Chp 24 - Negotiable Instruments

1. To purchase office supplies for her medical clinic, Becky executes a draft in favor of Sonya. A draft is

a. a promise to pay money.
b. a promise to deliver goods at a future date.
c. a conditional promise to pay money.
d. an unconditional written order to pay money.

answer: d PAGE: 452 TYPE: =

2. Ferdinand owes $8,000 in unpaid taxes. Using the back of an old shirt, he executes an instrument for $8,000 that otherwise meets the re­quirements for negotiability. This instrument is likely

a. negotiable.
b. nonnegotiable, because a shirt is not sufficiently permanent.
c. nonnegotiable, because the government does not appreciate such gestures.
d. nonnegotiable, because an instrument must be on paper so that it may be pro­cessed efficiently in the banking system.

answer: a PAGE: 457 TYPE: =

3. Which of the following writings are negotiable instruments?
a. a conditional promise to pay $25
b. an unconditional promise to pay a reasonable sum
c. an unconditional promise to pay $25 some time next month
d. none of the above
> d
EXPLANATION: A negotiable instrument must be an unconditional promise to pay a fixed amount either on demand or at a fixed future date.

4. Which of the following statements will make a promise to pay a conditional one?
a. "payment as per our contract"
b. "payment upon delivery of goods as stated in contract"
c. both A and B
d. none of the above
> b
EXPLANATION: Only B makes the payment uncertain. If the delivery is not made, neither is payment. Choice A merely refers to a contract; it does not indicate that payment is not certain.

5. Which of the following terms satisfy the requirement that negotiable instruments be for a fixed amount?
a. "pay $1,000"
b. "pay $1,000 + 10% interest"
c. "pay $1,000 + legal rate of interest"
d. all of the above
> d
EXPLANATION: To be for a fixed amount, the amount must be ascertainable from the face of the note or from a readily available source. It need not have a specific amount listed simply in dollars.

6. Which of the following orders are payable in money?
a. "Pay on demand $1,000 in gold."
b. "Pay on demand 1,000 doughnuts."
c. both A and B
d. none of the above
> d
EXPLANATION: The note must be payable in U.S. currency. Gold and doughnuts have value, but are not currency.

7. Are instruments with acceleration clauses negotiable?
a. no, because the value is not for a fixed amount
b. no, because the time of payment is uncertain
c. both A and B
d. yes
> d
EXPLANATION: All payments will be made within six months, and no matter when they are made, they will total $1,200. This instrument may be sold by Al to a third party.

8. To borrow money to finance the start-up of her consulting business, Barb executes an instrument in favor of First National Bank. For the instru­ment to be negotiable, Barb’s signature

a. must be placed in the lower right-hand corner of the instrument.
b. may be placed anywhere on the instrument.
c. must be placed at the bottom of the instrument.
d. none of the above.

answer: b PAGE: 457 TYPE: =

9. Kent writes on a piece of paper, “I owe you $500,” signs it, and gives it to Lane. This instrument is

a. negotiable.
b. nonnegotiable, because it does not include an express promise to pay.
c. nonnegotiable, because it does not state any conditions to payment.
d. none of the above.

answer: b PAGE: 458 TYPE: =

10. Which of the following phrases makes an order instrument negotiable?
a. "Pay to the order of Phil Palmer"
b. "Pay to the order of my brother"
c. both A and B
d. none of the above
> a
EXPLANATION: A is negotiable as Phil Palmer may indorse it, and the new holder will know that it has been properly indorsed. An instrument to my brother is too vague to be negotiable.

11. Carol signs a check that is payable to the order of All-Mart Discount Stores, Inc., but that does not include a date. This check is

a. negotiable.
b. nonnegotiable, because it does not include a date.
c. nonnegotiable, because it is payable to All-Mart Discount Stores.
d. nonnegotiable, because it is signed by Carol.

answer: A PAGE: 463 TYPE: =

12. On May 1, Doug signs a check that is payable to the order of Excel Credit Card Corporation and that is dated July 1. This check is

a. negotiable.
b. nonnegotiable, because it is payable to Excel Credit Card Corporation.
c. nonnegotiable, because it is postdated.
d. nonnegotiable, because it is signed by Doug.

answer: A PAGE: 463 TYPE: =

13 With a cashier's check, a bank acts as a
a. drawee.
b. drawer.
c. payee.
d. both A and B
> d
EXPLANATION: The bank acts as both. The bank creates the draft and pays it

14.Which of the following language on an order will create a negotiable instrument?
a. "Pay X"
b. "Please pay X"
c. "I wish you would pay X"
d. both A and B
> d
EXPLANATION: The third statement is too imprecise. The others make the payment mandatory, even though the second is a courteous order.

15. Which of the following phrases indicates a bearer instrument?
a. "payable to bearer"
b. "pay to cash"
c. "pay to the order of cash"
d. all of the above
> d
EXPLANATION: In each case, whoever actually has the instrument has a right to payment.

16. Dick signs a check payable to the order of Jane, writes “this is nonnego­tiable” in the lower left corner, and gives it to her. This check is

a. negotiable.
b. nonnegotiable, because it includes the notation “this is nonnegotiable.”
c. nonnegotiable, because it is not governed by Article 3.
d. nonnegotiable, because it was given to Jane.

answer: a PAGE: 463 TYPE: =

17. Cindy signs a check payable “to the order of my blue-eyed friend” and gives it to Dan, who does not have blue eyes. This check is

a. negotiable.
b. nonnegotiable, because Dan does not have blue eyes.
c. nonnegotiable, because it does not indicate a specific payee.
d. nonnegotiable, because it was executed as a joke.

answer: C PAGE: 461 TYPE: +

18. 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. negotiable.
b. nonnegotiable, because a holder can move up the payment date.
c. nonnegotiable, because moving up the payment date is conditional.
d. nonnegotiable, because the exact payment date cannot be deter­mined from the face of the instrument.

answer: A PAGE: 461 TYPE: =

19. Sam signs an instrument in which he promises to pay one thousand feet of digital cable to Jill on May 1. This instrument is

a. negotiable.
b. nonnegotiable, because digital cable is not “a medium of exchange authorized or adopted by a domestic or foreign government as part of its currency.”
c. nonnegotiable, because it does not indicate a specific brand of digi­tal cable.
d. nonnegotiable, because it states a specific date on which it is payable.

answer: B PAGE: 459 TYPE: =

20. Al has a negotiable instrument that does not indicate when it is to be paid. When is it payable to Al?
a. immediately
b. in 30 days
c. in a reasonable time
d. Never--the instrument is void if it does not have a payment date.
> a
EXPLANATION: If no date of payment is mentioned, the instrument is payable on demand as a demand instrument. For example, a check does not have a "payable on" date, and so you can cash it when you receive it.

21. Al loans Peg $1,000, and Peg agrees to repay him $200 per month for six months. The agreement contains an acceleration clause that may be invoked if any payment is missed. Peg makes one payment, and then defaults. What amount is due to Al immediately?
a. $0
b. $200, for the missed payment
c. $800, the remaining balance of the loan
d. $1,000, the remaining balance of the loan, plus interest
> d
EXPLANATION: An acceleration clause makes the entire agreement due immediately.

22. Alan writes a check. In the box on the check, he writes "$40.00." In the blank on the check, he writes, "Thirty dollars and 0/100." For how much may the holder cash the check?
a. $30
b. $40
c. $35
d. $0
> a
EXPLANATION: Words outweigh figures when the two are different.

23. If a check is marked, "Not governed by Article 3,", it is _______________, and if any other instrument is marked in the same way, it is _________________.
a. negotiable; negotiable
b. negotiable; nonnegotiable
c. nonnegotiable; negotiable
d. nonnegotiable; nonnegotiable
> b
EXPLANATION: Checks cannot be made nonnegotiable by any such marking, but all other instruments can.

24. Josephine owes $7,000 in unpaid taxes. Using the flank of her prized sow, she executes an instrument for $7,000 that otherwise meets the requirements for negotiability. This instrument is likely...
Which of the following is true?
a. Negotiable
b. Nonnegotiable, because a pig is not freely transferable.
c. Nonnegotiable, because the government does not appreciate such a gesture.
d. Nonnegotiable because an instrument must be on paper so that it may be processed efficiently in the banking system.
> b
EXPLANATION: Again pursuant to the UCC Article 3, the writing must have portability. If an instrument cannot be easily moved in the ordinary course of business, it is nonnegotiable.

25. Rita signs a promissory note for $10,000 in favor of State University (SU). The note does not specify the date of its payment. Rita defaults. In SU’s suit to collect on the note, the court will most likely rule in favor of

a. Rita, because SU assumed the risk that the note would not be paid.
b. Rita, because the note is not payable at a definite time or on demand.
c. SU, because the note is an unconditional promise to pay the holder.
d. SU, because there is a uniform “default time” for repayment when a date is not specified.

ANSWER: B PAGE: 459 TYPE: N