Clark 11e TB a Ch27

275

Chapter 27

Checks and Bankingin the Digital Age

TRUE/FALSE QUESTIONS

A1. A cashier’s check is an instrument in which a bank draws a check onitself.

ANSWER: T PAGE: 544 TYPE: =NAT: AACSB Analytic AICPA Legal

A2. A bank that has certified a check is under no obligation to accept it.

ANSWER: F PAGE: 545 TYPE: =NAT: AACSB Analytic AICPA Legal

A3. A person who writes a bad check is subject to a civil suit only.


A4. A drawer is liable to the holder of a check if the check is not honored.


A5. Once a check “bounces,” a holder cannot resubmit it for payment.


A6. The death of a customer revokes a bank’s authority to pay an item.

ANSWER: F PAGE: 547 TYPE: NNAT: AACSB Analytic AICPA Legal

276 TEST BANK A—UNIT FIVE: NEGOTIABLE INSTRUMENTS

A7. A stale check is one that has been outstanding for longer than onemonth.


A8. An oral stop payment order is valid for fourteen days.


A9. A bank that pays a customer’s check with a forged drawer’s signaturecan generally pass the loss onto the customer.


A10. A customer who fails to examine a bank statement and report a forgedsignature may be liable for later forgeries by the same wrongdoer.


A11. A bank that fails to detect an alteration to its customer’s check is liableto the customer for the loss.

ANSWER: T PAGE: 552 TYPE: NNAT: AACSB Analytic AICPA Legal

A12. A bank cannot recover from a holder who cashes a check bearing a forgedindorsement once the bank has accepted and paid the item.


A13. Generally, the funds represented by a deposited local check must beavailable for withdrawal within one business day.


A14. The first bank to receive a check for payment is the depositary bank.


CHAPTER 27: CHECKS, THE BANKING SYSTEM, AND E-MONEY 277

A15. Each bank in a collection chain must pass a check on before midnight ofthe day of its receipt.

ANSWER: F PAGE: 557 TYPE: NNAT: AACSB Reflective AICPA Critical Thinking

A16. A bank that encodes information on an item after its issue warrants toany subsequent bank that the information is correct.


A17. Stored-value cards are a form of digital cash.

ANSWER: T PAGE: 560 TYPE: NNAT: AACSB Reflective AICPA Critical Thinking

A18. Under the Check Clearing in the 21st Century Act, a substitute check isthe legal equivalent of an original check.


A19. Financial institutions that exchange digital images of checks do nothave to exchange the original paper checks.


A20. A customer has sixty days from the date of receipt of a statement of anelectronic transfer to notify the financial institution of any errors.


MULTIPLE CHOICE QUESTIONS

A1. Rikki signs a check “pay to the order of Scholar University” drawn onRikki’s account in State Bank to pay her tuition. Rikki is

a. the certifier.b. the drawee.c. the drawer.d. the payee.

ANSWER: C PAGE: 544 TYPE: NNAT: AACSB Reflective AICPA Legal


A2. Scott presents an instrument that states “pay to the order of Scott” toTown Bank for payment. This instrument is the most common type ofnegotiable instrument, which is

a. a certificate of deposit.b. a check.c. a note.d. a trade acceptance.

ANSWER: B PAGE: 544 TYPE: NNAT: AACSB Reflective AICPA Legal

A3. Elmo pays First National Bank $1,000 plus a service fee to draw a checkon itself made payable to Go Delivery Service. This is

a. a cashier’s check.b. a certified check.c. a trade acceptance.d. a traveler’s check.

ANSWER: A PAGE: 544 TYPE: NNAT: AACSB Reflective AICPA Legal

A4. First Community Bank agrees to accept a check by setting aside suffi-cient funds to cover the amount. This check is considered

a. cashed.b. certified.c. deposited.d. provisionally credited.

ANSWER: B PAGE: 545 TYPE: =NAT: AACSB Reflective AICPA Legal

A5. Kip writes a check for $1,000 drawn on Local Bank and presents it toMira. Mira presents the check for payment to Local Bank, which dishon-ors it. The party most likely liable to Mira is

a. Kip in a civil suit.b. Kip in a criminal prosecution.c. Local Bank in an administrative proceeding.d. neither Kip nor Local Bank.

ANSWER: A PAGE: 546 TYPE: =NAT: AACSB Reflective AICPA Legal


A6. Thelma signs a check “pay to the order of Uri” drawn on Thelma’saccount in Verity Bank. Thelma has $400 in her account but the amountof the check is $500, which the bank pays. This is

a. a dishonored check.b. an overdraft.c. a postdated check.d. a stale check.

ANSWER: B PAGE: 547 TYPE: NNAT: AACSB Reflective AICPA Legal

A7. Liu signs a check “pay to the order of Marv” drawn on Liu’s account inNational Bank. Liu later orders National not to pay the check, but thebank pays it over Liu’s order. Subsequent checks written on Liu’saccount “bounce.” Most likely liable for the costs to Liu is

a. any party to whom a subsequent check was written.b. Liu.c. Marv.d. National.


Fact Pattern 27-1A (Questions A8 and A9 apply)Echo takes her car to Fix-It, Inc., which repairs the car and bills Echo for $500.Echo writes out a check drawn on Capital Bank, but later, believing that Fix-Itdid not repair the car properly, issues a stop-payment order.

A8. Refer to Fact Pattern 27-1A. Capital Bank pays the check. Capital

a. can sue Echo for a wrongful stop-payment order.b. can sue Fix-It for breach of contract.c. can sue no one because it paid a check that was not properly

payable.d. is liable for Echo’s loss due to the wrongful payment.

ANSWER: D PAGE: 548 TYPE: =NAT: AACSB Reflective AICPA Legal


A9. Refer to Fact Pattern 27-1A. Capital Bank

a. is liable to Fix-It for the amount of the check.b. must stop payment if Capital has a reasonable time to act.c. need not stop payment unless Echo had a valid reason to act.d. need not follow Echo’s order unless the check was certified.


A10. John writes a check to Kay as payment for a DVD player but soon discov-ers the player is broken. He goes to the drawee bank and orally author-izes Larry, a bank officer, to stop payment on the check. This order isvalid for

a. fourteen days.b. fourteen months.c. six days.d. six months.


A11. Brandy forges Caleb’s signature on a check “payable to the order ofBrandy” drawn on Caleb’s account in Downtown Bank. Caleb’s forgedsignature is

a. effective if an innocent third party accepts the check.b. effective to the degree that it matches Caleb’s genuine signature.c. effective to the extent that Downtown Bank debits Caleb’s

account.d. not effective.

ANSWER: D PAGE: 549 TYPE: NNAT: AACSB Reflective AICPA Legal

A12. Dru signs a check “pay to the order of Eppie” drawn on Dru’s account inFirst Federal Bank. Greta forges Eppie’s indorsement. First Federal paysthe check. Most likely

a. Dru will be liable for the amount.b. Eppie will have to pay Dru for the amount.c. First Federal will have to recredit Dru’s account.d. the Federal Reserve will reimburse all parties for their costs.



A13. Ed can write checks on his account at First City Bank. Gina steals thechecks, forges Ed’s signature, and cashes the checks at First City. Thebank is excused from any liability if, after receipt of the first forgedcheck, Ed fails to report the forgeries within

a. five days.b. fourteen days.c. one year.d. three years.

ANSWER: C PAGE: 552 TYPE: =NAT: AACSB Reflective AICPA Legal

Fact Pattern 27-2A (Questions A14 and A15 apply)Ruth opens an account with State Bank under an agreement in which thebank reserves the right to charge the account for any item returned due to itsunauthorized alteration.

A14. Refer to Fact Pattern 27-2A. The agreement between Ruth and StateBank

a. cannot change the effect of the UCC.b. is in accord with the UCC.c. violates federal banking regulations.d. violates the UCC.


A15. Refer to Fact Pattern 27-2A. Tom deposits an altered check in Ruth’s ac-count. When Unity Bank, the check’s drawee bank, returns the item dueto its alteration, State Bank files a suit against Ruth to recover theamount. The court is most likely to rule that

a. Ruth does not have to pay, because she did not indorse the check.b. State Bank is entitled to recover under its account agreement.c. Tom is the party from whom State Bank should seek recovery.d. Unity Bank is the party from whom State Bank should seek

recovery.



A16. On Monday morning, Bob deposits into his account at County Bank a$500 check from Dina, who also has an account at County Bank. On thatsame day, this check is considered

a. cashiered.b. certified.c. paid.d. provisionally credited.

ANSWER: D PAGE: 556 TYPE: =NAT: AACSB Reflective AICPA Legal

Fact Pattern 27-3A (Questions A17 and A18 apply)Mike loses his National Bank access card. He realizes his loss the next day butwaits a week to call National. Meanwhile, Opal finds and uses Mike’s card towithdraw $3,000 from Mike’s account.

A17. Refer to Fact Pattern 27-3A. Mike is responsible for

a. $0.b. $50.c. $500.d. $3,000.


A18. Refer to Fact Pattern 27-3A. When Mike receives his National statement,he demands that the bank investigate the matter and recredit his ac-count. The bank

a. has no duty to investigate.b. must investigate and, if the dispute is not resolved within ten

days, recredit Mike’s account (at least until the dispute isresolved).

c. must investigate and immediately recredit Mike’s account (atleast until the dispute is resolved).

d. must investigate but need not recredit Mike’s account.



A19. First State Bank has fourteen branch offices. First State must establishmarket areas contiguous to these offices under

a. the Community Reinvestment Act.b. the Federal Reserve Board’s Regulation E.c. the Federal Trade Commission Act.d. the Home Mortgage Disclosure Act.


A20. E-Bank, an online financial institution, gives financial informationabout Paula and other customers to a federal agency without the cus-tomers’ permission. E-Bank may be liable under

a. the Federal Trade Commission Act.b. the Financial Services Modernization Act.c. the Right to Financial Privacy Act.d. the Uniform Electronic Transactions Act.


ESSAY QUESTIONS

A1. Hoppy steals two checks from Eagle Retail Stores, Inc.: a blank check anda check payable to the order of General Supplies Company (GSC), drawnon Eagle’s account with First National Bank. Hoppy forges Eagle’ssignature on the blank check and makes it payable to himself. Hoppyforges GSC’s indorsement on the back of the check payable to GSC, andadds “Pay to the order of Hoppy.” At Friendly Credit, Inc., Hoppy indorsesthe back of both checks with his own name and gives them to Friendlyfor cash. Friendly does not know about the theft or the forged signaturesand presents the checks to First National, which pays them. Eagle,which was not negligent, discovers the forgeries and asks First Nationalto recredit its account. Who suffers the loss on each check?

ANSWER: First National will suffer the loss of the amount on the blankcheck unless it can recover from Hoppy. Friendly will suffer the loss onthe amount on the check with the forged indorsement of GSC unlessFriendly, too, can recover from Hoppy. When the signature of a drawer isforged, the drawer has not been negligent, and the drawee bank pays thecheck over the forged signature, the party who bears the loss is thedrawee bank. The bank has a right to recover from the party who forgedthe signature, or from any party who does not take the check in goodfaith and for value, or who changes his or her position in reliance on


payment or acceptance. Here, regarding the blank check, Eagle, thedrawer, was not negligent, its signature was forged, and First National,the drawee bank, paid the check over the forged signature. (FirstNational cannot recover from Friendly on the basis of a breach of apresentment warranty, because Friendly warranted only that it did notknow the drawer’s signature was forged.) First National has a right torecover from Hoppy, but in most cases, actual recovery from a thief is aremote possibility. Because Friendly took the check in good faith and forvalue, First National does not have a right to recover the amount of thischeck from Friendly. A bank that pays a customer’s check bearing aforged indorsement must recredit the customer’s account. A forgedindorsement does not transfer title, however, and so whoever takes acheck with a forged indorsement cannot become a holder and will likelysuffer a loss on the check. (A subsequent transfer of the check breachesthe presentment warranty that in effect there are no unauthorized in-dorsements.) In this problem, First National must recredit Eagle’s ac-count, but First National can recover the amount from Friendly, who didnot acquire title to the check and thus did not become a holder. Friendlyhas a right to recover from Hoppy, but again actual recovery is unlikely.

PAGES: 549–552 TYPE: =NAT: AACSB Reflective AICPA Decision Modeling

A2. City Bank mistakenly transfers $1,000 from the account of Donna, itscustomer, to the account of Earl in First Federal Bank. The transfer isdone electronically. When City Bank learns of the mistake, it creditsDonna’s account and asks First Federal to “return” $1,000. First Federalrefuses. City Bank files a suit against First Federal, claiming that it isviolation of the Electronic Fund Transfer Act. How might the court rule?

ANSWER: The court will likely rule in favor of First Federal on CityBank’s claim under the Electronic Fund Transfer Act (EFTA). The EFTAdoes not apply because the plaintiff and defendant are financial institu-tions, not consumers. The EFTA covers only electronic fund transfersmade by consumers. Transfers between financial institutions are notcovered under the EFTA. City Bank may recover under other legal theo-ries, however, possibly including a cause founded on Article 4A of theUniform Commercial Code.

PAGES: 562 & 563 TYPE: =NAT: AACSB Reflective AICPA Decision Modeling

Clark 11e TB a Ch27

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