Clark 11e TB a Ch20

201

Chapter 20

The Formation ofSales and Lease Contracts

TRUE/FALSE QUESTIONS

A1. Article 2 of the UCC governs contracts for sales of goods.

ANSWER: T PAGE: 393 TYPE: =NAT: AACSB Analytic AICPA Legal

A2. Under the UCC, a sale occurs when title passes from a seller to a buyerfor a price.


A3. For an item to be characterized as a “good” under the UCC, it must beintangible.

ANSWER: F PAGE: 394 TYPE: =NAT: AACSB Analytic AICPA Legal

A4. A contract for the sale of minerals is considered to be a contract for thesale of goods if the severance is to be made by the buyer.

ANSWER: F PAGE: 395 TYPE: =NAT: AACSB Reflective AICPA Legal

A5. A sale of a fixture is always considered a sale of realty.


202 TEST BANK A—UNIT 4: DOMESTIC AND INT’L SALES & LEASE CONTRACTS

A6. The UCC imposes some different rules of conduct on merchants andconsumers.


A7. Under the UCC, a merchant who sells one type of good will be considereda merchant for any other type of good that he or she may sell.


A8. A consumer lease is subject to Article 11 of the CISG.

ANSWER: F PAGE: 398 TYPE: NNAT: AACSB Analytic AICPA Legal

A9. A lessor is a party who acquires a right to the possession and use ofgoods under a lease.


A10. Under the UCC, a contract for a sale of goods that includes open terms isvoid.

ANSWER: F PAGE: 399 TYPE: NNAT: AACSB Reflective AICPA Legal

A11. If a contract for a sale of goods omits a price term, a reasonable price forthe goods can be determined by looking at the market for them.

ANSWER: T PAGE: 400 TYPE: NNAT: AACSB Reflective AICPA Legal

A12. The UCC imposes a good faith limitation on output contracts.


A13. When an offer does not specify a means of acceptance, it can be acceptedby any means reasonable under the circumstances.

ANSWER: T PAGE: 401 TYPE: =NAT: AACSB Reflective AICPA Legal

CHAPTER 20: THE FORMATION OF SALES AND LEASE CONTRACTS 203

A14. Under the mirror image rule, an offer must be accepted in its entiretywithout modification or reservation or else no contract can be formed.


A15. If a nonmerchant’s offer expressly conditions acceptance on a nonmer-chant’s agreement to the terms of the offer, a positive response may con-stitute an acceptance even if it contains additional terms.

ANSWER: T PAGE: 402 TYPE: =NAT: AACSB Reflective AICPA Legal

A16. Under the UCC, an agreement modifying a contract needs no considera-tion to be binding.


A17. No oral contract is enforceable under the UCC.

ANSWER: F PAGE: 406 TYPE: =NAT: AACSB Analytic AICPA Legal

A18. Under the UCC, an oral contract for a sale of goods is enforceable unlesspayment has been made and accepted.


A19. A court can refuse to enforce a contract that the court deems to havebeen unconscionable at the time it was made.


A20. A contract between parties residing in different countries is subject toUnited Nations Convention on Contracts for the International Sale ofGoods.

ANSWER: T PAGE: 410 TYPE: NNAT: AACSB Analytic AICPA Legal


MULTIPLE CHOICE QUESTIONS

A1. Bild-Rite, Inc., is a Colorado-based firm that does business with clientsthroughout North America. Bild-Rite oversees construction projects, andbuys and sells commercial buildings, undeveloped land, and constructionsupplies and other goods. Bild-Rite has had to deal with work-site theftand vandalism. With respect to these circumstances, the UniformCommercial Code (UCC) provides a framework for

a. commercial transactions for the sale of and payment for goods.b. international construction contracts.c. domestic and foreign transactions in real estate.d. prosecuting crimes against business interests.

ANSWER: A PAGE: 393 TYPE: NNAT: AACSB Reflective AICPA Legal

A2. Omni Corporation is a Pennsylvania-based firm that does businessthroughout the United States. With respect to this circumstance, theUCC has been adopted by, and applies in,

a. a few of the states.b. all of the states, in whole or in part.c. half of the states.d. none of the states, to date.

ANSWER: B PAGE: 393 TYPE: NNAT: AACSB Reflective AICPA Legal

A3. Over the course of a year, Retail Marketers, Inc., sells goods from itsinventory and one of its warehouses. In exchange, Retail receives checksand other items that substitute for cash, which Retail uses to repay aloan from Savings Bank. Article 2 of the UCC governs

a. the checks.b. the payment of the loan.c. the sale of the buildings.d. the sale of the goods.

ANSWER: D PAGE: 393 TYPE: NNAT: AACSB Reflective AICPA Legal


A4. Nemo pays Office Supply Company $1,500 for a laptop computer. Underthe UCC, this is

a. a gift.b. a lease.c. a sale.d. not a gift, a lease, or a sale.

ANSWER: C PAGE: 394 TYPE: =NAT: AACSB Reflective AICPA Legal

A5. In a dispute over a sale involving a bicycle, Dain argues that as to thisdeal Elle’s Hobby Shop, where Dain bought the bike, is a merchant. Acourt may determine whether Elle’s is a merchant by assessing whether

a. it has sold any bikes within the last year.b. it holds itself out by occupation as having knowledge or skill

unique to the bike in the transaction.c. its owner enjoys biking.d. it subscribes to Bike, a biweekly trade magazine.

ANSWER: B PAGE: 396 TYPE: +NAT: AACSB Reflective AICPA Legal

A6. Cleo sells kitchen appliances, and occasionally cleaning supplies, to per-sons who come into her store, Discount Appliances. One afternoon, Cleosells a used display shelf to Earl. Under the UCC, Cleo is a merchant of

a. cleaning supplies and kitchen appliances only.b. cleaning supplies, display shelves, and kitchen appliances.c. cleaning supplies only.d. kitchen appliances only.

ANSWER: A PAGE: 396 TYPE: =NAT: AACSB Reflective AICPA Legal

A7. Rally Corporation enters into a contract to sell ski gear to SnoSportzCompany, which sells a pair of the skis to Tyra, a consumer, who latersells them to Uli, another consumer. Article 2 of the UCC applies to thesales transactions between

a. all of the buyers and sellers.b. Rally and SnoSportz only.c. SnoSportz and Tyra only.d. Tyra and Uli only.

ANSWER: A PAGE: 396 TYPE: NNAT: AACSB Reflective AICPA Legal


A8. Curtis enters into a contract with Drive-Away Lease Company for athree-year lease of a car. This contract is subject to

a. Article 2 of UCC.b. Article 2A of the UCC.c. Article 11 of the CISG.d. the common law only.

ANSWER: B PAGE: 398 TYPE: NNAT: AACSB Reflective AICPA Legal

A9. Standard Office Corporation pays Tech Products $1,000 to use a Techcomputer for a month. For purposes of the UCC, this is

a. a bailment.b. a consignment.c. a lease.d. a sale.


A10. Metro Daily and New City Newsstand enter into a contract under whichMetro agrees to deliver a certain quantity of newspapers to New Cityeach day. The contract does not include a price term. In a suit betweenthe parties over the price, a court will

a. determine a reasonable price.b. impose the lowest market price.c. refuse to enforce the agreement.d. return the parties to the positions they held before the contract.


A11. Regional Products, Inc., agrees to sell to Quantity Dealers Corporation acertain amount of goods but no mention is made of where the goods are tobe delivered. In general, the UCC requires that the delivery take place at

a. a neutral place of business halfway between the parties’ locations.b. a UCC-designated warehouse.c. Regional’s place of business.d. Quantity’s place of business.



A12. Roy’s Chick’n Shack orders chicken from Standard Food Supplier, butStandard does not deliver. Roy’s will probably be unable to enforce theagreement if the parties

a. did not limit the duration of the deal.b. did not specify a payment term.c. did not specify a quantity term.d. have not begun to perform.


A13. Desktop Company offers to sell eRetail, Inc., 1,000 computers for a$500,000, states that the offer will be open for six days, and asks for aresponse by fax. On the fourth day, eRetail sends an acceptance toDesktop via the mail, which is received on the sixth day. In this deal

a. a contract is formed.b. no contract is formed, because Desktop asked for a response by fax.c. no contract is formed, because Desktop received the acceptance

late.d. no contract is formed, because eRetail sent the acceptance late.


A14. Retail Music, Inc., offers to buy from Super Products Corporation (SPC)1,000 blank CDs of a certain brand. Without notifying Retail, SPC timelyships CDs of a different brand. This shipment is

a. an acceptance of the offer and a breach of the parties’ contract.b. an acceptance of the offer and a fulfillment of the parties’ contract.c. a refusal of the offer and a breach of the parties’ contract.d. a refusal of the offer and a fulfillment of the parties’ contract.


A15. United Farms offers to sell Valu Bakeries, Inc., fifty bushels of wheat.Valu’s representative Wendy responds, “We agree to buy fifty bushelsonly if the wheat is Grade A quality.” Wendy’s statement is

a. a breach of the parties’ contract.b. a counteroffer.c. a fulfillment of the parties’ contract.d. an acceptance.

ANSWER: B PAGE: 404 TYPE: =NAT: AACSB Reflective AICPA Legal


A16. Rite Clothiers, Inc., sells t-shirts to Brand Name Stores, Inc., under anexisting contract. When textile costs increase, Brand agrees to a priceincrease, but later wants to cancel the contract. Brand may

a. cancel the contract immediately.b. cancel the contract only after accepting a final shipment.c. cancel the contract only on reasonable notice.d. not cancel the contract.

ANSWER: D PAGE: 404 TYPE: =NAT: AACSB Reflective AICPA Legal

A17. Quinn enters into a series of agreements with Reba involving a sale of aSuite Dreams Motel, including the land, building, furnishings, shares ofstock in Suite Dreams Company, and a contract with Trudy to create anad campaign. Reba suspects that Quinn may be misrepresenting thefacts. The UCC Statute of Frauds governs the sale of

a. any of the property evidenced by a writing.b. any of the property that may involve fraud.c. the furnishings priced at $500 or more.d. the land and the building.

ANSWER: C PAGE: 405 TYPE: NNAT: AACSB Reflective AICPA Legal

A18. Tasty Pastries, Inc., and other bakers refer to a “baker’s dozen” as con-sisting of a collection of thirteen baked goods. This is an example of

a. course of dealing.b. course of performance.c. square dealing.d. usage of trade.

ANSWER: D PAGE: 407 TYPE: +NAT: AACSB Reflective AICPA Legal

A19. Gail enters into a contract with Hi-Price Appliances, Inc. In a suit be-tween the parties over payment under the contract, Gail claims that acertain clause is unconscionable. If the court agrees, it may

a. enforce, limit, or refuse to enforce the contract or the disputedclause.

b. enforce the contract without the disputed clause only.c. limit the application of the disputed clause only.d. refuse to enforce the entire contract only.



A20. Overseas Corporation (OC), a U.S. firm, orally agrees to sell six freezersto Pisa Pizza, Ltd., in Italy. OC fails to deliver. Under the CISG, PisaPizza can

a. enforce the agreement.b. not enforce the agreement because it is not in writing.c. not enforce the agreement because the price term is not specified.d. not enforce the agreement because there is no consideration.


ESSAY QUESTIONS

A1. Clean Machines Company makes washing machines. Over the phone,Clean offers to sell Dealers Appliance Outlet one hundred model EZ2000washers at a price of $150 per unit. Clean says that it will keep the offeropen for ninety days. Dealers responds that within two or three weeks itwill decide whether to accept. One week later, Clean faxes, and Dealerreceives, notice that the offer is withdrawn. Dealer immediately phonesClean to accept the $150-per-unit offer. When Clean refuses to deliver atthat price, Dealer files a suit. Clean asserts, first, that there is nocontract and, second, that if there is a contract, it is unenforceable.Discuss Clean’s assertions.

ANSWER: Clean’s contention that there is no contract between it andDealer is correct. An offeror can revoke an offer at any time beforeacceptance without liability unless the offer is irrevocable. For this offerto be considered irrevocable, Dealer would have to prove that it had anoption, which requires consideration, or that the offer was irrevocableunder UCC 2–205. Neither of these applies. Dealer gave no considerationfor the offer to be kept open, and thus no option was created. And, for theoffer to be irrevocable under the UCC without consideration, Clean—amerchant—would have had to give assurance that the offer would re-main open for ninety days in a signed writing. Because the assurancewas made orally, the offer was revocable. Thus, Dealer’s receipt ofClean’s revocation (withdrawal) of the offer before Dealer’s acceptanceterminated the offer, and no contract was formed.

Clean’s contention that even if a contract was created, thecontract is unenforceable is also correct. Under UCC 2–201, any contractfor the sale of goods priced at $500 or more must be in writing, besupported by written evidence such as a memorandum, or be the object ofan applicable exception (such as written confirmation between mer-chants, specially ordered or manufactured goods, admission under oath,or partial performance completed) to be enforceable. The contract in thecase presented here is for the sale of goods (washing machines) priced at


$500 or more ($15,000). It was not in writing; nor is there a writingsigned by Clean that an oral contract was formed. Also, none of theexceptions apply. Thus, even if Dealer could prove that an oral contracthad been made, the contract could not be enforced against Clean’sdefense of the Statute of Frauds.

PAGES: 400–401 & 405–406 TYPE: NNAT: AACSB Reflective AICPA Decision Modeling

A2. Tune Products, Inc., offers to sell to Unlimited Sales Company onehundred MP3 players at $50 a piece, subject to certain specific deliverydates. Unlimited replies with a signed purchase order that reads,“Accept your offer for 100 I-appliances at $50 each. Must be delivered toour warehouse.” Tune does not respond or deliver the goods. Unlimitedfiles a suit for breach of contract, to which Tune answers that there is nocontract because Unlimited’s purchase order contained additional termsand is not signed by Tune. Can Unlimited recover? Explain.

ANSWER: Yes. Additional or different terms in an unconditional accep-tance, which is otherwise definite and timely, are interpreted as propos-als for additional terms to a contract, unless the contract is betweenmerchants. In that situation, the terms become part of the contract un-less (1) the offer expressly limits acceptance to its terms, (2) the addi-tional terms materially alter the contract, or (3) the offeree objects to theadditional terms within a reasonable time. Here, the offer did not ex-pressly limit the acceptance, the extra terms did not materially changethe contract, and Tune did not object within a reasonable time. If eitheror both of the parties is not a merchant, a contract is formed according tothe terms of the original offer. Thus, here, the additional term (deliveryto Unlimited’s warehouse) would have become part of the contract even ifone or both parties had not been merchants. Tune’s Statute of Fraudsclaim (that the purchase order was not signed by Tune) also fails. For acontract for a sale of goods between merchants, when one party sends awritten confirmation within a reasonable time after terms have beenreached orally, the confirmation is binding unless the recipient objectswithin ten days of receipt. The merchant receiving the communicationmust have reason to know its contents, but it needs to be signed only bythe party who sends it. Here, Tune received the signed writing, but didnot object within the ten days.

PAGES: 402–404 & 405–406 TYPE: =NAT: AACSB Reflective AICPA Decision Modeling

Clark 11e TB a Ch20

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