Chapter 24
The Function and Creation of
Negotiable Instruments
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. A negotiable instrument can function as a substitute for cash.
A2. On a trade acceptance, the drawer is also the drawee.
A3. A time draft is payable at a definite future time.
A4. A promissory note payable to “bearer” is not negotiable.
A5. A check is a time instrument because it is payable in due time.
A6. A certificate of deposit is a type of note.
A7. For an instrument to be negotiable, it must be in writing.
A8. To be negotiable, an instrument must not be on material that lends itself to
permanence.
A9. For an instrument to be negotiable, it need not be signed.
A10. A signature can consist of a word, mark, or symbol.
A11. For an instrument to be negotiable, it must not contain an express promise or order to
pay.
A12. To be negotiable, an instrument must have conditional promises attached to it.
A13. A statement in an instrument that payment can be made only out of a particular fund
or source renders it nonnegotiable.
A14. A mere reference in an instrument to another writing makes the promise or order
conditional.
A15. To be negotiable, an order to pay must be addressed to only one person.
A16. An instrument that promises to pay “in gold” can be negotiable.
A17. An instrument is not negotiable if it is not payable at a definite time.
A18. Any person in possession of a negotiable instrument payable to bearer is a holder.
A19. An instrument payable “with interest” must specify a particular rate to be negotiable.
A20. An undated instrument is not negotiable.
MULTIPLE CHOICE QUESTIONS
Fact Pattern 24–1A (Questions A1–A2 apply)
Flik draws a check payable to “DeliMart” to buy groceries.
A1. Refer to Fact Pattern 24-1A. Flik’s check is most likely
a. a certificate of deposit.
b. an order to pay.
c. a promise to pay.
d. a promissory note.
A2. Refer to Fact Pattern 24-1A. With respect to Flik’s check, DeliMart is
a. the drawee.
b. the drawer.
c. the maker.
d. the payee.
Fact Pattern 24–2A (Questions A3–A4 apply)
Commodity Sales Corporation and Resource Purchasing Company enter a contract for a sale
of unprocessed silver. Commodity Sales draws a draft unconditionally ordering Resource
Purchasing to pay $50,000 to Commodity Sales’s order in sixty days. Resource Purchasing
signs and dates the draft.
A3. Refer to Fact Pattern 24-2A. This instrument is
a. a banker’s acceptance.
b. a nonnegotiable instrument.
c. a promissory note.
d. a trade acceptance.
A4. Refer to Fact Pattern 24-2A. On this instrument, Commodity Sales is
a. the banker.
b. the drawer.
c. the maker.
d. the trader.
A5. To obtain office supplies for Doctors Medical Clinic, Elmo executes a draft in favor of
Flynn. A draft is
a. a conditional promise to pay money.
b. an unconditional written order to pay money.
c. a qualified promise to set aside a sum of money.
d. a restricted promise to deliver goods at a future date.
A6. Bagels n’ Coffee Café issues an instrument in favor of Eatery Supplies, Inc. For the
instrument to be negotiable, it must
a. be a conditional promise or order to pay.
b. be payable on demand or at a specific time.
c. be signed by the payee.
d. recite the consideration given in exchange for it.
A7. Rita owes $6,000 in unpaid taxes. In the sand of Seaside Beach, she executes an
instrument for that amount that otherwise meets the requirements for negotiability.
This instrument is likely
a. negotiable.
b. nonnegotiable, because an instrument must be on paper.
c. nonnegotiable, because sand is not sufficiently permanent.
d. nonnegotiable, because the government does not appreciate it.
A8. To finance the purchase of a car from Giant Auto Sales, Hoppy signs an instrument
promising to pay to “Ideal Credit Union” $18,000 with interest in installments with the
final payment due May 15, 2014. To be negotiable, this instrument must include on its
face
a. any conditions on the sale of the car.
b. any conditions to the disbursement of the funds.
c. any conditions to the repayment of the loan.
d. no conditions.
A9. To finance the purchase of a house from Tuna, Uri signs an instrument promising to
pay to “Verity Mortgage Service” $160,000 with interest in installments with the final
payment due July 10, 2042. To be negotiable, this instrument must include the
signature of
a. a non-party witness.
b. Tuna or Tuna’s realtor.
c. Uri.
d. Verity’s chief financial officer.
A10. Ryan signs an instrument using an “R” with a circle around it. With this mark for a
signature, the instrument is
a. negotiable.
b. nonnegotiable, because an initial does not state the signer’s name.
c. nonnegotiable, because this mark is a symbol, not a signature.
d. nonnegotiable, because a simple mark implies a lack of serious intent.
A11. Karen writes on a piece of paper, “I owe you $600,” signs it, and gives it to Lou. This
instrument is
a. negotiable.
b. nonnegotiable, because it does not include an express promise to pay.
c. nonnegotiable, because it does not recite any consideration.
d. nonnegotiable, because it does not state any conditions to payment.
A12. Jack signs an instrument that states it is being executed “as per a contract for the sale
of three magic beans dated June 1.” This instrument is
a. negotiable.
b. nonnegotiable, because banks cannot easily process commodities.
c. nonnegotiable, because it includes the specific date of a contract.
d. nonnegotiable, because it refers to an express contract.
A13. Kelly signs an instrument in favor of Leo that states it is “subject to a certain
agreement between Kelly and Mona.” This instrument is
a. negotiable.
b. nonnegotiable, because it is made subject to a separate agreement.
c. nonnegotiable, because it refers to a separate agreement.
d. nonnegotiable, because Kelly and Mona are not the same persons.
A14. On behalf of Digital Cable Company, Elvin signs an instrument in which he promises to
deliver 1,000 feet of optic fiber cable to Financiers eBank on March 1. This instrument
is
a. negotiable.
b. nonnegotiable, because cable is not a medium of exchange authorized or
adopted by a government as currency.
c. nonnegotiable, because it does not indicate a specific type of cable.
d. nonnegotiable, because it does not recite any consideration.
A15. Rainey signs a promissory note for $10,000 in favor of State University (SU). The note
is undated but specifies that it is “payable one month after date.” This note is
a. negotiable.
b. nonnegotiable, because one month is not a reasonable time.
c. nonnegotiable, because there is no option to pay early.
d. nonnegotiable, because the maturity date cannot be determined from the face
of the instrument.
A16. Hayley signs an instrument payable to the order of InstaCredit, Inc., that allows a
holder to demand payment of the entire amount due, with interest, if Hayley 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.
A17. Quincy draws a check payable to “Replay Stadium” to buy two season tickets to the
next year’s State College football games. This instrument is
a. a bearer instrument.
b. an order instrument.
c. valid but nonnegotiable.
d. void.
A18. Shad signs a promissory note payable to Theresa “with interest” on which he
conspicuously notes that it is “nonnegotiable.” This instrument is
a. negotiable.
b. nonnegotiable, because it includes the notation “nonnegotiable.”
c. nonnegotiable, because it does not specify a rate of interest.
d. nonnegotiable, because the exact amount payable cannot be determined from
the face of the instrument.
A19. Locke signs a check payable to the order of Metro Bank, filling in the blanks for the
amount with the figures “$100” and “One thousand and 00/100 dollars.” This check is
payable in the amount of
a. $0.
b. $100.
c. $1,000.
d. $1,100.
A20. On May 1, Doug signs a check that is payable to the order of Employees Credit
Corporation and that is dated July 1. This check is
a. negotiable.
b. nonnegotiable, because it is payable to a corporation.
c. nonnegotiable, because it is postdated.
d. nonnegotiable, because it is signed by the drawer.
ESSAY QUESTIONS
A1. The accounting department of Delta Sales Company receives an instrument that
states, “March 16, 2011. Thirty days after date, I promise to pay to the order of cash,
$700 (seven hundred and 00/100 dollars), in Denver, Colorado, with interest at the
rate of 7% (seven percent) per year. This instrument is secured by a contract for the
sale of a computer. Due April 15, 2011. [Signed] Edward Jones.” What type of
instrument is this? Is it negotiable? If not, why not?
A2. On a sheet of paper, Elle writes, without her signature, “I acknowledge that I owe
Frank $600, payable out of the proceeds of the sale of my car, a 1995 Honda Civic,
which I promise to advertise ‘For Sale’ next week. Payment is to be made on or before
six months from today.” What type of instrument is this? Is it negotiable? If not, why
not?
