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CHAPTER 10: NATURE AND TERMINOLOGY 113

Chapter 10

Nature and Terminology

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. Some promises are not legally binding.

ANSWER: T PAGE: 206 TYPE: +


NAT: AACSB Analytic AICPA Critical Thinking

A2. Resolving whether a promise should be enforced is a function of


contract law.

ANSWER: T PAGE: 206 TYPE: N


NAT: AACSB Analytic AICPA Legal

A3. If a contractual promise is not fulfilled, the person who made it may
be required to perform the promised act.

ANSWER: T PAGE: 207 TYPE: N


NAT: AACSB Analytic AICPA Critical Thinking

A4. The intention to enter into a contract is judged by outward, objective


facts as interpreted by a reasonable person.

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accessible website, in whole or in part.
114 TEST BANK A—UNIT THREE: CONTRACTS AND E-CONTRACTS

ANSWER: T PAGE: 207 TYPE: +


NAT: AACSB Analytic AICPA Legal

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accessible website, in whole or in part.
CHAPTER 10: NATURE AND TERMINOLOGY 115

A5. The only requirement of a valid contract is that it be voluntarily


entered into.

ANSWER: F PAGE: 208 TYPE: N


NAT: AACSB Analytic AICPA Legal

A6. Every contract involves at least three parties.

ANSWER: F PAGE: 208 TYPE: N


NAT: AACSB Reflective AICPA Legal

A7. “Consideration” refers to the voluntary consent of all of the parties


to a contract.

ANSWER: F PAGE: 208 TYPE: +


NAT: AACSB Analytic AICPA Legal

A8. A unilateral contract is formed when the one receiving the offer com-
pletes the requested act or performance.

ANSWER: T PAGE: 209 TYPE: =


NAT: AACSB Analytic AICPA Legal

A9. No offer may be revoked before it is accepted.

ANSWER: F PAGE: 210 TYPE: =


NAT: AACSB Analytic AICPA Legal

A10. A check is a formal contract.

ANSWER: T PAGE: 210 TYPE: N


NAT: AACSB Analytic AICPA Legal

A11. Informal contracts are usually based on their substance rather than
their form.

ANSWER: T PAGE: 210 TYPE: =


NAT: AACSB Analytic AICPA Critical Thinking

A12. An express contract must be in writing.

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accessible website, in whole or in part.
116 TEST BANK A—UNIT THREE: CONTRACTS AND E-CONTRACTS

ANSWER: F PAGE: 210 TYPE: =


NAT: AACSB Analytic AICPA Legal

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accessible website, in whole or in part.
CHAPTER 10: NATURE AND TERMINOLOGY 117

A13. An implied contract is not an actual contract.

ANSWER: F PAGE: 210 TYPE: +


NAT: AACSB Reflective AICPA Legal

A14. If a voidable contract is ratified, the parties must fully perform their
respective legal obligations.

ANSWER: T PAGE: 211 TYPE: N


NAT: AACSB Analytic AICPA Legal

A15. An executed contract is one that has been fully performed.

ANSWER: T PAGE: 211 TYPE: =


NAT: AACSB Analytic AICPA Legal

A16. A quasi contract is a fictional contract.

ANSWER: T PAGE: 212 TYPE: =


NAT: AACSB Analytic AICPA Critical Thinking

A17. A void contract is enforceable if it is in writing.

ANSWER: F PAGE: 212 TYPE: =


NAT: AACSB Reflective AICPA Legal

A18. The doctrine of quasi contract can be used only when there is an
actual contract that covers the matter in controversy.

ANSWER: F PAGE: 214 TYPE: =


NAT: AACSB Reflective AICPA Legal

A19. Plain language laws regulate some types of contracts to require


“legalese.”

ANSWER: F PAGE: 215 TYPE: N


NAT: AACSB Analytic AICPA Legal

A20. A reasonable, lawful, and effective meaning will normally be given to


all of a contract’s terms.

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accessible website, in whole or in part.
118 TEST BANK A—UNIT THREE: CONTRACTS AND E-CONTRACTS

ANSWER: T PAGE: 217 TYPE: N


NAT: AACSB Reflective AICPA Legal

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accessible website, in whole or in part.
CHAPTER 10: NATURE AND TERMINOLOGY 119

MULTIPLE CHOICE QUESTIONS

A1. Phil agrees to work for Vacation Resorts, Inc., as a chef. In


determining whether a contract has been formed, an element of
prime importance is

a. the parties’ intent.


b. Phil’s rate of pay.
c. the duration of the work.
d. Vacation Resorts’s facilities.

ANSWER: A PAGE: 207 TYPE: N


NAT: AACSB Analytic AICPA Legal

A2. Crosby believes that he and Dakota agreed he would act as her
personal sports trainer for seven workout sessions. In a later dispute,
the existence of any contract can be judged by

a. the parties’ statements at the time of their alleged contract.


b. what the defendant claims was the parties’ intent.
c. what the plaintiff claims was the parties’ intent.
d. what the parties agree they intended.

ANSWER: A PAGE: 207 TYPE: N


NAT: AACSB Reflective AICPA Legal

A3. Expert Pavers, Inc., contracts with Fabricated Building Corporation to


repave Fabricated’s parking lot for which Fabricated agrees to pay.
The elements of this, and any other, contract include

a. capability.
b. consideration.
c. formation.
d. practicality.

ANSWER: B PAGE: 208 TYPE: +


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accessible website, in whole or in part.
120 TEST BANK A—UNIT THREE: CONTRACTS AND E-CONTRACTS

A4. Mona asserts that a deal she entered into with Nate is an unenforce-
able contract. Defenses to the enforcement of a contract include

a. a desire not to perform.


b. adverse economic consequences.
c. results that do not match expectations.
d. the lack of a party’s voluntary consent.

ANSWER: D PAGE: 208 TYPE: =


NAT: AACSB Reflective AICPA Legal

A5. Freida and Gail enter into a bilateral contract, which is created when
Freida gives a promise in exchange for Gail’s

a. payment of money only.


b. performance of a particular act only.
c. promise only.
d. prudent awareness only.

ANSWER: C PAGE: 208 TYPE: =


NAT: AACSB Reflective AICPA Legal

A6. Clay offers to pay Dorianne $50 for a golf lesson for Estee. They
agree to meet the day after tomorrow to exchange the cash for the
lesson. These parties have

a. a bilateral contract.
b. a trilateral contract.
c. a unilateral contract.
d. no contract.

ANSWER: A PAGE: 208 TYPE: =


NAT: AACSB Reflective AICPA Legal

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accessible website, in whole or in part.
CHAPTER 10: NATURE AND TERMINOLOGY 121

A7. Opie offers to sell his guitar to Pinky for $100. Pinky agrees. They
complete and sign a printed form, and Pinky gives Opie a check for
the price. This check is

a. a formal contract.
b. an informal contract.
c. a simple contract.
d. no contract.

ANSWER: A PAGE: 210 TYPE: +


NAT: AACSB Analytic AICPA Critical Thinking

A8. 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 present-day view,
these parties had

a. an expired contract when Neil said that he had changed his


mind.
b. a quasi contract when Neil said that he would pay for certain
work.
c. a unilateral contract as soon as Outdoor began to perform.
d. no contract.

ANSWER: C PAGE: 210 TYPE: =


NAT: AACSB Analytic AICPA Legal

A9. On behalf of the jazz group Synco-Passion, their manager Raul


agrees to a performance in the Quay Club on May 1. Portia, acting
for Quay Club, sends a written copy of the agreement to Raul to be
signed. Typically, businesspersons put their contracts in writing to

a. ensure proof of the contracts’ existence.


b. create substance from form.
c. obtain a check or other negotiable instrument.
d. practice their “letters of credit.”

ANSWER: A PAGE: 210 TYPE: N


NAT: AACSB Reflective AICPA Legal

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accessible website, in whole or in part.
122 TEST BANK A—UNIT THREE: CONTRACTS AND E-CONTRACTS

A10. Flo tells Gregor that she will buy his textbook from last semester for
$65. Gregor agrees. Flo and Gregor have

a. an executed contract.
b. an express contract.
c. an implied contract.
d. a quasi contract.

ANSWER: B PAGE: 210 TYPE: =


NAT: AACSB Reflective AICPA Legal

A11. When Jeff’s 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 Jeff’s obligation to pay the bill, this is

a. an express contract.
b. an implied contract.
c. a quasi contract.
d. no contract.

ANSWER: B PAGE: 210 TYPE: =


NAT: AACSB Reflective AICPA Legal

A12. Following negotiations with Merchants Storage Company, Lonny


enters into an informal contract to clean the loading dock. This
means that the parties’ contract

a. requires no special form.


b. must be drafted “in form” to be valid.
c. is indefinite and imprecise.
d. does not exist.

ANSWER: A PAGE: 210 TYPE: N


NAT: AACSB Reflective AICPA Legal

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accessible website, in whole or in part.
CHAPTER 10: NATURE AND TERMINOLOGY 123

A13. Sam and Tiffany enter into an implied contract. This is a contract in
which the parties’ conduct

a. defines the contract’s terms.


b. finds the contract’s facts.
c. terminates any unintended consequences.
d. undercuts any terms based on the facts.

ANSWER: A PAGE: 210 TYPE: =


NAT: AACSB Reflective AICPA Legal

A14. Scot enters into a contract with Tiffany that later proves voidable at
Tiffany’s option. If she elects to avoid any duty to perform under the
contract

a. both parties are released from it.


b. neither party is released from it.
c. only Scot is released from it.
d. only Tiffany is released from it.

ANSWER: A PAGE: 211 TYPE: N


NAT: AACSB Reflective AICPA Legal

A15. Holiday Sales Company and Global Distributors, Inc., enter into a
contract for the delivery of imported specialty goods. Until the goods
are delivered and paid for, these parties have

a. an executory contract.
b. no contract.
c. a quasi contract.
d. an informal contract.

ANSWER: A PAGE: 211 TYPE: N


NAT: AACSB Reflective AICPA Legal

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accessible website, in whole or in part.
124 TEST BANK A—UNIT THREE: CONTRACTS AND E-CONTRACTS

A16. Mia, a physician, renders aid to Noel, who is injured and unconscious.
Mia can recover the cost of the aid from Noel

a. even if Noel was not aware of the aid.


b. only if Noel recovers because of the aid.
c. only if Noel was aware of the aid.
d. under no circumstances.

ANSWER: A PAGE: 212 TYPE: =


NAT: AACSB Reflective AICPA Legal

A17. Green Grocers, Inc., enters into a contract with Hiway Transport
Company for the delivery of a shipment of fresh produce. In a later
dispute between these parties over the delivery, the doctrine of
quasi contract cannot be used because

a. both of the parties involved are businesses.


b. at least one of the parties had greater bargaining power.
c. the subject of the contract was a service.
d. there is an actual contract covering the subject in dispute.

ANSWER: D PAGE: 214 TYPE: N


NAT: AACSB Reflective 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. any available evidence.


b. any relevant extrinsic evidence.
c. the face of the instrument.
d. the later testimony of the parties.

ANSWER: C PAGE: 215 TYPE: =


NAT: AACSB Reflective AICPA Legal

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accessible website, in whole or in part.
CHAPTER 10: NATURE AND TERMINOLOGY 125

A19. Diaz and Cuzco enter an express contract for the construction of a
warehouse. Express contract terms are given, in relation to the
parties’ course of performance,

a. less priority.
b. the same priority.
c. no priority.
d. more priority.

ANSWER: D PAGE: 217 TYPE: +


NAT: AACSB Reflective AICPA Legal

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. the party who drafted the contract.


b. the party with the greater bargaining power.
c. the promisor.
d. the promisee.

ANSWER: A PAGE: 217 TYPE: =


NAT: AACSB Reflective AICPA Legal

ESSAY QUESTIONS

A1. Ed, a businessperson, is a friend of Fran, the owner of a candy store.


Every day, Ed spends five minutes in Fran’s 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, performance, 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 reasons given here is classified as valid,

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accessible website, in whole or in part.
126 TEST BANK A—UNIT THREE: CONTRACTS AND E-CONTRACTS

enforceable, and informal. In addition, this is a classic case of an


implied contract. There is no explicit agreement between the parties.
Rather, an agreement is implied by Ed’s 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 Ed’s 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 purpose, both parties have
capacity, and voluntariness of consent is not an issue, the contract is
neither voidable nor void.

PAGES: 207–208 & 210–212 TYPE: =


NAT: AACSB Reflective AICPA Decision Modeling

A2. 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 May. 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, although it is
executed on one side and executory on the other, is still classified as
executory.

PAGES: 210 & 211 TYPE: =


NAT: AACSB Reflective AICPA Decision Modeling

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part.

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