Exam Questions The Nature of Negotiable Instruments Ch.16

Business Law with UCC Applications, 15e (Sukys)

Chapter 16 The Nature of Negotiable Instruments

1) A negotiable instrument is an agreement by the maker that contains a fixed amount of money on demand or at a definite time to the bearer or to order.

Difficulty: 2 Medium

Topic: The Essentials of Negotiable Instruments

Learning Objective: 16-01 State the purpose of a negotiable instrument.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

2) The maker is a party to a note who promises to receive money.

Difficulty: 2 Medium

Topic: The Essentials of Negotiable Instruments

Learning Objective: 16-02 Explain those negotiable instruments that contain a promise to pay money.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

3) A draft (or bill of exchange) is a written promise by the maker to pay money to the order of another party, called the payee.

Difficulty: 2 Medium

Topic: The Essentials of Negotiable Instruments

Learning Objective: 16-02 Explain those negotiable instruments that contain a promise to pay money.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

4) Notes are orders to pay money, while drafts are promises to pay money.

Difficulty: 2 Medium

Topic: The Essentials of Negotiable Instruments

Learning Objective: 16-03 Explain those negotiable instruments that contain an order to pay money.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

5) The most common type of draft in use today is the bank draft.

Difficulty: 2 Medium

Topic: The Essentials of Negotiable Instruments

Learning Objective: 16-03 Explain those negotiable instruments that contain an order to pay money.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

6) If a drawee refuses to pay an unaccepted draft, the draft is dishonored, and the drawee becomes liable for refusing to pay it.

Difficulty: 2 Medium

Topic: The Essentials of Negotiable Instruments

Learning Objective: 16-03 Explain those negotiable instruments that contain an order to pay money.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

7) A sight draft is payable as soon as it is presented to the drawer for payment.

Difficulty: 2 Medium

Topic: The Essentials of Negotiable Instruments

Learning Objective: 16-03 Explain those negotiable instruments that contain an order to pay money.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

8) Ownership of a check is transferred by indorsement by the maker.

Difficulty: 3 Hard

Topic: The Essentials of Negotiable Instruments

Learning Objective: 16-04 Differentiate among the different types of checks and money orders.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

9) The first set of numbers on a printed check at the lower left-hand corner is the customer's bank account number at the Federal Reserve.

Difficulty: 2 Medium

Topic: The Essentials of Negotiable Instruments

Learning Objective: 16-04 Differentiate among the different types of checks and money orders.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

10) If a bank chooses to certify a check, the drawee is discharged from any further obligation.

Difficulty: 2 Medium

Topic: The Essentials of Negotiable Instruments

Learning Objective: 16-04 Differentiate among the different types of checks and money orders.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

11) A money order, which is drawn on the account of the maker, is a type of draft that may be purchased from banks, post offices, telegraph companies, and express companies as a substitute for a check.

Difficulty: 2 Medium

Topic: The Essentials of Negotiable Instruments

Learning Objective: 16-04 Differentiate among the different types of checks and money orders.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

12) Sam gives a check to Tina who indorses it over to Amanda. Amanda is called the holder in due course.

Difficulty: 2 Medium

Topic: Parties to Negotiable Instruments

Learning Objective: 16-05 Identify the requirements of a negotiable instrument.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

13) A holder is a person who is in possession of a negotiable instrument who is treated as favored and given immunity from certain defenses.

Difficulty: 2 Medium

Topic: Parties to Negotiable Instruments

Learning Objective: 16-05 Identify the requirements of a negotiable instrument.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

14) Under the UETA and Article 3 of the UCC, electronic negotiable instruments are not allowed unless there is a 'hard copy' on file with the local clerk of court.

Difficulty: 2 Medium

Topic: Parties to Negotiable Instruments

Learning Objective: 16-05 Identify the requirements of a negotiable instrument.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

15) Elke intends to sign a contract with Acme Gravel Co. If, while signing the contract, she transfers all her rights under the contract to Emmett Sand and Gravel Inc, she has legally assigned all her rights in the contract.

Difficulty: 3 Hard

Topic: Transferring Negotiable Instruments

Learning Objective: 16-06 Explain an assignment and a negotiation of an instrument.

Bloom's: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

16) Jake is the holder of an instrument that needs his signature. Upon his death, the instrument automatically converts to a 'bearer' instrument and Jake's heirs can cash it.

Difficulty: 3 Hard

Topic: Transferring Negotiable Instruments

Learning Objective: 16-06 Explain an assignment and a negotiation of an instrument.

Bloom's: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

17) When an instrument is indorsed in blank, the payee becomes a holder in due course and the instrument may be transferred by delivery alone.

Difficulty: 2 Medium

Topic: Transferring Negotiable Instruments

Learning Objective: 16-07 Name and describe four kinds of indorsements.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

18) An indorser, whether or not she receives consideration for the instrument, must make five warranties to subsequent transferees of the instrument. The fifth warranty provides that the indorser has no knowledge of the bankruptcy of the maker, acceptor, or drawer.

Difficulty: 2 Medium

Topic: Transferring Negotiable Instruments

Learning Objective: 16-08 Identify the implied warranties related to indorsements.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

19) Since Boise Bank's decision is "without recourse," Boise Bank must notify Joe by midnight of the next banking day.

Difficulty: 3 Hard

Topic: Transferring Negotiable Instruments

Learning Objective: 16-09 Explain the contract that is made when people indorse negotiable instruments.

Bloom's: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

20) Big Bank pays a check made by Franklin, payable to Ellen to a forger who signed Ellen's name. Big Bank is not liable to Franklin.

Difficulty: 3 Hard

Topic: Transferring Negotiable Instruments

Learning Objective: 16-10 Describe the legal effect of a forged indorsement.

Bloom's: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

21) Historically, when merchants bought goods, instead of paying for them with gold or silver, they simply filled in a piece of paper called a ________ which ordered the goldsmith or silversmith to give a certain amount of the precious metal to the person who sold the goods.

A) demand note

B) promissory note

C) bill of exchange

D) certificate of deposit

Difficulty: 2 Medium

Topic: The Essentials of Negotiable Instruments

Learning Objective: 16-01 State the purpose of a negotiable instrument.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

22) An instrument containing an acknowledgment that a bank has received a sum of money and a promise by the bank to repay the sum of money is called a(n):

A) installment note.

B) certificate of deposit.

C) promissory note.

D) certificate of demand.

Difficulty: 2 Medium

Topic: The Essentials of Negotiable Instruments

Learning Objective: 16-02 Explain those negotiable instruments that contain a promise to pay money.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

23) To accept a draft, the drawee:

A) need only sign the draft across the face of the instrument.

B) needs to write "accepted" on a separate piece of paper.

C) need only sign on a separate piece of paper affixed to the draft.

D) needs to write "accepted" behind the instrument and sign the bank's record.

Difficulty: 2 Medium

Topic: The Essentials of Negotiable Instruments

Learning Objective: 16-03 Explain those negotiable instruments that contain an order to pay money.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

24) Through what kind of written instrument would Tim direct Howard to pay $600 to the order of Celeste?

A) A certificate of deposit

B) A note

C) A draft

D) A dishonored draft

Difficulty: 3 Hard

Topic: The Essentials of Negotiable Instruments

Learning Objective: 16-03 Explain those negotiable instruments that contain an order to pay money.

Bloom's: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

25) Which of the following is true of a foreign draft?

A) It is drawn in one state and payable in another state.

B) It is drawn in one nation and payable in another nation.

C) It is drawn on one bank and payable to a governmental body.

D) It is drawn in one city and payable in another city in the United States.

Difficulty: 2 Medium

Topic: The Essentials of Negotiable Instruments

Learning Objective: 16-03 Explain those negotiable instruments that contain an order to pay money.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

26) A check that a drawee bank guarantees will be paid to the holder is a:

A) bank draft.

B) traveler's check.

C) certified check.

D) treasurer's check.

Difficulty: 1 Easy

Topic: The Essentials of Negotiable Instruments

Learning Objective: 16-04 Differentiate among the different types of checks and money orders.

Bloom's: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

27) A ________ check is a check drawn by one bank on another bank in which it has funds on deposit in favor of a third person, the payee.

A) traveler's

B) teller's

C) cashier's

D) certified

Difficulty: 2 Medium

Topic: The Essentials of Negotiable Instruments

Learning Objective: 16-04 Differentiate among the different types of checks and money orders.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

28) A check for which the issuing financial institution is both the drawer and the drawee is called a ________.

A) bank draft

B) teller's check

C) certified check

D) traveler's check

Difficulty: 2 Medium

Topic: The Essentials of Negotiable Instruments

Learning Objective: 16-04 Differentiate among the different types of checks and money orders.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

29) If an instrument states, "Pay to the order of Karen Fuji or her assigns," it is payable to:

A) order.

B) cash.

C) bearer.

D) holder.

Difficulty: 2 Medium

Topic: Parties to Negotiable Instruments

Learning Objective: 16-05 Identify the requirements of a negotiable instrument.

Bloom's: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

30) If Daphne gave value for and cashes Lisa's check, what legal rights, if any, does Daphne have?

A) Daphne may insist upon an unqualified indorsement.

B) Daphne may not insist upon any particular type of indorsement.

C) Daphne may insist upon both an unqualified indorsement and a restrictive indorsement.

D) Daphne may insist upon an unqualified, restrictive and special indorsement.

Difficulty: 3 Hard

Topic: Transferring Negotiable Instruments

Learning Objective: 16-06 Explain an assignment and a negotiation of an instrument.

Bloom's: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

31) A blank indorsement should be used:

A) only for the purpose of deposit or collection.

B) to impose warranty liability on the maker.

C) to reserve more space for other indorsements.

D) only in limited situations.

Difficulty: 2 Medium

Topic: Transferring Negotiable Instruments

Learning Objective: 16-07 Name and describe four kinds of indorsements.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

32) Writing the words, "pay to the order of" or "pay to", followed by name of the indorsee and the signature of the indorser on an instrument makes it a ________ indorsement.

A) special

B) restrictive

C) qualified

D) conditional

Difficulty: 3 Hard

Topic: Transferring Negotiable Instruments

Learning Objective: 16-07 Name and describe four kinds of indorsements.

Bloom's: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

33) A check indorsed "for deposit only":

A) prevents further negotiation of the instrument.

B) requires the amount of the instrument to be credited to the indorser's account before further negotiation occurs.

C) requires the amount of the instrument to be credited to the indorser's account and prevents further negotiation.

D) requires the amount of the instrument to be further indorsed by the payee in person before being credited to the indorser's account.

Difficulty: 2 Medium

Topic: Transferring Negotiable Instruments

Learning Objective: 16-07 Name and describe four kinds of indorsements.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

34) The words "without recourse" on an indorsement means the indorser is:

A) liable personally, but not other parties.

B) not liable for any problems associated with the instrument.

C) not liable if the instrument is dishonored.

D) liable for only up to fifty per cent of the loss.

Difficulty: 3 Hard

Topic: Transferring Negotiable Instruments

Learning Objective: 16-07 Name and describe four kinds of indorsements.

Bloom's: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

35) Lillian Fey purchases a night table from Aretha Boyner. Aretha wants Lillian to pay her by check before delivering the night table to Lillian's house. Lillian decides to attach an indorsement that reads, "Pay to Aretha Boyner if she delivers her night table to me, Lillian Fey, at 16 Holmes RD." This is an example of a(n):

A) indorsement for deposit.

B) conditional indorsement.

C) qualified indorsement.

D) significant indorsement.

Difficulty: 3 Hard

Topic: Transferring Negotiable Instruments

Learning Objective: 16-07 Name and describe four kinds of indorsements.

Bloom's: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

36) Which of the following is true of warranties by indorsers?

A) The indorser is not entitled to enforce the instrument.

B) The indorser warrants that the instrument is subject to a defense of any party that can be asserted against the indorser.

C) The indorser warrants that he or she has knowledge of the bankruptcy of the maker, acceptor, or drawer.

D) The indorser warrants that there has been no alteration or other irregularity.

Difficulty: 2 Medium

Topic: Transferring Negotiable Instruments

Learning Objective: 16-08 Identify the implied warranties related to indorsements.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

37) If a drawee refuses to pay the instrument, it is said to be:

A) delayed.

B) dishonored.

C) detained.

D) defaulted.

Difficulty: 2 Medium

Topic: Transferring Negotiable Instruments

Learning Objective: 16-09 Explain the contract that is made when people indorse negotiable instruments.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

38) Industries Inc. drew a check payable to "Gloria Schell and Pippen Tallit" in the sum of $20,000. For a proper negotiation, the check needs to be indorsed:

A) only by Gloria Schell, since her name appears first.

B) by either payee, since the indorsement of only one of the payees is necessary to negotiate the check.

C) by both payees.

D) by the maker.

Difficulty: 3 Hard

Topic: Transferring Negotiable Instruments

Learning Objective: 16-10 Describe the legal effect of a forged indorsement.

Bloom's: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

39) If a bank pays a forged check, it is liable for ________ the payee's funds.

A) converting

B) detaining

C) withholding

D) diverting

Difficulty: 2 Medium

Topic: Transferring Negotiable Instruments

Learning Objective: 16-10 Describe the legal effect of a forged indorsement.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

40) Brianna repaid a $600 loan to her friend, Sharkey. She made the check payable jointly to Sharkey and Sharkey's daughter, Evie, even though she intended Sharkey to have the entire interest in the repaid debt.

A) Sharkey can legally forge Evie's indorsement as Brianna did not intend Evie to have any interest.

B) Sharkey cannot cash the check unless Evie indorses it herself.

C) If Sharkey forges Evie's indorsement, he can be held liable for the tort of conversion.

D) If Sharkey cashes the check with Evie's indorsement, he is legally obligated to give her half of the payment.

Difficulty: 3 Hard

Topic: Transferring Negotiable Instruments

Learning Objective: 16-10 Describe the legal effect of a forged indorsement.

Bloom's: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

41) Mark gives a $3,000 check drawn on Access Bank to Acme Industries who mislays the check for three weeks. When Acme finds the check, they request that Access Bank certify the check. Access declines to do so, and Acme tells Mark that the check has been dishonored. Mark contacts Access who agrees to certify the check. Access subsequently wants to withdraw their certification, since Mark has insufficient funds in his account. Discuss the legal issues contained in their situation.

Difficulty: 3 Hard

Topic: The Essentials of Negotiable Instruments

Learning Objective: 16-04 Differentiate among the different types of checks and money orders.

Bloom's: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

42) An envelope containing a $10 rebate check was placed in Hart's mailbox by mistake. It was addressed to Rice, a former tenant, and read, "Pay to the bearer or G. Rice, $10.00." Discuss Hart's role.

Difficulty: 2 Medium

Topic: Parties to Negotiable Instruments

Learning Objective: 16-05 Identify the requirements of a negotiable instrument.

Bloom's: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

43) Discuss if the following instrument is negotiable:

"Ninety days after today, I promise to pay Sarah J. two thousand dollars."

Signed: Peter K.

Difficulty: 3 Hard

Topic: Parties to Negotiable Instruments

Learning Objective: 16-05 Identify the requirements of a negotiable instrument.

Bloom's: Evaluate

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

44) Cade, the owner of Cade Body Shop, Inc. is in the habit of paying business expenses from his personal checking account. One such check to Parts Warehouse, Inc. is dishonored, and Parts attempts to collect from Cade personally who asserts that only Cade Body Shop, Inc. is liable. Discuss the legal resolution of this problem.

Difficulty: 3 Hard

Topic: Parties to Negotiable Instruments

Learning Objective: 16-05 Identify the requirements of a negotiable instrument.

Bloom's: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

45) Donna is the holder of a note that has been indorsed so many times that there is no space left on the back of the note for indorsements. Donna wants to transfer the note for $200 to Acme Finance, but wants to indorse on the face of the note "without recourse, Donna ". Acme wants to staple a sheet of blank paper to the note and have Donna simply sign "Donna" there. Discuss whether Donna or Acme is correct concerning the location of Donna's signature and if Donna is legally entitled to indorse "without recourse."

Difficulty: 3 Hard

Topic: Transferring Negotiable Instruments

Learning Objective: 16-06 Explain an assignment and a negotiation of an instrument.

Bloom's: Evaluate

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

46) Ashe indorses an order instrument in the following manner: "Pay to Big Bank, for deposit only, Ashe." Discuss the types of indorsements and the legal implications the instrument represents.

Difficulty: 3 Hard

Topic: Transferring Negotiable Instruments

Learning Objective: 16-07 Name and describe four kinds of indorsements.

Bloom's: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

47) When Hanson received her paycheck, she indorsed it in blank, placed it on her desk, and went to get a cup of coffee. The check accidentally blew out of an open window. Matson, a stranger to Hanson, found the check on the sidewalk below, took it to a bank, and cashed it. Was the transfer of the check to the bank a negotiation? Why or Why not?

Difficulty: 3 Hard

Topic: Transferring Negotiable Instruments

Learning Objective: 16-07 Name and describe four kinds of indorsements.

Bloom's: Evaluate

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

48) Andrews forged the signature of Baumann on a check and gave it to Callas in payment for merchandise. Callas indorsed the check and delivered it to Davis as down payment on a car. When Davis presented the check to the bank for payment, the forgery was recognized. Callas claimed that he was not liable to Davis because he had no knowledge of the forgery. Discuss.

Difficulty: 3 Hard

Topic: Transferring Negotiable Instruments

Learning Objective: 16-08 Identify the implied warranties related to indorsements.

Bloom's: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

49) Sarah gives a negotiable note for $5,000 to Roofing Contractors. Roofing cleverly alters the note to $7,000 and negotiates the note to Bigger Bank for consideration. When this alteration is discovered, discuss what recourse Bigger Bank will have against Sarah and Roofing.

Difficulty: 3 Hard

Topic: Parties to Negotiable Instruments; Transferring Negotiable Instruments

Learning Objective: 16-05 Identify the requirements of a negotiable instrument.; 16-08 Identify the implied warranties related to indorsements.

Bloom's: Evaluate

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

50) Shawn was an indorser on a check. A subsequent holder presented the check to the bank named on the instrument and was informed that there was not enough money in the account to honor the check. The next day, the subsequent holder demanded the money from Shawn. Must Shawn pay the subsequent holder of the instrument? Why or why not?

Difficulty: 3 Hard

Topic: Transferring Negotiable Instruments

Learning Objective: 16-09 Explain the contract that is made when people indorse negotiable instruments.

Bloom's: Evaluate

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation