Chapter 27
Checks and Banking
in the Digital Age
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
B1. UCC Articles 3 and 4 govern issues relating to checks.
B2. A check is a special type of draft.
B3. A bank that has certified a check is under no obligation to accept it.
B4. Whenever a bank-customer relationship is established, certain contractual rights and
duties arise.
B5. When a bank properly dishonors a check for insufficient funds, it has no liability to the
customer.
B6. A bank may charge a postdated check against a customer’s account.
B7. A bank has no right to charge a customer’s account for the amount of a stale check.
B8. The incompetence of a customer immediately revokes a bank’s authority to pay an
item.
B9. A bank is not obligated to pay an uncertified check presented more than six months
from its date.
B10. A customer has a right to stop payment on a check that has been certified.
B11. A drawer must have a valid legal ground for issuing a stop-payment order, or the
holder can sue the drawer for payment.
B12. A forged signature on a check has no legal effect as the signature of a drawer.
B13. When a customer’s negligence contributes to a forgery, the bank normally is obligated
to recredit the customer’s account for the amount of the check.
B14. Any local check deposited must be available for withdrawal by check or as cash within
not more than five business days from the date of deposit.
B15. The bank on which a check is drawn is the depositary bank.
B16. No one can refuse to accept a substitute check as proof of payment.
B17. Under Check 21, the maximum time that a bank can hold funds from deposited checks
before making them available to the depositor will increase.
B18. If a customer’s debit card is lost or stolen and used without permission, the customer
shall be required to pay no more than $50 in any event.
B19. Gaining unauthorized access to an electronic fund transfer system constitutes a
federal felony.
B20. At the present time, it is not clear which, if any, laws apply to the security of e-money
issuers’ financial records.
MULTIPLE CHOICE QUESTIONS
B1. Kirk presents an instrument that states “pay to the order of Liv” to Metro Bank for
payment. This is a special type of draft drawn on a bank, ordering the bank to pay a
fixed amount of money on demand. This is
a. a certificate of deposit.
b. a check.
c. a debit card transaction receipt.
d. a trade acceptance.
B2. Brendan signs a check “pay to the order of City College Bookstore” drawn on his
account in Delmar Bank to pay for his current semester’s textbooks. The bookstore
deposits the check in its account in Evergreen Bank. Like most checks, this check is
a. a one-party instrument.
b. a four-party instrument.
c. a three-party instrument.
d. a two-party instrument.
B3. Ian buys a cell phone in Jiffy Mart, using the means that accounts for more retail
payments than any other. This means of payment is
a. a commercial check.
b. a debit card.
c. a personal check.
d. a trade acceptance.
B4. Jen signs a check “pay to the order of Key” drawn on Jen’s account in Lakeland Bank to
buy Key’s car. Jen asks Lakeland Bank to indicate on the face of the check that it will
accept it when Key presents it for payment. If the bank agrees, this will be
a. a cashier’s check.
b. a certified check.
c. a trade acceptance.
d. a traveler’s check.
B5. Pippi, the manager of Quik Mart, deposits the store’s receipts in its account at
Regional Bank. As to the receipts, the relationship between Quik Mart and the bank is
a. attorney and client.
b. creditor and debtor.
c. guardian and ward.
d. trustee and beneficiary.
B6. Daisy writes a check to Elvita on her account at First Savings Bank. The bank dishonors
the check even though Daisy has sufficient funds in her account. The bank is
a. liable to Daisy.
b. liable to itself.
c. liable to the next payee on one of Daisy’s checks.
d. not liable.
B7. Daria writes a check for $100 drawn on Estimable Bank and presents it to Fast Cash,
Inc., for payment. If the check is not backed by sufficient funds, Daria may be
prosecuted for
a. forgery.
b. fraud.
c. negligence.
d. nothing.
Fact Pattern 27-1B (Questions B8 and B9 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-It did not repair the car properly,
issues a stop-payment order.
B8. Refer to Fact Pattern 27-1B. If 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.
B9. Refer to Fact Pattern 27-1B. 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.
B10. Steve steals one of Tricia’s checks and forges her signature. Tricia’s bank, Unity Bank,
pays the check. Tricia can recover from
a. Steve, but not Unity Bank.
b. Unity Bank, which cannot recover from Steve.
c. Unity Bank, which can recover from Steve.
d. no one.
B11. Taki forges Uriel’s signature on a check “payable to the order of Taki” drawn on Uriel’s
account in Verity Bank. Most likely, if the bank pays the check
a. the Federal Reserve will reimburse all parties for their costs.
b. the loss will be covered by Verity’s insurance policy.
c. Uriel will be liable for the amount.
d. Verity will have to recredit Uriel’s account.
B12. Clay issues a check payable to Discount Mart. Ernestina, Discount’s cashier, forges the
store’s indorsement and deposits the check in her bank account. Clay’s bank, First
Friendly Bank, pays the check. Clay can recover from
a. Ernestina, who can recover from First Friendly Bank.
b. First Friendly Bank, which cannot recover from Ernestina.
c. First Friendly Bank, which can recover from Ernestina.
d. no one.
B13. Sullivan signs a check “pay to the order of Tilly” drawn on Sullivan’s account in
Universal Bank. Velma forges Tilly’s indorsement, Washington Bank cashes the check.
Velma disappears. Universal pays Washington and debits Sullivan’s account. Most
likely, the ultimate loss will fall on
a. Sullivan.
b. Tilly.
c. Universal Bank.
d. Washington Bank.
B14. On Monday, Eve deposits in her account at First State Bank a local check for $500.
After 5:00 P.M. on Friday, from these funds, Eve can withdraw no more than
a. $100.
b. $400.
c. $500.
d. $600.
Fact Pattern 27-2B (Questions B15–B17 apply)
Thom draws a check, on his account in State Bank in New York, payable to Digital Computers,
Inc., in San Francisco. Digital deposits the check in its account at First National Bank. First
National deposits the check in the Federal Reserve Bank of San Francisco, which transfers it to
the Federal Reserve Bank of New York. That Federal Reserve Bank sends the check to State
Bank.
B15. Refer to Fact Pattern 27-2B. Digital’s bank is
a. the cashing bank.
b. the depositary bank.
c. the intermediary bank.
d. the payor bank.
B16. Refer to Fact Pattern 27-2B. Thom’s bank is
a. the cashing bank.
b. the depositary bank.
c. the intermediary bank.
d. the payor bank.
B17. Refer to Fact Pattern 27-2B. When Digital’s bank received the check, it was required to
pass it on
a. before midnight of the next banking day.
b. before midnight of the next day, whether or not it was a “banking” day.
c. before noon of the next banking day.
d. within five business days.
B18. Cornucopia Bank receives a check drawn on the account of Get-Rich Industries, Inc.,
one of the bank’s customers, at 3 P.M. Friday. Harry, the presenter of the check, is not
one of the bank’s customers. The bank uses deferred posting with a 2 P.M. cutoff hour.
If it decides to dishonor the check, it must do so by midnight
a. Saturday.
b. Sunday.
c. Monday.
d. Tuesday.
B19. Delilah’s debit card, issued by Encarta Bank, is stolen and used without Delilah’s
permission. Delilah tells the bank within thirty days. Delilah may be required to pay no
more than
a. $5.
b. $50.
c. $500.
d. $5,000.
B20. London knowingly divulges to BreakingNews.com information about Neandro’s e-money
payments to Oracle Oil Corporation without the consent of Neandro or Oracle. London may
be in violation of federal law
a. if the e-payments were in electronic storage at the time.
b. if the e-payments were legitimate.
c. if the e-payments are not represented by physical evidence.
d. under none of these circumstances.
ESSAY QUESTIONS
B1. Joy steals a check from Kyle, forges his signature, and transfers the check to Loco
Loans, Inc., for value. Unaware that the signature is not Kyle’s, Loco Loans presents
the check to Metro Bank, the drawee, which cashes the check. Kyle discovers the
forgery and insists that Metro recredit his account. Can Metro refuse? If not, from
whom can the bank recover?
B2. Tiny authorizes United Bank to make transfers from his account to make payments on
his debt to Vic’s Auto Dealership, which sold Tiny the car that serves as collateral for
the debt. After three payments, Vic’s repossesses the car and refuses to return it. Tiny
phones the bank to stop the payments and follows up with a confirming letter. The
bank fails to stop the next two payments, and Vic’s refuses to refund anything. Can
Tiny get his money from the bank? Explain.