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1
Chapter 32
Agency Formation and Duties
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. A familiar example of an agent is the owner of a corporation.
B2. Agency relationships do not permeate the business world.
B3. The term fiduciary is at the heart of agency law.
B4. Through agents, a principal can conduct only one business operation at a time.
B5. If work is usually done under the employer’s direction, this indicates
independent-contractor status.
2 TEST BANK B—UNIT SEVEN: AGENCY AND EMPLOYMENT
B6. If a great degree of skill is required, this may indicate that a person is an
employee hired for a specialized job and not an independent contractor.
B7. Whether a worker is an employee or an independent contractor has no effect
on the employer’s liability for the worker’s actions.
B8. Employers can avoid certain tax liabilities by hiring independent contractors
instead of employees.
B9. Any copyrighted work created by an employee within the scope of his or her
employment at the request of the employer is a “work for hire.”
B10. An agency agreement can be implied by conduct.
B11. An agency relationship created for a purpose that is contrary to public policy
may still be enforceable.
B12. A person must have contractual capacity to be an agent.
CHAPTER 32: AGENCY FORMATION AND DUTIES 3
B13. Ratification involves a question of intent, and intent can be expressed only by
words.
B14. An agency by estoppel arises when the principal’s actins have created the
appearance of an agency that does not in fact exist.
BUSPROG: Analytic AICPA: BB-Legal
B15. Generally, the law assumes that the principal is aware of any information
acquired by the agent that is relevant to the agency.
B16. An agent can represent two principals in the same transaction as long as
neither of them knows about it.
B17. Even during emergency situations, when the principal cannot be consulted, the
agent may not deviate from the principal’s instructions without violating the duty
of obedience.
B18. A principal has a duty to cooperate with the agent and to assist the agent in
performing his or he duties.
B19. The agent has the right to be compensated, to be reimbursed and indemnified,
and to have a safe working environment.
4 TEST BANK B—UNIT SEVEN: AGENCY AND EMPLOYMENT
B20. Anything that an agent obtains by virtue of the employment or agency
relationship is his or hers to keep.
MULTIPLE CHOICE QUESTIONS
B1. Jewelry & Coin Company hires Kelly Ann to buy gems and precious metals
from various sources on its behalf. In this relationship, Jewelry & Coin is
a. an employee.
b. an independent contractor.
c. a principal.
d. an agent.
B2. California Produce Company hires Drew to work on California Produce’s
shipping dock, checking outgoing loads and dispatching the company’s drivers.
With respect to California Produce, Drew is most likely
a. an agent.
b. an independent contractor.
c. a principal.
d. a work for hire.
B3. Elaine owns the Fabric & Yarn store. Goldie is a salesperson in the store.
When Goldie makes a sale to Heather, the sale is binding on
a. Elaine.
b. Goldie.
c. Fabric & Yarn only—and only if Elaine is present at the sale.
d. no one.
Fact Pattern 32-1B (Questions B4-B6 apply)
CHAPTER 32: AGENCY FORMATION AND DUTIES 5
Margo works as an administrator and receptionist in Neon’s Garage Door Store. Neon
withholds federal taxes from Margo’s pay, and controls the methods and details of the
performance of her work. Margo is not authorized to modify the prices or other terms
of a sale at the store. Omar installs Neon’s Garage Door products at the buyers’
locations.
B4. Refer to Fact Pattern 32-1B. Neon authorizes Omar to sell garage door
upgrades and accessories at the buyers’ locations at prices that Omar
negotiates with those buyers. With respect to sales at those locations, Omar is
a. an independent contractor.
b. Neon’s employee only.
c. Neon’s employee and agent.
d. Neon’s principal.
B5. Refer to Fact Pattern 32-1B. At the shop, Margo is
a. an independent contractor.
b. Neon’s employee only.
c. Neon’s employee and agent.
d. Neon’s principal.
B6. Refer to Fact Pattern 32-1B. Neon hires Professional Janitorial Company to
clean the store. Neon gives Professional Janitorial instructions as to what
needs to be cleaned and when. Professional Janitorial is
a. an independent contractor.
b. Neon’s employee only.
c. Neon’s employee and agent.
d. Neon’s principal.
B7. Donato is Equipment Repair Service Company’s chief executive officer. On
Equipment Repair’s behalf, Donato solicits business, hires and fires workers,
and handles finances. Equipment Repair pays Donato varying amounts,
depending on his “needs.” Donato is most likely
6 TEST BANK B—UNIT SEVEN: AGENCY AND EMPLOYMENT
a. a principal.
b. an employee.
c. an employer.
d. an independent contractor.
B8. Sybil agrees with Tyrone and other professional athletes to sign contracts with
promoters and others on the athletes’ behalf. Sybil is
a. an agent.
b. an employee.
c. an employer.
d. a principal.
B9. Rosario is a chef and caterer who hires out on a per-project basis to companies
with on-location work sites, as well as to hosts of banquets, corporate
meetings, concerts, weddings, and other events. In this capacity, Rosario is
a. an agent.
b. an employee.
c. an independent contractor.
d. a principal.
B10. Ingmar asks Jessie to contract with Jessie’s high school classmates to babysit
Ingmar’s new baby. Jessie orally agrees to do so. This is
a. an agency by agreement.
b. an agency by estoppel.
c. an agency by ratification.
d. not an agency relationship.
CHAPTER 32: AGENCY FORMATION AND DUTIES 7
B11. Lucille is married to Marcus. Lucille buys food for their children’s lunches and
charges the cost to Marcus’s account. This is
a. an agency by operation of law.
b. an agency by estoppel.
c. an agency by ratification.
d. not an agency relationship.
B12. Rondi holds herself out as possessing special accounting skills. As an agent,
she must exercise the degree of skill or care expected of
a. a person having those skills.
b. an average, unskilled person.
c. a reasonable person.
d. the principal.
B13. Bernard is an expert on exotic flowers. Custom Floral Arrangements, Inc., hires
Bernard to order exotic flowers for its arrangements. Bernard does not examine
the quality of the flowers he orders on behalf of Custom Floral. Bernard has
breached
a. the duty of performance.
b. the duty of loyalty.
c. no duty.
d. the duty of notification.
B14. Lorena is appointed as an agent for Milled Grains, Inc. The agency agreement
is silent as to the level of sales that Lorena is expected to achieve. She must
a. achieve nothing because the agreement says nothing on the issue.
b. attain the level that Lorena achieved with her previous employer.
c. maintain the level Milled Grains attained before Lorena became an
agent.
d. use reasonable diligence and skill in selling.
8 TEST BANK B—UNIT SEVEN: AGENCY AND EMPLOYMENT
B15. Home Enterprises employs Itzak to buy property for a possible residential
development. Itzak secretly buys some of the property and sells it to Home
Enterprises at a profit. Itzak has breached
a. no duty.
b. the duty of accounting.
c. the duty of loyalty.
d. the duty of notification.
B16. Investment Holdings Corporation hires Jerilyn, a business appraiser, to locate
investment possibilities for Investment Holdings. Jerilyn learns of a salsa and
hot sauce manufacturing company available for a reasonable price, but
neglects to tell Investment Holdings. Most likely, Jerilyn
a. breached the agent’s fiduciary duties to the principal.
b. did nothing wrong.
c. failed to take advantage of a business opportunity.
d. assumed that the information was confidential.
B17. Largo is an agent for MaryElise. MaryElise gives Largo clear instructions to
enter into contracts on her behalf only on Mondays, Wednesdays, or Fridays.
Largo enters into a contract on her behalf on Tuesday. Largo has breached
a. the duty of performance.
b. the duty of loyalty.
c. no duty.
d. the duty of obedience.
B18. Bailey is an agent for Culinary Delites Company. In the course of Bailey’s
performance for Culinary Delites, she pays Drivers’ Repair Service for certain
vehicle maintenance and repair work. Bailey’s right to obtain the amount of the
payments from Culinary Delites arises under the principal’s duty of
CHAPTER 32: AGENCY FORMATION AND DUTIES 9
a. avoidance.
b. cooperation.
c. indemnification.
d. reimbursement.
B19. Global Games Corporation employs Hyacinth as an agent. Global Games gives
her an exclusive territory in which to sell its products. Global Games cannot
compete with her in that territory under the duty of
a. compensation.
b. cooperation.
c. indemnification.
d. reimbursement.
B20. Insurance Sales Corporation hires Jeremy to act as its agent. Insurance
Sales’s right not to perform a contract entered into by Jeremy, if he breaches
their agency agreement, is the right of
a. avoidance.
b. indemnification.
c. nullification.
d. termination.
ESSAY QUESTIONS
B1. Build-It Construction Company contracts with Classic Beverage Corporation to
build Classic Beverage’s corporate headquarters. Build-It Construction
contracts with Dependable Tools & Materials Inc. for construction supplies but
refuses to pick up the order. Meanwhile, Classic Beverage hires Elmo, a
certified public accountant, to work in its cost-accounting division as an
employee, with no authority to hire or supervise others. Elmo asks Fayette, an
outside experienced accountant, to advise him on certain accounting
procedures but fails to pay Fayette for the service. Classic Beverage also
10 TEST BANK B—UNIT SEVEN: AGENCY AND EMPLOYMENT
contracts with Gloria, a salesperson, to solicit orders for its products in a
designated territory. Gloria obtains an order from Highpoint Concessions, Inc.,
which is assured the order will be filled soon. But Gloria does not follow through
with the paperwork and fails to submit the order to Classic Beverage. Highpoint
Concessions suffers a loss. Dependable Tools, Fayette, and Highpoint
Concessions claim Classic Beverage is liable under agency law. Discuss fully
whether an agency relationship was created by Classic Beverage with Build-It
Construction, Elmo, or Gloria.
B2. Yoshi contracts with Zach to buy a certain pub, Aficionado’s, for Yoshi, who
asks Zach not to reveal her identity. Zach makes a deal with Burcet, the owner
of the pub, and makes a down payment. Yoshi fails to pay the rest of the price,
and does not pay Zach for his services. Does Zach have any recourse against
Yoshi? If so, on what basis and to what extent?
CHAPTER 32: AGENCY FORMATION AND DUTIES 11
