in words.
ANSWER: T
PAGE:
NAT: AACSB Analytic
221
AICPA Legal
TYPE:
=
TYPE:
=
A12. An express contract must be in writing.
ANSWER: F
PAGE:
NAT: AACSB Analytic
221
AICPA Legal
B12. An implied-in-fact contract is implied from the conduct of the parties.
ANSWER: T
PAGE:
NAT: AACSB Analytic
221
AICPA Legal
TYPE:
N
A13. An implied-in-fact contract is an actual contract.
ANSWER: T
PAGE:
NAT: AACSB Reflective
221
TYPE:
N
AICPA Legal
B13. An executory contract is one that has been fully performed.
ANSWER: F
PAGE:
NAT: AACSB Analytic
223
AICPA Legal
TYPE:
=
A14. A voidable contract is a valid contract that can be avoided at the
option of at least one of the parties to it.
ANSWER: T
PAGE:
NAT: AACSB Analytic
223
AICPA Legal
TYPE:
=
101
CHAPTER 10: NATURE AND TERMINOLOGY
B14. An unenforceable contract is one that cannot be enforced because of
certain legal defenses against it.
ANSWER: T
PAGE:
NAT: AACSB Analytic
223
AICPA Legal
TYPE:
=
A15. An executed contract is one that has been fully performed.
ANSWER: T
PAGE:
NAT: AACSB Analytic
223
AICPA Legal
TYPE:
=
102
TEST BANK AUNIT THREE: CONTRACTS AND E-CONTRACTS
B15. A contract cannot be void if its purpose is legal.
ANSWER: F
PAGE:
NAT: AACSB Reflective
223
TYPE:
=
AICPA Legal
A16. A quasi contract is a fictional contract.
ANSWER: T
PAGE:
NAT: AACSB Analytic
224
TYPE:
AICPA Critical Thinking
N
B16. A contract is void if its purpose is illegal.
ANSWER: T
PAGE:
NAT: AACSB Reflective
223
TYPE:
=
AICPA Legal
A17. The doctrine of quasi contract applies only if there is an actual con tract that covers the area in controversy.
ANSWER: F
PAGE:
NAT: AACSB Reflective
224
TYPE:
=
AICPA Legal
224
AICPA Legal
TYPE:
B17. A quasi contract is a true contract.
ANSWER: F
PAGE:
NAT: AACSB Analytic
N
A18. A void contract is enforceable if it is in writing.
ANSWER: F
PAGE:
NAT: AACSB Reflective
224
TYPE:
=
AICPA Legal
B18. A party who confers a benefit on someone else unnecessarily can
recover the cost under the principle of quasi contract.
ANSWER: F
PAGE:
NAT: AACSB Reflective
224
TYPE:
=
AICPA Legal
A19. Under the plain meaning rule, a court will enforce a contract, in
which the writing is clear and unequivocal, according to its plain
terms.
ANSWER: T
PAGE:
NAT: AACSB Analytic
225
AICPA Legal
TYPE:
=
103
CHAPTER 10: NATURE AND TERMINOLOGY
B19. The existence of an express contract does not bar an action in quasi
contract concerning the same transaction.
ANSWER: F
PAGE:
=
NAT: AACSB Reflective
225
TYPE:
AICPA Legal
A20. When the words in a contract have more than one meaning, they are
generally interpreted in favor of the party who drafted the contract.
ANSWER: F
PAGE:
NAT: AACSB Reflective
228
TYPE:
=
AICPA Legal
B20. A contracts general intent will usually be subordinated to specific
clauses contained within the contract.
ANSWER: F
PAGE:
NAT: AACSB Analytic
228
AICPA Legal
TYPE:
=
MULTIPLE CHOICE QUESTIONS
A1.
Expert Pavers, Inc., contracts with Fabricated Building Corporation to
repave Fabricateds parking lot for which Fabricated agrees to pay.
The elements of this, and any other, contract do not include
a.
b.
c.
d.
capacity.
consideration.
legality.
practicality.
ANSWER: D
PAGE:
NAT: AACSB Analytic
217
AICPA Legal
TYPE:
+
104
B1.
TEST BANK AUNIT THREE: CONTRACTS AND E-CONTRACTS
Cathy assures Don that she will deliver his products as he directs. An
assurance that one will do something in the future is part of the
definition of
a.
b.
c.
d.
a declaration.
a moral obligation.
an ethical principle.
a promise.
ANSWER: D
PAGE:
NAT: AACSB Reflective
Thinking
A2.
the
the
the
the
=
Critical
conscious theory of contracts.
objective theory of contracts.
personal theory of contracts.
subjective theory of contracts.
ANSWER: B
PAGE:
NAT: AACSB Analytic
217
AICPA Legal
TYPE:
=
Dalton contracts to tutor Ellen in the principles of business law. For
the breach of a contractual promise, contract law entitles innocent
parties to
a.
b.
c.
d.
any relief that a court wants to provide.
any relief that a defendant wants to concede.
any relief that a plaintiff wants to seek.
some forms of relief.
ANSWER: D
PAGE:
NAT: AACSB Analytic
A3.
TYPE:
AICPA
Bob claims that Carol breached their contract. Carol responds that
she never intended to enter into a contract with Bob. The intent to
enter into a contract is determined with reference to
a.
b.
c.
d.
B2.
216
217
TYPE:
AICPA Critical Thinking
=
Laura and Mike enter into what Laura later claims is a contract. In
deciding whether a valid contract was formed, a court will not look at
a.
the
b.
the
c.
the
d.
the
contract.
circumstances surrounding the alleged contract.
parties conduct at the time of the alleged contract.
parties statements at the time of the alleged contract.
parties subjective beliefs at the time of the alleged
105
CHAPTER 10: NATURE AND TERMINOLOGY
ANSWER: D
PAGE:
NAT: AACSB Reflective
B3.
a valid offer only.
a valid acceptance only.
a valid offer and a valid acceptance.
neither a valid offer nor a valid acceptance.
ANSWER: C
PAGE:
NAT: AACSB Analytic
TYPE:
=
a desire not to perform.
adverse economic consequences.
results that do not match expectations.
the lack of a partys genuine assent.
ANSWER: D
PAGE:
NAT: AACSB Reflective
218
TYPE:
=
AICPA Legal
Paco offers to pay Quik Delivery (QD) $50 if it picks up and delivers
to him a package from Rich within 30 minutes. QD can accept the
offer only by meeting the deadline. If QD performs as directed, these
parties will have
a.
b.
c.
d.
a bilateral contract.
a trilateral contract.
a unilateral contract.
no contract.
ANSWER: C
PAGE:
NAT: AACSB Reflective
A5.
217
AICPA Legal
Mona asserts that a deal she entered into with Nate is an unenforceable contract. Defenses to the enforcement of a contract include
a.
b.
c.
d.
B4.
TYPE:
=
AICPA Legal
Stu makes an offer to Tina to enter into a contract. Tina accepts the
offer. A valid contract requires
a.
b.
c.
d.
A4.
217
218
TYPE:
N
AICPA Legal
On Monday, Neil tells Outdoor Landscaping, Inc., that he will pay
Outdoor $500 if a variety of tasks are completed by Friday. On
Wednesday, when Outdoor is more than half done with the work,
Neil says that he has changed his mind. Under the modern-day view,
these parties had
106
TEST BANK AUNIT THREE: CONTRACTS AND E-CONTRACTS
a.
b.
c.
d.
an expired contract when Neil said that he had changed his
mind.
a quasi contract when Neil said that he would pay for certain
work.
a unilateral contract as soon as Outdoor began to perform.
no contract.
ANSWER: C
PAGE:
NAT: AACSB Analytic
218
AICPA Legal
TYPE:
N
107
CHAPTER 10: NATURE AND TERMINOLOGY
B5.
Allen applies for a police officers job with Bay City, which responds
with a letter setting an appointment for a psychological exam. The
letter does not state that it is a conditional employment offer.
Based on the courts reasoning in Case 10.1, Ardito v. City of
Providence, this letter is
a.
b.
c.
d.
a bilateral contract that Allen accepted by applying for the job.
a quasi contract on which Allen can rely for employment.
a unilateral contract that Allen can accept by passing the
exam.
no contract.
ANSWER: D
PAGE:
NAT: AACSB Communication
A6.
=
payment of money only.
performance of a particular act only.
promise only.
prudent awareness only.
ANSWER: C
PAGE:
NAT: AACSB Reflective
218
TYPE:
=
AICPA Legal
Jack promises to buy Kriss computer for $400. Jack is
a.
b.
c.
d.
an executor.
an offeree.
a promisee.
a promisor.
ANSWER: D
PAGE:
NAT: AACSB Reflective
A7.
TYPE:
Freida and Gail enter into a bilateral contract, which is created when
Freida gives a promise in exchange for Gails
a.
b.
c.
d.
B6.
219
AICPA Legal
220
TYPE:
N
AICPA Legal
Clay offers to pay Dot $50 for a golf lesson for Eula. They agree to
meet the day after tomorrow to exchange the cash for the lesson.
These parties have
a.
b.
c.
d.
a bilateral contract.
a trilateral contract.
a unilateral contract.
no contract.
108
TEST BANK AUNIT THREE: CONTRACTS AND E-CONTRACTS
ANSWER: A
PAGE:
NAT: AACSB Reflective
B7.
an executee.
an offeror.
a promisee.
a promisor.
ANSWER: C
PAGE:
NAT: AACSB Reflective
220
TYPE:
N
AICPA Legal
Lara applies for a firefighters job with Metro City, which responds
with a letter setting an appointment for a medical exam. The letter
also states that it is a conditional employment offer. Based on the
courts reasoning in Case 10.1, Ardito v. City of Providence, this
letter is
a.
b.
c.
d.
a bilateral contract that Lara accepted by applying for the job.
a quasi contract on which Lara can rely for employment.
a unilateral contract that Lara can accept by passing the exam.
no contract.
ANSWER: C
PAGE:
NAT: AACSB Communication
B8.
TYPE:
N
AICPA Legal
Jill promises to buy Kents handheld game-player for $75. Kent is
a.
b.
c.
d.
A8.
218
219
AICPA Legal
TYPE:
=
A contract between Gamma Software Company and Omega Designs,
Inc., ends with the initials L.S. These initials
a.
b.
c.
d.
emphasize that the parties must sign with legal signatures.
remind the parties that they must have legal status to
contract.
stand for locus sigilli and substitute for a seal.
underscore that the parties deal must have lawful
significance.
ANSWER: C
PAGE:
NAT: AACSB Reflective
Thinking
220
TYPE:
AICPA
=
Critical
109
CHAPTER 10: NATURE AND TERMINOLOGY
A9.
Opie offers to sell his guitar to Pinky for $100. Pinky agrees. They
complete and sign a printed form that includes, near the blanks for
their signatures, the word seal. This is
a.
b.
c.
d.
a formal contract.
an informal contract.
a social contract.
no contract.
ANSWER: A
PAGE:
NAT: AACSB Analytic
220
TYPE:
AICPA Critical Thinking
N
110
B9.
TEST BANK AUNIT THREE: CONTRACTS AND E-CONTRACTS
Tom enters a coffee shop in which he has an open account, fills a
cup of coffee, holds it so the cashier can see it, acknowledges the
cashiers nod, and walks out with the coffee, knowing that he will be
billed for it at the end of the month. Tom has formed
a.
b.
c.
d.
an express contract.
an implied-in-fact contract.
an implied-in-law contract.
a quasi contract.
ANSWER: B
PAGE:
NAT: AACSB Reflective
221
TYPE:
=
AICPA Legal
A10. Flo tells Gregor that she will buy his textbook from last semester for
$65. Gregor agrees. Flo and Gregor have
a.
b.
c.
d.
an executed contract.
an express contract.
an implied-in-fact contract.
a quasi contract.
ANSWER: B
PAGE:
NAT: AACSB Reflective
221
TYPE:
+
AICPA Legal
B10. Bay Construction, Inc., a contractor, asks Cool Electric, a
subcontractor, to provide certain services. Nothing is expressed
about payment. provides Cool the services, but Bay refuses to pay.
In Cools suit to recover, the chief issue is most likely to be whether
these parties had
a.
b.
c.
d.
a formal contract.
an actual contract.
an implied-in-fact contract.
a voidable contract.
ANSWER: C
PAGE:
NAT: AACSB Communication
221
AICPA Legal
TYPE:
N
A11. Great Marketing Company and Hot Tunes, Inc., sign a document that
states Great agrees to create a marketing campaign for Hot and Hot
agrees to pay Great for the service. Great and Hot have
a.
b.
an executed contract.
an express contract.
111
CHAPTER 10: NATURE AND TERMINOLOGY
c.
d.
an implied-in-fact contract.
a quasi contract.
ANSWER: B
PAGE:
NAT: AACSB Reflective
221
TYPE:
N
AICPA Legal
B11. Macro Corporation and Micro, Inc., enter into an agreement. To
constitute a contract
a.
b.
c.
d.
all terms must be express.
all terms must be implied.
the terms may be express, implied, or a mix of both.
the terms may be express or implied, but not both.
ANSWER: C
PAGE:
NAT: AACSB Analytic
221
AICPA Legal
TYPE:
=
A12. When Jeffs car breaks down, he asks Kwik Tow, Inc., to tow it from
its location to Loyal Repair Shop. There is no discussion of a price,
and Jeff and Kwik do not sign any documents. After the tow, Kwik
sends Jeff a bill. With respect to Jeffs obligation to pay the bill, this is
a.
b.
c.
d.
an
an
an
no
express contract.
implied-in-fact contract.
implied-in-law contract.
contract.
ANSWER: B
PAGE:
NAT: AACSB Reflective
221
TYPE:
N
AICPA Legal
B12. Lou claims that he and Mira entered into an implied-in-fact contract.
To establish this contract, it is not necessary to show that
a.
b.
c.
d.
a court imposed a promise in the interest of fairness.
Lou expected to be paid for providing services or property.
Lou provided Mira with services or property.
Mira failed to reject services or property provided by Lou.
ANSWER: A
PAGE:
NAT: AACSB Reflective
221
TYPE:
=
AICPA Legal
A13. Sam and Tiffany enter into an implied-in-fact contract. This is a
contract in which the parties conduct
112
TEST BANK AUNIT THREE: CONTRACTS AND E-CONTRACTS
a.
b.
c.
d.
defines the contracts terms.
finds the contracts facts.
terminates any unintended consequences.
undercuts any terms based on the facts.
ANSWER: A
PAGE:
NAT: AACSB Reflective
221
TYPE:
=
AICPA Legal
B13. Cole drives into Dinos Service Station and asks Erin, the attendant,
to fill the tank in Coles sport utility vehicle. After Erin fills the tank,
but before Cole pays for the gas, any contract between Cole and
Dinos is
a.
b.
c.
d.
executed.
executory.
quasi.
unenforceable.
ANSWER: B
PAGE:
NAT: AACSB Reflective
223
TYPE:
N
AICPA Legal
A14. Delia promises to buy a house from Edwin, who promises to vacate
the property on July 1. If these promises are in writing, they are most
likely
a.
b.
c.
d.
enforceable.
unenforceable.
void.
voidable.
ANSWER: A
PAGE:
NAT: AACSB Reflective
223
TYPE:
=
AICPA Legal
B14. Beth claims that her contract with Carl is voidable. If the contract is
avoided
a.
b.
c.
d.
both parties are released from it.
neither party is released from it.
only Beth is released from it.
only Carl is released from it.
ANSWER: A
PAGE:
NAT: AACSB Reflective
223
TYPE:
=
AICPA Legal
CHAPTER 10: NATURE AND TERMINOLOGY
113
A15. Avatar, Inc., and Bling Corporation sign a contract in which Avatar
agrees to deliver t-shirts emblazoned with video game characters in
exchange for Blings promise to pay. Avatar delivers. The contract is
a.
b.
c.
d.
voidable.
executed.
executive.
executory.
ANSWER: D
PAGE:
NAT: AACSB Reflective
223
TYPE:
N
AICPA Legal
B15. Employment Sources, Inc., enters into a contract with Fred. If Fred is
a minor, this contract is most likely
a.
b.
c.
d.
enforceable.
unenforceable.
void.
voidable.
ANSWER: D
PAGE:
NAT: AACSB Reflective
223
TYPE:
=
AICPA Legal
A16. Mia, a physician, renders aid to Noel, who is injured and unconscious.
Mia can recover the cost of the aid from Noel
a.
b.
c.
d.
even if Noel was not aware of the aid.
only if Noel recovers because of the aid.
only if Noel was aware of the aid.
under no circumstances.
ANSWER: A
PAGE:
NAT: AACSB Reflective
224
TYPE:
=
AICPA Legal
B16. Curt promises to buy illegal copies of CDs and DVDs from Donna,
who promises to deliver on May 1. These promises are most likely
a.
b.
c.
d.
enforceable.
valid.
void.
voidable.
ANSWER: C
PAGE:
NAT: AACSB Reflective
223
TYPE:
=
AICPA Legal
114
TEST BANK AUNIT THREE: CONTRACTS AND E-CONTRACTS
A17. Pete, a judge, can apply the doctrine of quasi contract to a dispute
between Quality Service Company and Regulated Office Systems
a.
b.
c.
d.
only if there is a valid contract covering the area in question.
only if there is not a valid contract covering the area in
question.
whether or not there is a valid contract covering the area in
question.
under no circumstances.
ANSWER: B
PAGE:
NAT: AACSB Reflective
224
TYPE:
=
AICPA Legal
B17. Dot, a real estate agent, tells Ed, a home seller, that her commission
is 12 percent. Ed agrees that Dot can sell his house but refuses to
sign a contract unless the amount of the commission is reduced.
After the house is sold, Ed refuses to pay 12 percent. Dot is most
likely to recover
a.
b.
c.
d.
nothing.
on a theory of an express contract.
on a theory of an implied-in-fact contract.
on a theory of a quasi contract.
ANSWER: D
PAGE:
NAT: AACSB Reflective
224
TYPE:
N
AICPA Legal
A18. Phil enters into a contract with Quality Resorts, Inc., to work as a
chef. Under the plain meaning rule, the meaning of this contract
must be determined by reference to
a.
b.
c.
d.
any available evidence.
any relevant extrinsic evidence.
the face of the instrument.
the later testimony of the parties.
ANSWER: C
PAGE:
NAT: AACSB Reflective
225
TYPE:
=
AICPA Legal
B18. Ada mistakenly pays property taxes that should have been assessed
against Bud. Ada can recover the amount from Bud in quantum
meriut
115
CHAPTER 10: NATURE AND TERMINOLOGY
a.
b.
c.
d.
even if Bud was not aware of the error.
only if Bud tried to conceal the error.
only if Bud was aware of the error.
under no circumstances.
ANSWER: A
PAGE:
NAT: AACSB Reflective
224
TYPE:
=
AICPA Legal
A19. Eve and Frank enter an express contract for the construction of a
warehouse. Express contract terms are given
a.
b.
c.
d.
less priority than the parties prior dealing.
less priority than the trade usage in that particular industry.
less priority than the parties course of performance.
more priority than the prior dealing, course of performance,
and trade usage.
ANSWER: D
PAGE:
NAT: AACSB Reflective
228
TYPE:
=
AICPA Legal
B19. Cory enters into a contract with Diane to act as her personal sports
trainer. If they later dispute the meaning, and the contract contains
unclear terms, the rules of contract interpretation will give effect to
a.
b.
c.
d.
the parties intent as expressed in their contract.
what the defendant claims was the parties intent.
what the plaintiff claims was the parties intent.
what the parties now agree they intended.
ANSWER: A
PAGE:
NAT: AACSB Analytic
228
AICPA Legal
TYPE:
=
A20. National Grocers, Inc., enters into a contract with Overland Shipping
Company for the delivery of a shipment of fresh produce. If
ambiguities appear in the contract, they will be construed against
a.
b.
c.
d.
the
the
the
the
party who drafted the contract.
party with the greater bargaining power.
promisor.
promisee.
ANSWER: A
PAGE:
NAT: AACSB Reflective
228
TYPE:
=
AICPA Legal
116
TEST BANK AUNIT THREE: CONTRACTS AND E-CONTRACTS
B20. Adams Accounting Services and Best Products, Inc., enter into a contract. Terms in the contract that are the subject of separate
negotiation are considered subordinate to
a.
b.
c.
d.
standardized terms.
terms that can be understood only by lawyers and judges.
terms that are not negotiated separately.
=one of the choices.
ANSWER: D
PAGE:
NAT: AACSB Analytic
228
AICPA Legal
TYPE:
=
ESSAY QUESTIONS
A1.
Ed, a businessperson, is a friend of Fran, the owner of a candy store.
Every day, Ed spends five minutes in Frans candy store, looking at
the candy and usually buying one or two candy bars. One afternoon,
Ed goes into the store, looks at the candy, and picks up a $1 candy
bar. Ed waves the candy at Fran without saying a word and walks
out. Is there a contract? If so, how would it be classified in terms of
formation, perform ance, and enforceability?
ANSWER: The facts presented here indicate the presence of all the
elements necessary for a valid contract. There are a serious offer
and acceptance, consideration is exchanged (a candy bar for $1),
both parties have capacity, the selling of the candy is legal, and
there is no particular form required for this type of contract. Thus, a
contract exists and for the rea sons given here is classified as valid,
enforceable, and informal. In addition, this is a classic case of an
implied-in-fact contract. There is no explicit agreement between the
parties. Rather, an agreement is implied by Eds action of waving the
candy bar and by his past conduct. By his conduct Ed is telling Fran
that he will pay for the candy later. The contract is also bilateral (as
opposed to unilateral), because Fran impliedly promises to sell the
candy to Ed in exchange for Eds implied promise to pay. The
contract is partially executory, as Ed has engaged to pay for the
candy in the future. Because the contract is for a legal pur pose, both
parties have capacity, and reality of consent is not an issue, the contract is neither voidable nor void
PAGES:
218, 220, 221 & 223
NAT: AACSB Reflective
TYPE: =
AICPA Decision
CHAPTER 10: NATURE AND TERMINOLOGY
117
Modeling
B1.
Cody signs and returns a letter from Deb, referring to Debs DoubleD Ranch and its price. When Cody attempts to complete the deal,
Deb refuses, claiming that they have no contract. Cody claims they
do. What standard determines whether these parties have a
contract?
ANSWER: The objective theory of contracts is the standard to
determine whether the parties have a contract. Under this standard,
if a reasonable person would have thought that the offeree (Cody)
accepted a legitimate offer by the offeror (Deb) when the offeree
signed and returned the letter, a contract was made, and both
parties are bound. This assessment is determined in part by what
was said in the letter (did the letter constitute a valid offer?) and
what was said in response (did the response constitute a valid
acceptance?). Under any circumstances, the issue is not whether either party subjectively believed that they did, or did not, have a
contract.
PAGE:
217
TYPE: =
NAT: AACSB Reflective
Modeling
A2.
AICPA Decision
On May 1, Local Cartage Company and Modern Computers, Inc.,
orally agree that Local Cartage will pick up from National Chip
Corporation and deliver to Modern Computers manufacturing plant
a certain number of computer chips on each Monday in the month.
Under the agreement, Modern Computers will pay for the delivery
services on June 1. On May 1, is this contract express, implied in fact,
or implied in law? On May 31, after all of the deliveries have been
made, is the contract executed or executory?
ANSWER: An express contract is one in which the terms are fully
expressed, either in writing or orally. The contract between Local
Cartage and Modern Computers is an oral contract, in which the
terms are fully expressed. That means their contract is an express
contract. The contract between Local Cartage and Modern
Computers is an executory contract on May 31. An executed
contract is a contract that has been fully performed on both sides.
An executory contract is a contract that has not been fully
performed. If, as in this problem, one party (Local Cartage) has fully
performed but the other (Modern Computers) has not, the contract,
118
TEST BANK AUNIT THREE: CONTRACTS AND E-CONTRACTS
although it is executed on one side and executory on the other, is
still classified as executory.
PAGES:
221 & 223
NAT: AACSB Reflective
Modeling
B2.
TYPE: =
AICPA Decision
On May 1, Faith, a real estate agent, and Grace, a commercial
property owner, sign an agreement to find a buyer for Graces office
building. Under the terms, if a buyer makes a serious offer within
sixty days, Grace must pay Faiths commission. Faith puts signs on
the building, ads in real estate pamphlets and a local newspaper,
and features the property in a walking tour on the Internet. On
June 1, Grace tells Faith that she is canceling their arrangement. Ten
days later, Grace closes a sale on the building without Faiths
participation. Faith files a suit against Grace for the amount of her
commission. In whose favor is the court most likely to rule and why?
ANSWER: The court is most likely to issue a judgment in Faiths
favor on the basis that the parties in this situation had agreed to a
unilateral contract. The court would likely reason that Faith had
begun performance under this contract by putting up the signs,
placing the ads, and adding a featured tour of the building on the
Internet. Under the modern view of unilateral contracts, once a party
to such a contract has begun performance, the other party cannot
legitimately revoke or otherwise cancel the deal. Thus, Graces
attempted revocation in this problemwhich was probably based on
her desire to avoid paying a commission to Faithwould constitute a
breach of her contract with Faith, and Grace would owe Faith her
commission even though Faith did not participate in the closing of
the sale on the property. The problem does not mention whether
Faith found the buyer, but Grace would most likely be liable for the
payment of the commission under the terms of her contract with
Faith even if Grace found the buyer herself.
PAGES:
218220
TYPE: N
NAT: AACSB Reflective
Modeling
AICPA Decision