325
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
A1. A cashier’s check is an instrument in which a bank draws a check on itself.
A2. A certified checks is an instrument that has been accepted for payment by the bank
on which it is drawn.
A3. A creditor-debtor relationship can exist between a bank and its customer.
326 TEST BANK A—UNIT FIVE: NEGOTIABLE INSTRUMENTS
A4. A drawer is liable to the holder of a check if the check is not honored.
A5. Any failure of a bank to honor a check because it would create an overdraft is a
wrongful dishonor.
A6. The death of a customer immediately revokes a bank’s authority to pay an item.
A7. A check that is presented for payment more than one month from its date is a stale
check.
A8. Only a customer or a person authorized to draw on an account can order a bank not
to pay a check when it is presented for payment.
A9. When a bank pays a check on which the drawer’s signature is forged, generally the
customer suffers the loss.
A10. A customer can escape liability for failing to notify the bank of forged or altered
checks when the customer can prove that the bank was negligent.
A11. A bank that pays a customer’s check bearing a forged indorsement is not obligated to
recredit the customer’s account.
CHAPTER 27: CHECKS AND BANKING IN THE DIGITAL AGE 327
A12. If a bank fails to detect an alteration on a customer’s check, it is liable to its customer
for the loss.
A13. Any local check deposited must be available for withdrawal by check or as cash within
one business day from the date of deposit.
A14. The first bank to receive a check for payment is the intermediary bank.
A15. Each bank in a collection chain must pass a check on before midnight of the next
business day following its receipt.
A16. A bank that encodes information on an item after the item has been issued warrants
to any subsequent bank that the encoded information is correct.
A17. Bank customers cannot demand that their original canceled checks be returned with
their monthly statement.
A18. The maximum time that a bank can hold funds from deposited checks before making
them available to the depositor will not change.
328 TEST BANK A—UNIT FIVE: NEGOTIABLE INSTRUMENTS
A19. A customer has two days to discover and notify the bank of any error on the monthly
statement involving an electronic transfer of funds.
A20. No financial institution can disclose nonpublic personal information about a consumer
to an unaffiliated third party under any circumstances.
MULTIPLE CHOICE QUESTIONS
A1. Rikki signs a check “pay to the order of Scholar University” drawn on Rikki’s account in
State Bank to pay her tuition. Rikki is
a. the certifier.
b. the drawee.
c. the drawer.
d. the payee.
A2. Elmo pays First National Bank $1,000 plus a service fee to draw a check on 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.
CHAPTER 27: CHECKS AND BANKING IN THE DIGITAL AGE 329
A3. Scott presents an instrument that states “pay to the order of Scott” to Town Bank for
payment. This instrument is the most common type of negotiable instrument, which is
a. a certificate of deposit.
b. a check.
c. a note.
d. a trade acceptance.
A4. First Community Bank agrees to accept a check by setting aside sufficient funds to
cover the amount. This check is considered
a. cashed.
b. certified.
c. deposited.
d. provisionally credited.
A5. Kareem writes a check for $1,000 drawn on Liberty Bank and presents it to Maris.
Maris presents the check for payment to Liberty Bank, which dishonors it. The party
most likely liable to Maris is
a. Kareem in a civil suit.
b. Kareem in a criminal prosecution.
c. Liberty Bank in an administrative proceeding.
d. the Federal Reserve.
330 TEST BANK A—UNIT FIVE: NEGOTIABLE INSTRUMENTS
A6. Thelma signs a check “pay to the order of Uri” drawn on Thelma’s account in Verity
Bank. Thelma has $400 in her account but the amount of 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.
A7. Liu signs a check “pay to the order of Marv” drawn on Liu’s account in National Bank.
Liu later orders National not to pay the check, but the bank pays it over Liu’s order.
Subsequent checks written on Liu’s account “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.
A8. Darwin signs a check “pay to the order of Eva Marie” drawn on Darwin’s account in
First Funds Bank and dates the check “April 1.” Eva Marie presents the check to the
bank for payment on November 12. This is
a. a stop-payment order.
b. an overdraft.
c. a postdated check.
d. a stale check.
CHAPTER 27: CHECKS AND BANKING IN THE DIGITAL AGE 331
A9. Shakira issues a check drawn on Thrifty Bank to United Office Supply to pay for six
computer desks. Later, Shakira discovers defects in the goods and orders Thrifty to
stop payment on the check. Shakira does not renew the order, and the bank clears the
check eight months later. The bank
a. must recredit Shakira’s account.
b. must obtain funds from United to cover the amount of the check.
c. must substitute acceptable goods.
d. need not recredit Shakira’s account.
A10. Johnny writes a check to Katie as payment for a 3D DVD player but soon discovers the
player is broken. He goes to the drawee bank and orally authorizes Sissy, a bank
officer, to stop payment on the check. This order is valid 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 of Brandy” drawn on
Caleb’s account in Delphi Bank. Caleb’s forged signature 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.
332 TEST BANK A—UNIT FIVE: NEGOTIABLE INSTRUMENTS
A12. Elmer can write checks on his account at Finance City Bank. Gina steals the checks,
forges Elmer’s signature, and cashes the checks at Finance City. The bank is excused
from any liability if, after receipt of the first forged check, Elmer fails to report the
forgeries within
a. five days.
b. fourteen days.
c. one year.
d. three years.
A13. Drew signs a check “pay to the order of Eppie” drawn on Drew’s account in Fidelity
Bank. Greta forges Eppie’s indorsement. Fidelity pays the check. Most likely
a. Drew will be liable for the amount.
b. Eppie will have to pay Drew for the amount.
c. Fidelity will have to recredit Drew’s account.
d. the Federal Reserve will reimburse all parties for their costs.
A14. Roald writes a check for $700 to Savannah. Savannah indorses the check in blank and
transfers it to Twitchell, who alters the check to read $7,000 and presents it to Union
Bank, the drawee, for payment. The bank cashes it. Roald discovers the alteration and
files a suit against the bank. Roald can recover
a. $7,000.
b. $6,300.
c. $700.
d. 0.
CHAPTER 27: CHECKS AND BANKING IN THE DIGITAL AGE 333
A15. On Monday morning, Bob deposits into his account at County Bank a $500 check from
Dyna, who also has an account at County Bank. On that same day, this check is
considered
a. cashiered.
b. certified.
c. paid.
d. provisionally credited.
A16. Smith & Jones Associates is a business customer of Superior Bank. Under federal law, Smith &
Jones cannot demand
a. any proof of payment except Superior’s good faith.
b. monthly statements.
c. recrediting of its account on payment of a forged item.
d. the return of its original checks with its monthly statements.
Fact Pattern 27–1A (Questions A17 and A18 apply)
Mike loses his National Bank access card. He realizes his loss the next day but waits a week to
call National. Meanwhile, Opal finds and uses Mike’s card to withdraw $3,000 from Mike’s
account.
A17. Refer to Fact Pattern 27-1A. Mike is responsible for
a. $0.
b. $50.
c. $500.
d. $3,000.
334 TEST BANK A—UNIT FIVE: NEGOTIABLE INSTRUMENTS
A18. Refer to Fact Pattern 27-1A. When Mike receives his National statement, he demands
that the bank investigate the matter and recredit his account. 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 is resolved).
c. must investigate and immediately recredit Mike’s account (at least until the
dispute is resolved).
d. must investigate but need not recredit Mike’s account.
A19. Paris knowingly divulges to Media Exposure magazine information about Randy’s e–
money payments to City Bank without the consent of Randy or City Bank. Paris may be
in violation of federal law
a. if the e-payments were in transmission at the time.
b. if the e-payments have not yet been made.
c. if the e-payments are not represented by paper checks.
d. under none of these circumstances.
A20. eBank, an online financial institution, gives financial information about Frieda and
other customers to a federal agency. eBank may be in violation of federal law
a. if the agency did not have a warrant.
b. if the institution is not deemed to be a bank.
c. if the institution did not issue its customers credit or debit cards.
d. under none of these circumstances.
ESSAY QUESTIONS
A1. Hoppy steals two checks from Eagle Retail Stores, Inc.: a blank check and a check
payable to the order of General Supplies Company (GSC), drawn on Eagle’s account
with First National Bank. Hoppy forges Eagle’s signature on the blank check and makes
it payable to himself. Hoppy forges GSC’s indorsement on the back of the check
CHAPTER 27: CHECKS AND BANKING IN THE DIGITAL AGE 335
payable to GSC, and adds “Pay to the order of Hoppy.” At Friendly Credit, Inc., Hoppy
indorses the back of both checks with his own name and gives them to Friendly for
cash. Friendly does not know about the theft or the forged signatures and presents
the checks to First National, which pays them. Eagle, which was not negligent,
discovers the forgeries and asks First National to recredit its account. Who suffers the
loss on each check?
A2. City Bank mistakenly transfers $1,000 from the account of Donna, its customer, to the
account of Earl in First Federal Bank. The transfer is done electronically. When City
Bank learns of the mistake, it credits Donna’s account and asks First Federal to
“return” $1,000. First Federal refuses. City Bank files a suit against First Federal,
claiming that it is in violation of the Electronic Fund Transfer Act. How might the court
rule?
336 TEST BANK A—UNIT FIVE: NEGOTIABLE INSTRUMENTS