24
The Chapter Function and Creation of
Negotiable Instruments
TRUE/FALSE QUESTIONS
A1.
A negotiable instrument serves as a substitute for cash.
ANSWER: T
PAGE:
NAT: AACSB Reflective
Thinking
B1.
TYPE:
+
488
AICPA Legal
TYPE:
+
488
AICPA Legal
TYPE:
N
TYPE:
N
A time draft is payable at a definite future time.
ANSWER: T
PAGE:
NAT: AACSB Analytic
B3.
488
AICPA Legal
A trade acceptance is a draft.
ANSWER: T
PAGE:
NAT: AACSB Analytic
A3.
=
Critical
On a trade acceptance, the drawer is also the payee.
ANSWER: T
PAGE:
NAT: AACSB Analytic
B2.
TYPE:
AICPA
A draft is an unconditional written order that involves two parties.
ANSWER: F
PAGE:
NAT: AACSB Analytic
A2.
486
488
AICPA Legal
A promissory note that states it is payable within ninety days
represents an extension of credit by the holder to the debtor.
245
246
TEST BANK AUNIT FIVE: NEGOTIABLE INSTRUMENTS
ANSWER: T
PAGE:
NAT: AACSB Analytic
A4.
TYPE:
=
489
AICPA Legal
TYPE:
N
489
AICPA Legal
TYPE:
=
490
TYPE:
=
AICPA Legal
490
AICPA Legal
TYPE:
=
For an instrument to be negotiable, it must be in writing.
ANSWER: T
PAGE:
NAT: AACSB Analytic
B7.
489
AICPA Legal
An instrument is nonnegotiable unless the word negotiable is
printed on it.
ANSWER: F
PAGE:
NAT: AACSB Analytic
A7.
N
A notation on an instrument that it is negotiable is sufficient to
render it negotiable.
ANSWER: F
PAGE:
NAT: AACSB Reflective
B6.
TYPE:
A certificate of deposit represents a loan by its owner to a bank.
ANSWER: T
PAGE:
NAT: AACSB Analytic
A6.
489
AICPA Legal
A certificate of deposit is a type of draft.
ANSWER: F
PAGE:
NAT: AACSB Analytic
B5.
=
A cashiers check drawn by a bank on itself is an instrument in which
the bank is both the drawer and the drawee.
ANSWER: T
PAGE:
NAT: AACSB Analytic
A5.
TYPE:
A promissory note payable to bearer is not negotiable.
ANSWER: F
PAGE:
NAT: AACSB Analytic
B4.
489
AICPA Legal
491
AICPA Legal
To be negotiable, an instrument must be portable.
TYPE:
=
CHAPTER 24: THE FUNCTION & CREATION OF NEGOTIABLE INSTRUMENTS
ANSWER: T
PAGE:
NAT: AACSB Analytic
A8.
491
TYPE:
=
AICPA Legal
492
TYPE:
=
AICPA Legal
As a substitute for money, an instrument does not have to be signed
by anyone to be negotiable.
ANSWER: F
PAGE:
NAT: AACSB Analytic
B9.
=
A trade name can serve as a valid signature.
ANSWER: T
PAGE:
NAT: AACSB Reflective
A9.
TYPE:
To be negotiable, an instrument must be written on high-quality,
letter- or legal-size paper.
ANSWER: F
PAGE:
NAT: AACSB Reflective
B8.
491
AICPA Legal
247
492
AICPA Legal
TYPE:
+
A signature can consist of initials signed by a party.
ANSWER: T
PAGE:
NAT: AACSB Reflective
492
TYPE:
=
AICPA Legal
A10. Rubber stamp signatures can be legally binding signatures.
ANSWER: T
PAGE:
NAT: AACSB Reflective
492
TYPE:
=
AICPA Legal
B10. To be negotiable, an instrument must be signed in the lower righthand corner.
ANSWER: F
PAGE:
NAT: AACSB Analytic
492
AICPA Legal
TYPE:
N
A11. A certificate of deposit may be negotiable even if it does not contain
an express promise to pay.
ANSWER: T
PAGE:
NAT: AACSB Analytic
492
AICPA Legal
TYPE:
N
B11. An acknowledgment of indebtedness is sufficient to create a negotiable instrument.
248
TEST BANK AUNIT FIVE: NEGOTIABLE INSTRUMENTS
ANSWER: F
PAGE:
NAT: AACSB Reflective
492
TYPE:
=
AICPA Legal
A12. To be negotiable, an instrument must include any conditions to
payment on its face.
ANSWER: F
PAGE:
NAT: AACSB Analytic
492
AICPA Legal
TYPE:
N
B12. An order stating I wish you would pay is sufficient to create a
negotiable instrument.
ANSWER: F
PAGE:
NAT: AACSB Reflective
492
TYPE:
=
AICPA Legal
A13. An instrument that states simply I.O.U. is negotiable.
ANSWER: F
PAGE:
NAT: AACSB Reflective
492
TYPE:
=
AICPA Legal
B13. A conditional promise to pay is not a negotiable instrument.
ANSWER: T
PAGE:
NAT: AACSB Reflective
492
TYPE:
N
AICPA Legal
A14. Stating on an instrument that it is as per contract renders it
nonnegotiable.
ANSWER: F
PAGE:
NAT: AACSB Reflective
492
TYPE:
=
AICPA Legal
B14. To be negotiable, an instrument must be payable in money.
ANSWER: T
PAGE:
NAT: AACSB Analytic
493
AICPA Legal
TYPE:
=
CHAPTER 24: THE FUNCTION & CREATION OF NEGOTIABLE INSTRUMENTS
249
A15. An instrument that promises to pay in gold can be negotiable.
ANSWER: F
PAGE:
NAT: AACSB Reflective
493
TYPE:
=
AICPA Legal
B15. An instrument that promises to pay in goods can be negotiable.
ANSWER: F
PAGE:
NAT: AACSB Reflective
493
TYPE:
=
AICPA Legal
A16. A promissory note is negotiable even if it does not state that it is
payable on demand or at a definite time.
ANSWER: F
PAGE:
NAT: AACSB Analytic
493
AICPA Legal
TYPE:
=
B16. An acceptor is a drawee who has agreed to pay an instrument when
it is presented later for payment.
ANSWER: T
PAGE:
NAT: AACSB Reflective
493
TYPE:
N
AICPA Legal
A17. Any person in possession of a negotiable instrument payable to
bearer is a holder.
ANSWER: T
PAGE:
NAT: AACSB Analytic
496
AICPA Legal
TYPE:
+
B17. A promissory note is not negotiable if reference must be made to
foreign exchange rates at the time payment is due.
ANSWER: F
PAGE:
NAT: AACSB Reflective
493
TYPE:
=
AICPA Legal
A18. An instrument payable with interest must specify a particular rate
to be negotiable.
ANSWER: F
PAGE:
NAT: AACSB Analytic
500
AICPA Legal
TYPE:
N
B18. An extension clause on an instrument is the reverse of an
acceleration clause.
ANSWER: T
PAGE:
NAT: AACSB Reflective
498
TYPE:
N
AICPA Legal
TEST BANK AUNIT FIVE: NEGOTIABLE INSTRUMENTS
250
A19. An undated instrument is not negotiable.
ANSWER: F
PAGE:
NAT: AACSB Reflective
500
TYPE:
=
AICPA Legal
B19. A check payable to the order of bearer is neither an order
instrument nor a bearer instrument.
ANSWER: F
PAGE:
NAT: AACSB Reflective
498
TYPE:
N
AICPA Legal
A20. A notation on a check that it is nonnegotiable is sufficient to
render it nonnegotiable.
ANSWER: F
PAGE:
NAT: AACSB Reflective
500
TYPE:
=
AICPA Legal
B20. Normally, if the numerical amount and the written amount on a
check differ, the words outweigh the figures.
ANSWER: T
PAGE:
NAT: AACSB Analytic
500
AICPA Legal
TYPE:
+
MULTIPLE CHOICE QUESTIONS
Fact Pattern 24-1A (Questions A1A2 apply)
Flik draws a check payable to GrocMart to buy groceries.
A1.
Refer to Fact Pattern 24-1A. Fliks check is most likely
a.
b.
c.
d.
a
a
a
a
certificate of deposit.
negotiable instrument.
promise to pay.
promissory note.
ANSWER: B
PAGE:
NAT: AACSB Reflective
488
TYPE:
N
AICPA Legal
CHAPTER 24: THE FUNCTION & CREATION OF NEGOTIABLE INSTRUMENTS
251
Fact Pattern 24-1B (Questions B1B2 apply)
Dominion Sales Ltd. in Canada and Eagle Buying Company in the United
States enter a contract for a sale of forestry products. Dominion draws a
draft unconditionally ordering Great Federal Bank, Eagles bank, to pay
$60,000 to Dominions order in sixty days. Eagle signs and dates the draft.
B1.
Refer to Fact Pattern 24-1B. This instrument is
a.
b.
c.
d.
a
a
a
a
bankers acceptance.
nonnegotiable instrument.
promissory note.
trade acceptance.
ANSWER: A
PAGE:
NAT: AACSB Reflective
488
TYPE:
N
AICPA Legal
Fact Pattern 24-1A (Questions A1A2 apply)
Flik draws a check payable to GrocMart to buy groceries.
A2.
Refer to Fact Pattern 24-1A. With respect to Fliks check, GrocMart is
a.
b.
c.
d.
the
the
the
the
drawee.
drawer.
maker.
payee.
ANSWER: D
PAGE:
NAT: AACSB Reflective
488
TYPE:
N
AICPA Legal
Fact Pattern 24-1B (Questions B1B2 apply)
Dominion Sales Ltd. in Canada and Eagle Buying Company in the United
States enter a contract for a sale of forestry products. Dominion draws a
draft unconditionally ordering Great Federal Bank, Eagles bank, to pay
$60,000 to Dominions order in sixty days. Eagle signs and dates the draft.
B2.
Refer to Fact Pattern 24-1B. With respect to this instrument,
Dominion is
a.
b.
c.
d.
the
the
the
the
ANSWER:
banker.
maker.
payee.
trader.
C
PAGE:
488
TYPE:
N
TEST BANK AUNIT FIVE: NEGOTIABLE INSTRUMENTS
252
NAT: AACSB Reflective
AICPA Legal
Fact Pattern 24-2A (Questions A3A4 apply)
Quantity Sales Corporation and Resources Purchasing Company enter a
contract for a sale of processed silver. Quantity Sales draws a draft
unconditionally ordering Resources Purchasing to pay $50,000 to Quantity
Saless order in sixty days. Resources Purchasing signs and dates the
draft.
A3.
Refer to Fact Pattern 24-2A. This instrument is
a.
b.
c.
d.
a
a
a
a
bankers acceptance.
nonnegotiable instrument.
promissory note.
trade acceptance.
ANSWER: D
PAGE:
NAT: AACSB Reflective
B3.
488
TYPE:
N
AICPA Legal
Beck draws a check payable to County Farm Supply to buy a
quantity of fertilizer to deposit in Becks field. This check is
a.
b.
c.
d.
a
a
a
a
certificate of deposit.
draft.
promise to pay.
promissory note.
ANSWER: B
PAGE:
NAT: AACSB Reflective
488
TYPE:
N
AICPA Legal
Fact Pattern 24-2A (Questions A3A4 apply)
Quantity Sales Corporation and Resources Purchasing Company enter a
contract for a sale of processed silver. Quantity Sales draws a draft
unconditionally ordering Resources Purchasing to pay $50,000 to Quantity
Saless order in sixty days. Resources Purchasing signs and dates the
draft.
A4.
Refer to Fact Pattern 24-2A. On this instrument, Quantity Sales is
a.
b.
c.
d.
the
the
the
the
banker.
drawer.
maker.
trader.
CHAPTER 24: THE FUNCTION & CREATION OF NEGOTIABLE INSTRUMENTS
ANSWER: B
PAGE:
NAT: AACSB Reflective
488
253
TYPE:
N
AICPA Legal
Fact Pattern 24-2B (Questions B4B5 apply)
Ewa signs an instrument unconditionally promising to pay to First State
Bank $5,000 with interest in installments with the final payment due June
1, 2012.
B4.
Refer to Fact Pattern 24-2B. The instrument that Ewa signed is most
likely
a.
b.
c.
d.
a certificate of deposit.
a draft.
an order to pay.
a promissory note.
ANSWER: D
PAGE:
NAT: AACSB Reflective
A5.
489
TYPE:
N
AICPA Legal
To obtain office supplies for Doctors Medical Clinic, Elmo executes a
draft in favor of Flynn. A draft is
a.
b.
c.
d.
a conditional promise to pay money.
an unconditional written order to pay money.
a qualified promise to set aside a sum of money.
a restricted promise to deliver goods at a future date.
ANSWER: B
PAGE:
NAT: AACSB Analytic
488
AICPA Legal
TYPE:
=
Fact Pattern 24-2B (Questions B4B5 apply)
Ewa signs an instrument unconditionally promising to pay to First State
Bank $5,000 with interest in installments with the final payment due June
1, 2012.
B5.
Refer to Fact Pattern 24-2B. With respect to this instrument, First
States Bank is
a.
b.
c.
d.
the
the
the
the
ANSWER:
drawee.
drawer.
maker.
payee.
D
PAGE:
489
TYPE:
N
TEST BANK AUNIT FIVE: NEGOTIABLE INSTRUMENTS
254
NAT: AACSB Reflective
A6.
Diners Restaurant issues an instrument in favor of Eatery Supplies,
Inc. For the instrument to be negotiable, it need not
a.
b.
c.
d.
be an unconditional promise or order to pay.
be payable on demand or at a specific time.
be signed by Diners Restaurant.
recite the consideration given in exchange for a promise to
pay.
ANSWER: D
PAGE:
NAT: AACSB Reflective
B6.
TYPE:
=
AICPA Legal
negotiable.
nonnegotiable, because an instrument must be on paper.
nonnegotiable, because a t-shirt is not sufficiently permanent.
nonnegotiable, because the government does not appreciate
it.
ANSWER: A
PAGE:
NAT: AACSB Reflective
491
TYPE:
=
AICPA Legal
Rita owes $6,000 in unpaid taxes. In the sand of Seaside Beach, she
executes an instrument for that amount that otherwise meets the requirements for negotiability. This instrument is likely
a.
b.
c.
d.
negotiable.
nonnegotiable, because an instrument must be on paper.
nonnegotiable, because sand is not sufficiently permanent.
nonnegotiable, because the government does not appreciate
it.
ANSWER: C
PAGE:
NAT: AACSB Reflective
B7.
490
Gail owes $5,000 in unpaid taxes. Using the back of an old t-shirt,
she executes an instrument for $5,000 that otherwise meets the re quirements for negotiability. This instrument is most likely
a.
b.
c.
d.
A7.
AICPA Legal
491
TYPE:
=
AICPA Legal
Dino, the chief executive officer of Electrician Services, Inc., signs an
instrument by placing his thumbprint on it. This instrument is
a.
negotiable.
CHAPTER 24: THE FUNCTION & CREATION OF NEGOTIABLE INSTRUMENTS
b.
c.
d.
nonnegotiable, because a thumbprint does not state the
signers name.
nonnegotiable, because a thumbprint implies a lack of binding
intent.
nonnegotiable, because a thumbprint is not a signature.
ANSWER: A
PAGE:
NAT: AACSB Reflective
A8.
TYPE:
=
AICPA Legal
any conditions on the sale of the car.
any conditions to the disbursement of the funds.
any conditions to the repayment of the loan.
no conditions.
ANSWER: D
PAGE:
NAT: AACSB Reflective
492
TYPE:
N
AICPA Legal
To borrow money to finance the start-up of his business, Buck
executes an instrument in favor of City Bank. For the instrument to
be negotiable, the signature must be
a.
b.
c.
d.
anywhere on the instrument.
anywhere on the lower half of the instrument only.
in the lower left-hand corner of the instrument only.
in the lower right-hand corner of the instrument only.
ANSWER: A
PAGE:
NAT: AACSB Analytic
A9.
492
To finance the purchase of a car from Giant Auto Sales, Hoppy signs
an instrument promising to pay to Ideal Credit Union $18,000 with
interest in installments with the final payment due May 15, 2014. To
be negotiable, this instrument must include on its face
a.
b.
c.
d.
B8.
255
492
AICPA Legal
TYPE:
=
To finance the purchase of a house from Tuna, Uri signs an
instrument promising to pay to Verity Mortgage Service $160,000
with interest in installments with the final payment due July 10,
2040. To be negotiable, this instrument must include the signature
of
a.
b.
c.
d.
a non-party witness.
Tuna or Tunas realtor.
Uri.
Veritys chief financial officer.
256
TEST BANK AUNIT FIVE: NEGOTIABLE INSTRUMENTS
ANSWER: C
PAGE:
NAT: AACSB Reflective
492
TYPE:
N
AICPA Legal
CHAPTER 24: THE FUNCTION & CREATION OF NEGOTIABLE INSTRUMENTS
B9.
257
USA Oil Corporation signs an instrument that states it is being exe cuted in accord with a contract for the purchase of 4,000 barrels of
oil dated May 1. This instrument is
a.
b.
c.
d.
negotiable.
nonnegotiable, because information about the sale must be
obtained from another source.
nonnegotiable, it because states an express condition to
payment.
nonnegotiable, because the terms of the sale are not clear.
ANSWER: A
PAGE:
NAT: AACSB Reflective
492
TYPE:
=
AICPA Legal
TEST BANK AUNIT FIVE: NEGOTIABLE INSTRUMENTS
258
A10. Ross signs an instrument using an R with a circle around it. With
this mark for a signature, the instrument is
a.
b.
c.
d.
negotiable.
nonnegotiable, because an initial does not state the signers
name.
nonnegotiable, because an initial is not a signature.
nonnegotiable, because a simple initial implies a lack of
binding intent.
ANSWER: A
PAGE:
NAT: AACSB Reflective
492
TYPE:
=
AICPA Legal
B10. Kevin, the owner of Livestock Ranch Corporation, signs an
instrument that includes the phrase payment for this note will be
made from the proceeds of next years stock sale. This instrument
is
a.
b.
c.
d.
negotiable.
nonnegotiable, because information about the sale must be
obtained from another source.
nonnegotiable, because it states an express condition to
payment.
nonnegotiable, because the reasons for the note are not clear.
ANSWER: A
PAGE:
NAT: AACSB Reflective
493
TYPE:
=
AICPA Legal
A11. Karen writes on a piece of paper, I owe you $600, signs it, and
gives it to Lou. This instrument is
a.
b.
c.
d.
negotiable.
nonnegotiable, because it does not include an express promise
to pay.
nonnegotiable, because it does not recite any consideration.
nonnegotiable, because it does not state any conditions to
payment.
ANSWER: B
PAGE:
NAT: AACSB Reflective
492
TYPE:
=
AICPA Legal
B11. International Properties, Inc. (IPI), signs an instrument in favor of
Financial Investments Corporation that includes the statement IPI
CHAPTER 24: THE FUNCTION & CREATION OF NEGOTIABLE INSTRUMENTS
259
plans to pay this debt from the proceeds of the sale of the IPI Office
Building in Montreal. This instrument is
a.
b.
c.
d.
negotiable.
nonnegotiable, because banks cannot easily process office
buildings.
nonnegotiable, because it refers to a separate sale.
nonnegotiable, because Montreal is in Canada, not the United
States.
ANSWER: A
PAGE:
NAT: AACSB Reflective
493
TYPE:
=
AICPA Legal
A12. Jack signs an instrument that states it is being executed in accord
with a contract for the sale of three magic beans dated June 1. This
instrument is
a.
b.
c.
d.
negotiable.
nonnegotiable, because banks cannot easily process
commodities.
nonnegotiable, because it includes the specific date of a
contract.
nonnegotiable, because it refers to an express contract.
ANSWER: A
PAGE:
NAT: AACSB Reflective
492
TYPE:
=
AICPA Legal
B12. On behalf of First-Rate Capital, Inc., Greg signs an instrument
promising to pay $5,000 in gold to Hot Funds, Inc., on May 15. This
instrument is
a.
b.
c.
d.
negotiable.
nonnegotiable, because gold is not a medium of exchange
author ized or adopted by a government as currency.
nonnegotiable, because it does not recite any consideration.
nonnegotiable, because it is for an amount of $500 or more.
ANSWER: B
PAGE:
NAT: AACSB Reflective
493
TYPE:
=
AICPA Legal
A13. Kelly signs an instrument in favor of Leo that states it is subject to a
certain agreement between Kelly and Mona. This instrument is
a.
negotiable.
TEST BANK AUNIT FIVE: NEGOTIABLE INSTRUMENTS
260
b.
c.
d.
nonnegotiable, because it is made subject to a separate
agreement.
nonnegotiable, because it refers to a separate agreement.
nonnegotiable, because Kelly and Mona are not the same
persons.
ANSWER: B
PAGE:
NAT: AACSB Reflective
493
TYPE:
=
AICPA Legal
CHAPTER 24: THE FUNCTION & CREATION OF NEGOTIABLE INSTRUMENTS
261
B13. Opal signs a promissory note payable to the order of Payday Loan
Company. The note states that it is payable with interest at the
legal rate. This note is
a.
b.
c.
d.
negotiable.
nonnegotiable, because it does not specify a rate of interest.
nonnegotiable, because it is a promissory note.
nonnegotiable, because it is payable only with interest.
ANSWER: A
PAGE:
NAT: AACSB Reflective
493
TYPE:
=
AICPA Legal
A14. Ray signs a promissory note for $10,000 in favor of State University
(SU). The note does not specify the date of its payment. Ray
defaults. In SUs suit to collect on the note, the court will most likely
rule in favor of
a.
b.
c.
d.
Ray, because SU assumed the risk that the note would not be
paid.
Ray, because the note is not payable at a definite time or on
demand.
SU, because the note is an unconditional promise to pay the
holder.
SU, because there is a uniform default time for repayment
when a date is not specified.
ANSWER: B
PAGE:
NAT: AACSB Reflective
493
TYPE:
=
AICPA Legal
B14. Maria signs an instrument payable to the order of National Loans,
Inc., on or before June 15. This instrument is
a.
b.
c.
d.
negotiable.
nonnegotiable, because the maker can move up the payment
date.
nonnegotiable, because moving up the payment date is
optional.
nonnegotiable, because the exact payment date cannot be
determined from the face of the instrument.
ANSWER: A
PAGE:
NAT: AACSB Reflective
496
TYPE:
=
AICPA Legal
TEST BANK AUNIT FIVE: NEGOTIABLE INSTRUMENTS
262
A15. On behalf of Digital Cable Company, Ed signs an instrument in which
he promises to deliver 1,000 feet of optic fiber cable to First Internet
Bank on March 1. This instrument is
a.
b.
c.
d.
negotiable.
nonnegotiable, because cable is not a medium of exchange
author ized or adopted by a government as currency.
nonnegotiable, because it does not indicate a specific type of
cable.
nonnegotiable, because it does not recite any consideration.
ANSWER: B
PAGE:
NAT: AACSB Reflective
493
TYPE:
=
AICPA Legal
B15. Tyrone draws a check payable to Cash and presents it to United
Bank for payment. This instrument is
a.
b.
c.
d.
a bearer instrument.
an order instrument.
valid but nonnegotiable.
void.
ANSWER: A
PAGE:
NAT: AACSB Reflective
498
TYPE:
N
AICPA Legal
A16. Pam signs an instrument payable to the order of Quick Credit, Inc.,
that allows a holder to demand payment of the entire amount due,
with interest, if Pam fails to make a payment. This instrument is
a.
b.
c.
d.
negotiable.
nonnegotiable, because a holder can move up the payment
date.
nonnegotiable, because moving up the payment date is
conditional.
nonnegotiable, because the exact payment date cannot be
determined from the face of the instrument.
ANSWER: A
PAGE:
NAT: AACSB Reflective
496
TYPE:
=
AICPA Legal
CHAPTER 24: THE FUNCTION & CREATION OF NEGOTIABLE INSTRUMENTS
263
B16. Wilbur signs a note that includes a clause under which the notes
holder
can delay the date of its payment indefinitely. This is
a.
b.
c.
d.
an acceleration clause.
an extension clause.
an immaturity clause.
a stop-payment clause.
ANSWER: B
PAGE:
NAT: AACSB Reflective
498
TYPE:
N
AICPA Legal
A17. Quincy draws a check payable to Replay Stadium to buy two
season tickets to the next years State College football games. This
instrument is
a.
b.
c.
d.
a bearer instrument.
an order instrument.
valid but nonnegotiable.
void.
ANSWER: B
PAGE:
NAT: AACSB Reflective
498
TYPE:
N
AICPA Legal
B17. EZ Credit Company signs an instrument payable to the order of Flem
that states, The maker of this note at the date of maturity, May 1,
2011, can extend the time of payment, but for no more than a reasonable time. This instrument is
a.
b.
c.
d.
negotiable.
nonnegotiable, because it includes an extension clause.
nonnegotiable, because it is not payable within a definite time.
nonnegotiable, because it is payable to a specific payee.
ANSWER: C
PAGE:
NAT: AACSB Reflective
498
TYPE:
=
AICPA Legal
A18. Sid signs a promissory note payable to Tony on which Sid
conspicuously notes that it is not negotiable and gives the note to
Toney. This instrument is
a.
b.
negotiable.
nonnegotiable,
negotiable.
because
it
includes
the
notation
not
TEST BANK AUNIT FIVE: NEGOTIABLE INSTRUMENTS
264
c.
d.
nonnegotiable, because it is a promissory note.
nonnegotiable, because it was given to Bob.
ANSWER: B
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B18. Will signs a check payable to X and gives it to Yves. This check is
a.
b.
c.
d.
negotiable.
nonnegotiable, because it does not indicate a specific payee.
nonnegotiable, because obviously it was executed as a joke.
nonnegotiable, because Yves is not X.
ANSWER: A
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A19. Bill signs a check payable to the order of City Bank, filling in the
blanks for the amount with the figures $100 and One thousand
and 00/100 dollars. This check is payable in the amount of
a.
b.
c.
d.
$0.
$100.
$1,000.
$1,100.
ANSWER: C
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B19. Lucy signs a $1,000 note payable, at 6 percent interest, on May 1 to
Metro Bank and writes on its face that it is nonnegotiable. This
note is
a.
b.
c.
d.
negotiable.
nonnegotiable, because it does not include an acceleration
clause.
nonnegotiable, because it is payable with interest.
nonnegotiable, because its maker conspicuously wrote this on
its face.
ANSWER: D
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A20. On May 1, Doug signs a check that is payable to the order of Excel
Credit Corporation and that is dated July 1. This check is
CHAPTER 24: THE FUNCTION & CREATION OF NEGOTIABLE INSTRUMENTS
a.
b.
c.
d.
265
negotiable.
nonnegotiable, because it is payable to Excel Credit Card
Corporation.
nonnegotiable, because it is postdated.
nonnegotiable, because it is signed by Doug.
ANSWER: A
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A
TYPE:
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TEST BANK AUNIT FIVE: NEGOTIABLE INSTRUMENTS
266
B20. Julie signs a check payable to the order of Kwik Mart Stores, Inc.,
that does not include a date. This check is
a.
b.
c.
d.
negotiable.
nonnegotiable, because it does not include a date.
nonnegotiable, because it is payable to Kwik-Mart.
nonnegotiable, because it is signed by Julie.
ANSWER: A
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ESSAY QUESTIONS
A1.
The accounting department of Delta Sales Company receives an
instrument that states, March 16, 2001. Thirty days after date, I
promise to pay to the order of cash, $700 (seven hundred and
00/100 dollars), in Denver, Colorado, with interest at the rate of 7%
(seven percent) per year. This instrument is secured by a contract
for the sale of a computer. Due April 15, 2001. [Signed] Edward
Jones. What type of instrument is this? Is it nego tiable? If not, why
not?
ANSWER: This instrument is a promissory note and a bearer note,
and it is negotiable. A promissory note is an instrument with two
parties: a maker and a payee. The maker of this note is Edward
Jones. The payee is cash. A note that is payable to cash is a
bearer note. To be negotia ble, an instrument must be in writing,
signed by the maker or drawer, an unconditional promise or order to
pay, state a fixed amount of money, payable on demand or at a
definite time, and payable to order or to bearer (unless it is a check).
This instrument meets all of these requirements. The notation on the
instrument that it is secured by a contract for the sale of a
computer is not a condition for payment and does not otherwise
affect the negotiability of the instrument.
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Modeling
B1.
AICPA Decision
On the back of an envelope, Phoebe writes, I promise to pay Quint
or bearer $600 on demand. [Signed] Phoebe. What type of
instrument is this? Is it negotiable? If not, why not?
CHAPTER 24: THE FUNCTION & CREATION OF NEGOTIABLE INSTRUMENTS
267
ANSWER: This instrument is a promissory note and a bearer note,
and it is negotiable. A promissory note is an instrument with two
parties: a maker and a payee. The maker of this note is Phoebe. The
payee is Quint or bearer. A note that is payable to a specific payee
or bearer is a bearer note. To be negotia ble, an instrument must
be in writing, be signed by the maker or drawer, be an unconditional
promise or order to pay, state a fixed amount of money, bee payable
on demand or at a defi nite time, and be payable to order or to
bearer (unless it is a check). This instrument meets all of these
requirements. It is handwritten on the back of an envelope, which
has permanence and is transferable. The maker signed it. Its
payment is not conditional and includes the makers definite promise
to pay. Also, $600 is a fixed amount payable in money, and the
instrument is payable on demand and to bearer.
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Modeling
A2.
AICPA Decision
On a sheet of paper, Elle writes, without her signature, I
acknowledge that I owe Frank $600, payable out of the proceeds of
the sale of my car, a 1995 Honda Civic, which I promise to advertise
For Sale next week. Payment is to be made on or before six months
from today. What type of instrument is this? Is it nego tiable? If not,
why not?
ANSWER: This instrument is a promissory note, but it is
nonnegotiable. A promissory note is an instrument with two parties
a maker and a payee. The maker of this note is Elle. The payee is
Frank. The note is nonnegotiable because (1) Elle did not sign it; (2)
it does not include a definite promise to pay but only acknowledges
that a debt is owed; (3) it is undated, which means that the end of
the six-month period is uncertain, making the note not payable at a
definite time; and (4) it is payable only to Frank, not to his order or
to bearer. Any of these alone would make the note nonnegotiable.
(Payment is also conditioned on the sale of Elles car, but this does
not make the note nonnegotiable [UCC 3106(b)(ii)].)
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B2.
AICPA Decision
Donna gets her paycheck from Eagle Financial Services, Inc., her employer, and attempts to deposit it in her account at First National
268
TEST BANK AUNIT FIVE: NEGOTIABLE INSTRUMENTS
Bank. Greg, the banks teller, notices that on the check the amount
stated in words is different from the amount stated in numerals.
Which amount can the bank lawfully credit to Donnas account?
ANSWER: An amount stated in words on a check prevails over an
amount stated in numerals on the same instrument (unless the
words are ambiguous). Thus, in this question, the bank can lawfully
credit the depositors account for the amount stated in words.
PAGE:
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Modeling
AICPA Decision