Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
CPA PassMaster Questions–Regulation 6
Export Date: 10/30/08
1
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
Commercial Paper
CPA-01068
Type1 M/C
1. CPA-01068 Lw R03 #11
A-D
Corr Ans: A
PM#1
R 6-01
Page 15
Under the Negotiable Instruments Article of the UCC, which of the endorser's liabilities are disclaimed by
a "without recourse" endorsement?
a.
b.
c.
d.
Contract liability only.
Warranty liability only.
Both contract and warranty liability.
Neither contract nor warranty liability.
CPA-01068
Explanation
Choice "a" is correct. Endorsing a negotiable instrument without recourse negates contract liability but
not warranty liability.
Choices "b", "c", and "d" are incorrect. Each of these choices incorrectly addresses warranty and/or
contract liability.
CPA-01074
Type1 M/C
2. CPA-01074 Lw R03 #12
A-D
Corr Ans: A
PM#2
R 6-01
Page 8
Under the Negotiable Instruments Article of the UCC, which of the following provisions satisfies the
requirement that an instrument, to be negotiable, must be payable at a definite time?
a.
b.
c.
d.
The instrument is dated and payable "15 days after sight."
The instrument is dated and payable "in six months but the payor may extend this period indefinitely."
The instrument is undated and payable "30 days after date."
The instrument is undated and payable "when the payee dies."
CPA-01074
Explanation
Choice "a" is correct. An instrument is payable at a definite time if it can be established from the face of
the instrument when the obligation will become due. An obligation payable 15 days after sight is payable
15 days after it is presented for payment.
Choice "b" is incorrect. Although six months is a definite time, the option of the payor to extend
indefinitely the time for payment destroys negotiability.
Choice "c" is incorrect. If an instrument is not dated, we cannot know when 30 days after date is.
Therefore, this is not payable at a definite time.
Choice "d" is incorrect. Although the payee will die some day, we do not know when, so the date of
payment is not definite.
CPA-01078
Type1 M/C
3. CPA-01078 Lw R02 #17
A-D
Corr Ans: C
PM#3
R 6-01
Page 15
Under the Negotiable Instruments Article of the UCC, an endorsement of an instrument "for deposit only"
is an example of what type of endorsement?
a.
b.
c.
d.
Blank.
Qualified.
Restrictive.
Special.
CPA-01078
Explanation
Choice "c" is correct. The words "for deposit only" restrict further negotiation of the instrument and so are
an example of a restrictive endorsement.
2
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
Choice "a" is incorrect. A blank endorsement is a signature alone without additional words.
Choice "b" is incorrect. A qualified endorsement is one that includes the words "without recourse" and so
eliminates the endorser's contract liability on the instrument.
Choice "d" is incorrect. A special endorsement is one that names a new payee.
CPA-01083
Type1 M/C
4. CPA-01083 Lw R99 #14
A-D
Corr Ans: C
PM#5
R 6-01
Page 3
Which of the following instruments is subject to the provisions of the Negotiable Instruments Article of the
UCC?
a.
b.
c.
d.
A bill of lading.
A warehouse receipt.
A certificate of deposit.
An investment security.
CPA-01083
Explanation
Choice "c" is correct. Checks, drafts, promissory notes and certificates of deposits are within the
provisions of the Negotiable Instruments Article of the UCC (Article 3).
Choice "a" is incorrect. A bill of lading is governed by Article 7.
Choice "b" is incorrect. A warehouse receipt is governed by Article 7.
Choice "d" is incorrect. Investment securities (e.g., stocks and bonds) are governed by Article 8.
CPA-01086
Type1 M/C
5. CPA-01086 Lw R96 #8
A-D
Corr Ans: A
PM#6
R 6-01
Page 4
Under the Negotiable Instruments Article of the UCC, when an instrument is endorsed "Pay to John Doe"
and signed "Faye Smith," which of the following statements is (are) correct?
a.
b.
c.
d.
Payment of the
instrument is
guaranteed
Yes
Yes
No
No
The instrument can
be further
negotiated
Yes
No
Yes
No
CPA-01086
Explanation
Choice "a" is correct. The first assertion is true-payment is guaranteed. The instrument here is endorsed.
In essence, an endorser makes a contract of guarantee: if the instrument is presented for payment and is
dishonored, the endorser agrees to pay on the instrument according to its terms when it was endorsed.
The second assertion is also true. When an instrument is endorsed to a specified person, it becomes
order paper, but it still may be negotiated further, as long as the special payee endorses.
Note: Actually, whether or not the instrument may be further negotiated also depends on to whom the
instrument was drawn in the first place, and that information is not provided. If the instrument here was
payable to bearer or to the order of Faye Smith, it may be further negotiated, but if it was payable to the
order of anyone else, it could not be further negotiated without that person's endorsement.
CPA-01100
Type1 M/C
A-D
Corr Ans: A
PM#9
R 6-01
6. CPA-01100 Lw May 95 #43 Page 5
Under the Commercial Paper Article of the UCC, for an instrument to be negotiable it must:
a. Be payable to order or to bearer.
3
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Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
b. Be signed by the payee.
c. Contain references to all agreements between the parties.
d. Contain necessary conditions of payment.
CPA-01100
Explanation
Choice "a" is correct. Any writing to be a negotiable instrument must be payable to order or to bearer. If
the instrument is payable to order, it is negotiated by delivery with any necessary endorsement; if payable
to bearer it is negotiated by delivery. UCC 3-104
Choice "b" is incorrect. Whether an instrument is negotiable is determined by its form when drawn or
made; the subsequent signature of a payee can neither create nor destroy negotiability.
Choice "c" is incorrect. A negotiable instrument need not contain references to any other document.
Choice "d" is incorrect. If an instrument is conditional, it generally cannot be negotiable.
CPA-01104
Type1 M/C
A-D
Corr Ans: D
PM#10
R 6-01
7. CPA-01104 Lw May 95 #44 Page 7
Under the Commercial Paper Article of the UCC, which of the following circumstances would prevent a
promissory note from being negotiable?
a. An extension clause that allows the maker to elect to extend the time for payment to a date specified
in the note.
b. An acceleration clause that allows the holder to move up the maturity date of the note in the event of
default.
c. A person having a power of attorney signs the note on behalf of the maker.
d. A clause that allows the maker to satisfy the note by the performance of services or the payment of
money.
CPA-01104
Explanation
Choice "d" is correct. To be negotiable, a note must be payable in money and only in money. A note that
allows the maker to pay by performing services is not negotiable. UCC 3-104
Choice "a" is incorrect. To be negotiable, an instrument must be payable on demand or at a definite time.
If the latest date for payment can be determined from the face of a demand instrument, it is considered to
be payable at a definite time even if that latest date can be reached only through an extension clause.
UCC 3-109
Choice "b" is incorrect. To be negotiable, an instrument must be payable on demand or at a definite time.
If the latest date for payment can be determined from the face of a demand instrument, it is considered to
be payable at a definite time even if it includes an acceleration clause. UCC 3-109
Choice "c" is incorrect. An agent, such as a person having a power of attorney, can sign a negotiable
instrument on behalf of a principal.
CPA-01108
Type1 M/C
A-D
Corr Ans: C
PM#11
R 6-01
8. CPA-01108 Lw May 95 #45 Page 12
Under the Commercial Paper Article of the UCC, which of the following requirements must be met for a
transferee of order paper to become a holder?
I. Possession.
II. Endorsement of transferor.
a.
b.
c.
d.
I only.
II only.
Both I and II.
Neither I nor II.
4
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Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
CPA-01108
Explanation
Choice "c" is correct. To be a holder of order paper, one must have all necessary signatures, such as
that of the transferor, and possession of the instrument must have been transferred. UCC 3-201
Choice "a" is incorrect. To have the status of a holder, one must also have the signatures of all
necessary parties, such as that of the transferor.
Choice "b" is incorrect. To have the status of a holder, the instrument must have been transferred to the
possession of the holder.
Choice "d" is incorrect. To be a holder of order paper, one must have all necessary signatures, such as
that of the transferor, and possession of the instrument must have been transferred.
CPA-01114
Type1 M/C
A-D
Corr Ans: B
PM#12
R 6-01
9. CPA-01114 Lw May 95 #46 Page 17
Under the Commercial Paper Article of the UCC, which of the following requirements must be met for a
person to be a holder in due course of a promissory note?
a.
b.
c.
d.
The note must be payable to bearer.
The note must be negotiable.
All prior holders must have been holders in due course.
The holder must be the payee of the note.
CPA-01114
Explanation
Choice "b" is correct. One may be an HDC only of a negotiable instrument. UCC 3-302
Choice "a" is incorrect. One can be an HDC on a negotiable note payable to order; it need not be
payable to bearer.
Choice "c" is incorrect. One will be an HDC if he is a holder who takes the instrument for value, in good
faith, and without notice that the instrument is overdue or has been dishonored or of any defenses on or
claims to the instrument. There is no requirement that all prior holders be HDCs. UCC 3-302
Choice "d" is incorrect. Transferees can be HDCs. The status is not limited to the payee of the note.
Indeed, the payee generally cannot be an HDC.
CPA-01120
Type1 M/C
A-D
Corr Ans: B
PM#14
R 6-01
10. CPA-01120 Lw May 95 #48 Page 22
Under the Commercial Paper Article of the UCC, which of the following statements best describes the
effect of a person endorsing a check "without recourse?"
a.
b.
c.
d.
The person has no liability to prior endorsers.
The person makes no promise or guarantee of payment on dishonor.
The person gives no warranty protection to later transferees.
The person converts the check into order paper.
CPA-01120
Explanation
Choice "b" is correct. Signing without recourse negates contract liability on the instrument. Contract
liability is the promise to pay upon dishonor. UCC 3-414
Choice "a" is incorrect. An endorser is liable to subsequent parties on an instrument; not to prior parties,
and this is true no matter how the endorser signs.
Choice "c" is incorrect. Signing without recourse negates contract liability on the instrument. Warranty
liability (e.g., all signatures are genuine, the instrument has not been materially altered, etc.) is not
negated.
5
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Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
Choice "d" is incorrect. A person does not automatically convert a check to order paper by endorsing it
"without recourse." A special endorsement (i.e., one naming a new payee) can convert bearer paper to
order paper.
CPA-01129
Type1 M/C
A-D
Corr Ans: C
PM#16
R 6-01
11. CPA-01129 Lw May 95 #50 Page 25
Pay to Ann Tyler
Paul Tyler
Ann Tyler
Mary Thomas
Betty Ash
Pay George Green Only
Susan Town
Susan Town, on receiving the above instrument, struck Betty Ash's endorsement. Under the Commercial
Paper Article of the UCC, which of the endorsers of the above instrument will be completely discharged
from secondary liability to later endorsers of the instrument?
a.
b.
c.
d.
Ann Tyler
Mary Thomas
Betty Ash
Susan Town
CPA-01129
Explanation
Choice "c" is correct. Striking a prior endorser discharges the endorser's liability to all persons who take
the instrument after the signature is stricken. UCC 3-601
Choice "a" is incorrect. Striking a prior endorser discharges the endorser's liability to all persons who take
the instrument after the signature is stricken. It has no effect on a prior endorser's liability because
liability goes up the chain of title. UCC 3-601
Choice "b" is incorrect. Striking a prior endorser discharges the endorser's liability to all persons who take
the instrument after the signature is stricken. It has no effect on a prior endorser's liability because
liability goes up the chain of title. UCC 3-601
Choice "d" is incorrect. Striking a prior endorser discharges the endorser's liability to all persons who take
the instrument after the signature is stricken. It has no effect on a subsequent endorser's own liability.
CPA-01132
Type1 M/C
A-D
Corr Ans: A
PM#17
R 6-01
12. CPA-01132 Lw May 93 #36 Page 3
On February 15, 1993, P.D. Stone obtained the following instrument from Astor Co. for $1,000. Stone
was aware that Helco, Inc. disputed liability under the instrument because of an alleged breach by Astor
of the referenced computer purchase agreement. On March 1, 1993, Willard Bank obtained the
instrument from Stone for $3,900. Willard had no knowledge that Helco disputed liability under the
instrument.
February 12, 1993
6
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
Helco, Inc. promises to pay to Astor Co. or bearer
the sum of $4,900 (four thousand nine hundred and
00/100 dollars) on March 12, 1993 (maker may elect
to extend due date to March 31, 1993) with interest
thereon at the rate of 12% per annum.
HELCO, INC.
By:
A.J. Help
A.J. Help, President
Reference: Computer purchase agreement dated
February 12, 1993
The reverse side of the instrument is endorsed as follows:
Pay to the order of Willard
Bank, without recourse
P.D. Stone
P.D. Stone
The instrument is a:
a.
b.
c.
d.
Promissory note.
Sight draft.
Check.
Trade acceptance.
CPA-01132
Explanation
Choice "a" is correct. The instrument is two-party paper since it merely contains a promise to pay.
Promissory note is the only two-party paper choice mentioned.
Choice "b" is incorrect. A draft is three-party paper since it contains an order to pay rather than a promise
to pay. This instrument contains a promise to pay, so it cannot be a draft.
Choice "c" is incorrect. A check is three-party paper drawn on a bank. It contains an order to pay rather
than a promise to pay. This instrument contains a promise to pay, so it is not three-party paper.
Choice "d" is incorrect. A trade acceptance is three-party paper since it contains an order to a third party
to pay rather than a promise to pay. This instrument contains a promise rather than an order, so it cannot
be three-party paper.
CPA-01136
Type1 M/C
A-D
Corr Ans: C
PM#18
R 6-01
13. CPA-01136 Lw May 93 #37 Page 9
On February 15, 1993, P.D. Stone obtained the following instrument from Astor Co. for $1,000. Stone
was aware that Helco, Inc. disputed liability under the instrument because of an alleged breach by Astor
of the referenced computer purchase agreement. On March 1, 1993, Willard Bank obtained the
instrument from Stone for $3,900. Willard had no knowledge that Helco disputed liability under the
instrument.
February 12, 1993
Helco, Inc. promises to pay to Astor Co. or bearer
the sum of $4,900 (four thousand nine hundred and
00/100 dollars) on March 12, 1993 (maker may elect
to extend due date to March 31, 1993) with interest
7
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
thereon at the rate of 12% per annum.
HELCO, INC.
By:
A.J. Help
A.J. Help, President
Reference: Computer purchase agreement dated
February 12, 1993
The reverse side of the instrument is endorsed as follows:
Pay to the order of Willard
Bank, without recourse
P.D. Stone
P.D. Stone
The instrument is:
a.
b.
c.
d.
Nonnegotiable, because of the reference to the computer purchase agreement.
Nonnegotiable, because the numerical amount differs from the written amount.
Negotiable, even though the maker has the right to extend the time for payment.
Negotiable, when held by Astor, but nonnegotiable when held by Willard Bank.
CPA-01136
Explanation
Choice "c" is correct. The fact that the time for payment can be extended does not destroy negotiability
(because of lack of a definite time for payment) as long as the instrument can be extended only to
another definite time. UCC 3-119
Choice "a" is incorrect. Mere reference to the transaction without making the instrument subject to the
transaction does not destroy negotiability. UCC 3-112
Choice "b" is incorrect. When the words conflict with the numbers on a negotiable instrument, the Code
provides that the words will control. Negotiability is not destroyed by the conflict because the instrument
is for the fixed amount stated by the words. UCC 3-118
Choice "d" is incorrect. Negotiability goes to the form of the instrument and not to the identity of the
holder. The instrument does not change form merely because it is in the hands of someone other than
the payee.
CPA-01145
Type1 M/C
A-D
Corr Ans: B
PM#19
R 6-01
14. CPA-01145 Lw May 93 #38 Page 13
On February 15, 1993, P.D. Stone obtained the following instrument from Astor Co. for $1,000. Stone
was aware that Helco, Inc. disputed liability under the instrument because of an alleged breach by Astor
of the referenced computer purchase agreement. On March 1, 1993, Willard Bank obtained the
instrument from Stone for $3,900. Willard had no knowledge that Helco disputed liability under the
instrument.
February 12, 1993
Helco, Inc. promises to pay to Astor Co. or bearer
the sum of $4,900 (four thousand nine hundred and
00/100 dollars) on March 12, 1993 (maker may elect
to extend due date to March 31, 1993) with interest
thereon at the rate of 12% per annum.
8
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
HELCO, INC.
By:
A.J. Help
A.J. Help, President
Reference: Computer purchase agreement dated
February 12, 1993
The reverse side of the instrument is endorsed as follows:
Pay to the order of Willard
Bank, without recourse
P.D. Stone
P.D. Stone
Which of the following statements is correct?
a.
b.
c.
d.
Willard Bank cannot be a holder in due course because Stone's endorsement was without recourse.
Willard Bank must endorse the instrument to negotiate it.
Neither Willard Bank nor Stone are holders in due course.
Stone's endorsement was required for Willard Bank to be a holder in due course.
CPA-01145
Explanation
Choice "b" is correct. Although the note was a bearer instrument when made, the last endorsement
controls what is necessary for further negotiation. When a special endorsee is named, the instrument
must be signed by that endorsee to further negotiate it. Here, Stone named Willard Bank as a special
endorsee by writing on the back of the note that it was payable to Willard Bank. Thus, Willard's signature
is necessary for further negotiation. UCC 3-204
Choice "a" is incorrect. An endorsement without recourse affects the transferee's rights to hold the
endorser liable upon dishonor but it does not affect the transferee's ability to become a holder in due
course. An endorsement without recourse does not serve as notice of a defense that will prevent holder
in due course status. UCC 3-302
Choice "c" is incorrect. Although Stone cannot be a holder in due course because Stone took the
instrument with notice of defenses on the instrument, Willard Bank had no such notice. Willard also
fulfilled the other requirements for HDC status: it was holder since the instrument contains all necessary
signatures and was properly negotiated by Stone delivery, the bank gave value ($3,900), and nothing in
the facts indicates that the bank did not take in good faith. UCC 3-302
Choice "d" is incorrect. Stone's signature was not necessary to negotiate the instrument to Willard Bank.
The note was a bearer instrument in the hands of Astor since it was payable to Astor or bearer. Astor did
not name Stone as a special endorsee and so no signature was necessary to negotiate the instrument.
Delivery alone would have been sufficient. UCC 3-204
CPA-01150
Type1 M/C
A-D
Corr Ans: D
PM#20
R 6-01
15. CPA-01150 Lw May 93 #39 Page 18
On February 15, 1993, P.D. Stone obtained the following instrument from Astor Co. for $1,000. Stone
was aware that Helco, Inc. disputed liability under the instrument because of an alleged breach by Astor
of the referenced computer purchase agreement. On March 1, 1993, Willard Bank obtained the
instrument from Stone for $3,900. Willard had no knowledge that Helco disputed liability under the
instrument.
February 12, 1993
Helco, Inc. promises to pay to Astor Co. or bearer
9
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
the sum of $4,900 (four thousand nine hundred and
00/100 dollars) on March 12, 1993 (maker may elect
to extend due date to March 31, 1993) with interest
thereon at the rate of 12% per annum.
HELCO, INC.
By:
A.J. Help
A.J. Help, President
Reference: Computer purchase agreement dated
February 12, 1993
The reverse side of the instrument is endorsed as follows:
Pay to the order of Willard
Bank, without recourse
P.D. Stone
P.D. Stone
If Willard Bank demands payment from Helco and Helco refuses to pay the instrument because of Astor's
breach of the computer purchase agreement, which of the following statements would be correct?
a. Willard Bank is not a holder in due course because Stone was not a holder in due course.
b. Helco will not be liable to Willard Bank because of Astor's breach.
c. Stone will be the only party liable to Willard Bank because he was aware of the dispute between
Helco and Astor.
d. Helco will be liable to Willard Bank because Willard Bank is a holder in due course.
CPA-01150
Explanation
Choice "d" is correct. Willard Bank is an HDC because it took the note for value, in good faith, and
without notice of any defense. An HDC is not subject to personal defenses and Helco's defense is a
personal defense. UCC 3-204
Choice "a" is incorrect. Although Stone was not an HDC because Stone had knowledge of a defense on
the note, Willard Bank is an HDC because it took the note for value, in good faith, and without notice of
any defense. UCC 3-302
Choice "b" is incorrect. Willard Bank is an HDC because it took the note for value, in good faith, and
without notice of any defense. An HDC is not subject to personal defenses and Helco's defense is a
personal defense. UCC 3-302
Choice "c" is incorrect. Willard Bank is an HDC because it took the note for value, in good faith, and
without notice of any defense. An HDC is not subject to personal defenses and Helco's defense is a
personal defense. Thus, Helco will be liable to Willard Bank. UCC 3-302
CPA-01533
Type1 M/C
A-D
Corr Ans: D
PM#23
R 6-01
16. CPA-01533 Lw May 93 #42 Page 21
Robb, a minor, executed a promissory note payable to bearer and delivered it to Dodsen in payment for a
stereo system. Dodsen negotiated the note for value to Mellon by delivery alone and without
endorsement. Mellon endorsed the note in blank and negotiated it to Bloom for value. Bloom's demand
for payment was refused by Robb because the note was executed when Robb was a minor. Bloom gave
prompt notice of Robb's default to Dodsen and Mellon. None of the holders of the note were aware of
Robb's minority. Which of the following parties will be liable to Bloom?
Dodsen
Mellon
10
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
a.
b.
c.
d.
Yes
Yes
No
No
Yes
No
No
Yes
CPA-01533
Explanation
Choice "d" is correct. Mellon can be held liable, but Bloom cannot hold Dodsen liable on an endorser's
contract because Dodsen did not endorse. Neither could Bloom hold Dodsen liable for breach of any
transfer warranty since such warranties are made only to immediate transferees when one does not
endorse, and Dodsen did not endorse and the immediate transferee was Mellon rather than Bloom. UCC
3-417
CPA-01537
Type1 M/C
A-D
Corr Ans: C
PM#24
R 6-01
17. CPA-01537 Lw May 93 #43 Page 25
Vex Corp. executed a negotiable promissory note payable to Tamp, Inc. The note was collateralized by
some of Vex's business assets. Tamp negotiated the note to Miller for value. Miller endorsed the note in
blank and negotiated it to Bilco for value. Before the note became due, Bilco agreed to release Vex's
collateral. Vex refused to pay Bilco when the note became due. Bilco promptly notified Miller and Tamp
of Vex's default. Which of the following statements is correct?
a.
b.
c.
d.
Bilco will be unable to collect from Miller because Miller's endorsement was in blank.
Bilco will be able to collect from either Tamp or Miller because Bilco was a holder in due course.
Bilco will be unable to collect from either Tamp or Miller because of Bilco's release of the collateral.
Bilco will be able to collect from Tamp because Tamp was the original payee.
CPA-01537
Explanation
Choice "c" is correct. When a person entitled to enforce an instrument impairs the value of collateral
securing the instrument, the obligations of the endorsers are discharged to the extent of the impairment.
The security was completely released so the endorsers will be released from their obligation (assuming
the note was fully collateralized). UCC 3-606
Choice "a" is incorrect. An endorsement in blank does not prevent endorser liability. Rather, the
endorsement must be qualified (i.e., without recourse) to prevent the endorser's contract liability. UCC 3204
Choice "b" is incorrect. When a person entitled to enforce an instrument impairs the value of collateral
securing the instrument, the obligations of the endorsers are discharged to the extent of the impairment.
UCC 3-606
Choice "d" is incorrect. The fact that Tamp was the original payee is irrelevant.
CPA-01541
Type1 M/C
A-D
Corr Ans: B
PM#25
R 6-01
18. CPA-01541 Lw Nov 92 #33 Page 3
Which of the following negotiable instruments is subject to the UCC Commercial Paper Article?
a.
b.
c.
d.
Corporate bearer bond with a maturity date of January 1, 2001.
Installment note payable on the first day of each month.
Warehouse receipt.
Bill of lading payable to order.
CPA-01541
Explanation
Choice "b" is correct. Commercial paper includes drafts and notes. Thus, it covers an installment note
[UCC 3-104].
Choice "a" is incorrect. The commercial paper article specifically excludes investment securities such as
corporate bonds [UCC 3-103(1)], which are covered under Article 8.
11
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
Choice "c" is incorrect. The commercial paper article specifically excludes documents of title [UCC 3103(1)], which includes warehouse receipts governed by Article 7.
Choice "d" is incorrect. The commercial paper article specifically excludes documents of title [UCC 3103(1)], which includes bills of lading governed by Article 7.
CPA-01547
Type1 M/C
A-D
Corr Ans: A
PM#26
R 6-01
19. CPA-01547 Lw Nov 92 #34 Page 8
Which of the following conditions, if present on an otherwise negotiable instrument, would affect the
instrument's negotiability?
a.
b.
c.
d.
The instrument is payable six months after the death of the maker.
The instrument is payable at a definite time subject to an acceleration clause in the event of a default.
The instrument is postdated.
The instrument contains a promise to provide additional collateral if there is a decrease in value of the
existing collateral.
CPA-01547
Explanation
Choice "a" is correct. Negotiable commercial paper must be payable on demand or at a definite time
[UCC 3-104(1)(c)]. An instrument payable at someone's death or at a time after someone's death is not
payable at a definite time because while all people will die, we don't know when [UCC 3-109(2)].
Choice "b" is incorrect. Negotiable commercial paper must be payable on demand or at a definite time
[UCC 3-104(1)(c)], and an instrument payable at a definite time but subject to acceleration is considered
to be payable at a definite time because only the latest date for payment need be known [UCC 3109(1)(c)].
Choice "c" is incorrect. An instrument is not made non-negotiable by postdating [UCC 3-114(1)].
Choice "d" is incorrect. While to be negotiable an instrument must not be subject to any unauthorized
promises [UCC 3-104(1)(b)], the UCC authorizes promises to maintain collateral [UCC 3-112(1)(c)].
CPA-01552
Type1 M/C
A-D
Corr Ans: C
PM#27
R 6-01
20. CPA-01552 Lw Nov 92 #35 Page 15
West Corp. received a check that was originally made payable to the order of one of its customers, Ted
Burns. The following endorsement was written on the back of the check:
Ted Burns, without recourse,
for collection only
Which of the following describes the endorsement?
a.
b.
c.
d.
Special
Yes
No
No
Yes
Restrictive
Yes
No
Yes
No
CPA-01552
Explanation
Choice "c" is correct. An endorsement is special if it specifies the person to whom it is payable [UCC 3204]. No new payee is named here, so the endorsement is in blank. An endorsement is restrictive if it
includes the words "for collection" [UCC 3-205(c)], so the endorsement is restrictive.
12
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
CPA-01555
Type1 M/C
A-D
Corr Ans: C
PM#28
R 6-01
21. CPA-01555 Lw Nov 91 #48 Page 17
For a person to be holder in due course of a promissory note:
a.
b.
c.
d.
The note must be payable in U.S. currency to the holder.
The holder must be the payee of the note.
The note must be negotiable.
All prior holders must have been holders in due course.
CPA-01555
Explanation
Choice "c" is correct. Negotiability of the instrument is a prerequisite to holder in due course (HDC)
status.
Choice "a" is incorrect. A note is negotiable as long as it is payable in currency recognized as money
where the currency is issued.
Choice "b" is incorrect. The holder need not be the payee to be a HDC. The whole point of commercial
paper is its transferability - it may be transferred beyond the original payee.
Choice "d" is incorrect. Not all prior holders need to have been HDCs for the present holder to be an
HDC. For instance, if the note is endorsed to a person as a gift, the donee is not an HDC since he has
not given value, but a subsequent holder could acquire HDC status by paying value for the note.
CPA-01557
Type1 M/C
A-D
Corr Ans: A
PM#29
R 6-01
22. CPA-01557 Lw Nov 90 #48 Page 20
A maker of a note will have a valid defense against a holder in due course as a result of any of the
following conditions, except:
a.
b.
c.
d.
Lack of consideration.
Infancy.
Forgery.
Fraud in the execution.
CPA-01557
Explanation
Choice "a" is correct. An HDC takes free of personal defenses but is subject to real defenses. Lack of
consideration is a personal defense and thus is not valid defense against an HDC.
Choice "b" is incorrect. An HDC takes free of personal defenses but is subject to real defenses. Infancy
is a real defense (represented by the "I" in the FAIDS mnemonic) and so is a valid defense for the maker.
Choice "c" is incorrect. An HDC takes free of personal defenses but is subject to real defense. Forgery is
a real defense (represented by the "F" in the FAIDS mnemonic) and so is a valid defense for the maker.
Choice "d" is incorrect. An HDC takes free of personal defenses but is subject to real defenses. Fraud in
the execution is a real defense (represented by the "F" in the FAIDS mnemonic) and so is a valid defense
for the maker.
CPA-05266
Type1 M/C
A-D
Corr Ans: B
PM#40
R 6-01
23. CPA-05266 Released 2006 Page 7
Under the Negotiable Instruments Article of the UCC, an instrument will be precluded from being
negotiable if the instrument:
a.
b.
c.
d.
Fails to state the place of payment.
Is made subject to another agreement.
Fails to state the underlying consideration.
Is undated.
CPA-05266
Explanation
13
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
Choice "b" is correct. Under the Negotiable Instruments Article of the UCC, an instrument is not
negotiable if it states that it is "subject to" or "contingent upon" another agreement.
Choice "a" is incorrect. A negotiable instrument is not required to state the place of payment.
Choice "c" is incorrect. Consideration is not required for an instrument to be negotiable. We frequently
make gifts by check. The check can be negotiable even though no consideration is given for the gift.
Choice "d" is incorrect. Failure to date an instrument will not destroy negotiability. An undated instrument
is counted as being payable on demand.
CPA-05526
Type1 M/C
A-D
Corr Ans: B
PM#41
R 6-01
24. CPA-05526 Released 2007 Page 8
Under the Negotiable Instruments Article of the UCC, which of the following instruments meets the
negotiability requirement of being payable on demand or at a definite time?
a. A promissory note payable one year after a person's marriage.
b. A promissory note payable June 30, year 1, whose holder can extend the time of payment until the
following June 30 if the holder wishes.
c. A promissory note payable June 30, year 1, whose maturity can be extended by the maker for a
reasonable time.
d. An undated promissory note payable one month after date.
CPA-05526
Explanation
Choice "b" is correct. An instrument is payable on demand if it says that it is payable on demand or is
silent regarding the time for payment. An instrument is payable at a definite time only if the latest date on
which payment can be made can be determined from the face of the instrument. An instrument payable
on June 30 or the following June 30 if the holder wishes is payable at a definite time because the latest
date on which payment is due can be determined from the face of the instrument (the following June 30).
Choice "a" is incorrect. An instrument is payable on demand if it says that it is payable on demand or is
silent regarding the time for payment. An instrument is payable at a definite time only if the latest date on
which payment can be made can be determined from the face of the instrument. The instrument here is
not payable on demand. Neither is it payable at a definite time-even if the person's wedding date is setbecause the wedding date could change.
Choice "c" is incorrect. An instrument is payable on demand if it says that it is payable on demand or is
silent regarding the time for payment. An instrument is payable at a definite time only if the latest date on
which payment can be made can be determined from the face of the instrument. The instrument is not
payable on demand. Neither is it payable at a definite time because the extension clause does not set a
specific due date.
Choice "d" is incorrect. An instrument is payable on demand if it says that it is payable on demand or is
silent regarding the time for payment. An instrument is payable at a definite time only if the latest date on
which payment can be made can be determined from the face of the instrument. The note is not payable
on demand because it purports to be payable one month in the future. Neither is it payable at a definite
time. Because the note is undated, it cannot be determined when the one-month period began or,
consequently, when it ends.
Secured Transactions
CPA-01579
Type1 M/C
A-D
Corr Ans: A
PM#3
R 6-02
25. CPA-01579 Lw Nov 94 #59 Page 36
Under the Secured Transactions Article of the UCC, what would be the order of priority for the following
security interests in consumer goods?
I. Financing agreement filed on April 1.
II. Possession of the collateral by a creditor on April 10.
14
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
III. Financing agreement perfected on April 15.
a.
b.
c.
d.
I, II, III.
II, I, III.
II, III, I.
III, II, I.
CPA-01579
Explanation
Choice "a" is correct. When there are conflicting perfected security interests in the same collateral, the
first to be filed or perfected has priority. Here, I was filed first. II was next perfected by possession. III
was last to be filed or perfected.
CPA-01582
Type1 M/C
A-D
Corr Ans: A
PM#4
R 6-02
26. CPA-01582 Lw Nov 94 #60 Page 39
Under the Secured Transactions Article of the UCC, which of the following remedies is available to a
secured creditor when a debtor fails to make a payment when due?
a.
b.
c.
d.
Proceed
against the
collateral
Yes
Yes
No
No
Obtain a general
judgment against
the debtor
Yes
No
Yes
No
CPA-01582
Explanation
Choice "a" is correct. When a debtor defaults, the secured creditor can proceed against the collateral, but
is not required to. Instead, the creditor can obtain a general judgment.
CPA-01583
Type1 M/C
A-D
Corr Ans: C
PM#5
R 6-02
27. CPA-01583 Lw May 94 #48 Page 29
Under the UCC Secured Transactions Article, which of the following events will always prevent a security
interest from attaching?
a.
b.
c.
d.
Failure to have an authenticated record of a security agreement.
Failure of the creditor to have possession of the collateral.
Failure of the debtor to have rights in the collateral.
Failure of the creditor to give present consideration for the security interest.
CPA-01583
Explanation
Choice "c" is correct. For a security interest to attach (i) there must be an agreement to create the
security interest evidenced by either an authenticated security agreement or the creditor's taking
possession or control of the collateral, (ii) the creditor must give value, and (iii) the debtor must have
rights in the collateral. Thus, a debtor must always have rights in the collateral in order for a security
interest to attach.
Choice "a" is incorrect. If there is no authenticated security agreement, a security interest can attach if
the secured party takes possession of the collateral or has control of it.
Choice "b" is incorrect. The creditor need not take possession for a security interest to attach if there is a
written security agreement.
Choice "d" is incorrect. The creditor must give value, which includes antecedent debts. Thus, value is
not limited to present consideration.
CPA-01612
Type1 M/C
A-D
Corr Ans: A
PM#6
R 6-02
15
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
28. CPA-01612 Lw May 94 #49 Page 31
Under the UCC Secured Transactions Article, which of the following after-acquired property may be
attached to a security agreement given to a secured lender?
a.
b.
c.
d.
Inventory
Yes
Yes
No
No
Equipment
Yes
No
Yes
No
CPA-01612
Explanation
Choice "a" is correct. A secured party may take a security interest in both after-acquired inventory and
after-acquired equipment. The only limits on the effect of after-acquired property clauses involve
consumer goods and commercial tort claims.
CPA-01617
Type1 M/C
A-D
Corr Ans: B
PM#7
R 6-02
29. CPA-01617 Lw May 94 #50 Page 34
Under the UCC Secured Transactions Article, which of the following actions will best perfect a security
interest in a negotiable instrument against any other party?
a.
b.
c.
d.
Filing a security agreement.
Taking possession of the instrument.
Perfecting by attachment.
Obtaining a duly executed financing statement.
CPA-01617
Explanation
Choice "b" is correct. Because a holder in due course of a negotiable instrument has priority over a prior
perfected security interest, the best way to perfect a security interest in a negotiable instrument is to take
possession of it, because taking possession of the instrument prevents a later person from becoming a
holder in due course.
Choice "a" is incorrect. A security interest perfected by filing may be defeated by a subsequent holder in
due course, so filing is not the best method of perfecting here. Moreover, a financing statement, not a
security agreement, is what is filed when filing is appropriate.
Choice "c" is incorrect. A security interest in a negotiable instrument is not automatically perfected upon
attachment, as this choice suggests, so relying on attachment would be wholly ineffective.
Choice "d" is incorrect. Merely obtaining an executed financing statement is not a method of perfection;
the statement must be filed to constitute perfection. Moreover, as discussed with respect to choice "b",
filing is not the best method of perfecting when a negotiable instrument is involved because a subsequent
holder in due course would have higher priority.
CPA-01618
Type1 M/C
A-D
Corr Ans: C
PM#8
R 6-02
30. CPA-01618 Lw May 94 #51 Page 33
Under the UCC Secured Transactions Article, perfection of a security interest by a creditor provides
added protection against other parties in the event the debtor does not pay its debts. Which of the
following parties is not affected by perfection of a security interest?
a.
b.
c.
d.
Other prospective creditors of the debtor.
The trustee in a bankruptcy case.
A buyer in the ordinary course of business.
A subsequent personal injury judgment creditor.
CPA-01618
Explanation
16
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
Choice "c" is correct. Perfection has little effect on a buyer in the ordinary course of business (such a
buyer takes subject to a perfected security interest only if the buyer knows that the sale violates the
security agreement).
Choice "a" is incorrect. Perfection gives the secured party superior rights in the collateral as against most
later creditors.
Choice "b" is incorrect. If the bankruptcy is filed after perfection, the secured party will have priority in the
collateral as against the trustee in bankruptcy because the trustee is treated as a lien creditor as of the
day the bankruptcy petition is filed and a prior perfected security interest has priority over a subsequent
lien creditor.
Choice "d" is incorrect. Subsequent judgment creditors have lower priority in collateral than a secured
creditor who has perfected a security interest in the collateral.
CPA-01624
Type1 M/C
A-D
Corr Ans: C
PM#10
R 6-02
31. CPA-01624 Lw May 94 #53 Page 33
Larkin is a wholesaler of computers. Larkin sold 40 computers to Elk Appliance for $80,000. Elk paid
$20,000 down and signed a promissory note for the balance. Elk also executed a security agreement
giving Larkin a security interest in Elk's inventory, including the computers. Larkin perfected its security
interest by properly filing a financing statement in the state of Whiteacre. Six months later, Elk moved its
business to the state of Blackacre, taking the computers. On arriving in Blackacre, Elk secured a loan
from Quarry Bank and signed a security agreement putting up all inventory (including the computers) as
collateral. Quarry perfected its security interest by properly filing a financing statement in the state of
Blackacre. Two months after arriving in Blackacre, Elk went into default on both debts. Which of the
following statements is correct?
a. Quarry's security interest is superior because Larkin's time to file a financing statement in Blackacre
had expired prior to Quarry's filing.
b. Quarry's security interest is superior because Quarry had no actual notice of Larkin's security interest.
c. Larkin's security interest is superior even though at the time of Elk's default Larkin had not perfected
its security.
d. Larkin's security interest is superior provided it repossesses the computers before Quarry does.
CPA-01624
Explanation
Choice "c" is correct. When a security interest in collateral is perfected and the collateral is subsequently
moved to another state, the collateral is temporarily perfected in the state into which it is moved for four
months. Thus, since Larkin's security interest in Elk's computers was perfected in Whiteacre, the interest
was temporarily perfected in Blackacre. Since the default occurred within the four month temporary
perfection period, Larkin has priority over the bank's subsequently perfected security interest.
Choice "a" is incorrect. A secured creditor has four months in which to perfect in the new state when
collateral in which the creditor has a perfected security interest is moved to the second state.
Choice "b" is incorrect. Quarry's lack of notice is irrelevant. There is a four month temporary period of
perfection when collateral subject to a perfected security interest is moved to another state.
Choice "d" is incorrect. Larkin's security interest is superior, because it is prior in time, whether or not
Larkin repossesses first, under the four month temporary period of perfection that applies when collateral
subject to a perfected security interest is moved to another state.
CPA-01626
Type1 M/C
A-D
Corr Ans: A
PM#11
R 6-02
32. CPA-01626 Lw May 94 #54 Page 38
Drew bought a computer for personal use from Hale Corp. for $3,000. Drew paid $2,000 in cash and
signed a security agreement for the balance. Hale properly filed the security agreement. Drew defaulted
in paying the balance of the purchase price. Hale asked Drew to pay the balance. When Drew refused,
Hale peacefully repossessed the computer.
17
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
Under the UCC Secured Transactions Article, which of the following remedies will Hale have?
a.
b.
c.
d.
Obtain a deficiency judgment against Drew for the amount owed.
Sell the computer and retain any surplus over the amount owed.
Retain the computer over Drew's objection.
Sell the computer without notifying Drew.
CPA-01626
Explanation
Choice "a" is correct. After consumer goods collateral is repossessed and more than 60% of the price
has been paid, unless the debtor agrees otherwise, it must be sold and the creditor can hold the debtor
liable for any deficiency.
Choice "b" is incorrect. After the sale, if there is any surplus it must be given to the debtor.
Choice "c" is incorrect. After consumer goods collateral is repossessed and more than 60% of the price
has been paid, unless the debtor agrees otherwise, it must be sold.
Choice "d" is incorrect. A secured party generally must notify the debtor of the sale.
CPA-01627
Type1 M/C
A-D
Corr Ans: C
PM#12
R 6-02
33. CPA-01627 Lw May 94 #55 Page 39
Drew bought a computer for personal use from Hale Corp. for $3,000. Drew paid $2,000 in cash and
signed a security agreement for the balance. Hale properly filed the security agreement. Drew defaulted
in paying the balance of the purchase price. Hale asked Drew to pay the balance. When Drew refused,
Hale peacefully repossessed the computer.
Under the UCC Secured Transactions Article, which of the following rights will Drew have?
a.
b.
c.
d.
Redeem the computer after Hale sells it.
Recover the sale price from Hale after Hale sells the computer.
Force Hale to sell the computer.
Prevent Hale from selling the computer.
CPA-01627
Explanation
Choice "c" is correct. Where a debtor has paid more than 60% of the price of consumer goods collateral
and the creditor repossesses the collateral after default, the creditor must sell the collateral within 90 days
unless the debtor agrees otherwise.
Choice "a" is incorrect. A debtor has a right to redeem before collateral is sold, but not after it is sold.
Choice "b" is incorrect. After collateral is sold, the proceeds go first to the costs of the sale, next to satisfy
the secured party, then to any other party with an interest in the collateral. Only if there is a surplus can
the debtor recover any of the sale price.
Choice "d" is incorrect. The debtor may allow the creditor to keep the collateral in satisfaction of the debt,
but has no power to prevent a sale if the creditor does not want to retain the collateral in satisfaction.
CPA-01629
Type1 M/C
A-D
Corr Ans: C
PM#13
R 6-02
34. CPA-01629 Lw Nov 93 #53 Page 38
In what order are the following obligations paid after a secured creditor rightfully sells the debtor's
collateral after repossession?
I. Debt owed to any junior security holder.
II. Secured party's reasonable sale expenses.
III. Debt owed to the secured party.
a.
b.
c.
d.
I, II, III.
II, I, III.
II, III, I.
III, II, I.
18
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
CPA-01629
Explanation
Choice "c" is correct. Upon disposition of the goods, the costs of the sale are satisfied first, the secured
party is paid next, and any junior security holders are paid next. If any proceeds remain, they are
remitted to the debtor.
CPA-01631
Type1 M/C
A-D
Corr Ans: D
PM#14
R 6-02
35. CPA-01631 Lw Nov 93 #58 Page 29
Winslow Co., which is in the business of selling furniture, borrowed $60,000 from Pine Bank. Winslow
executed a promissory note for that amount and used all of its accounts receivable as collateral for the
loan. Winslow executed a security agreement that described the collateral. Winslow did not file a
financing statement. Which of the following statements best describes this transaction?
a.
b.
c.
d.
Perfection of the security interest occurred even though Winslow did not file a financing statement.
Perfection of the security interest occurred by Pine having an interest in accounts receivable.
Attachment of the security interest did not occur because Winslow failed to file a financing statement.
Attachment of the security interest occurred when the loan was made and Winslow executed the
security agreement.
CPA-01631
Explanation
Choice "d" is correct. A security interest attaches when there is a security agreement, the creditor gives
value, and the debtor has rights in the collateral. All three requirements were present when the loan here
was made and the security agreement was executed.
Choices "a" and "b" are incorrect. A security interest in accounts receivable can be automatically
perfected upon attachment, but only if the accounts receivable assigned do not make up a significant part
of the assignor's accounts receivable. Here, Winslow Co. assigned all of its accounts receivable, so
automatic pefection does not apply.
Choice "c" is incorrect. A security interest attaches when there is a security agreement, the creditor gives
value, and the debtor has rights in the collateral. A financing statement is not required, although it is
relevant to perfection.
CPA-01645
Type1 M/C
A-D
Corr Ans: C
PM#17
R 6-02
36. CPA-01645 Lw May 93 #46 Page 29
On March 1, Green went to Easy Car Sales to buy a car. Green spoke to a salesperson and agreed to
buy a car that Easy had in its showroom. On March 5, Green made a $500 downpayment and signed a
security agreement to secure the payment of the balance of the purchase price. On March 10, Green
picked up the car. On March 15, Easy filed the security agreement. On what date did Easy's security
interest attach?
a.
b.
c.
d.
March 1.
March 5.
March 10.
March 15.
CPA-01645
Explanation
Choice "c" is correct. For a security interest to attach, three elements must coexist. There must be an
agreement to create a security interest, the secured party must give value for the interest, and the debtor
must have rights in the collateral. Here, all elements existed on March 10-the parties agreed to create a
security interest on March 5, the secured party gave value on March 10, and the debtor obtained an
interest in the collateral on March 10 when he picked up the car.
Choices "a" and "b" are incorrect as per the above.
Choice "d" is incorrect. A security agreement need not be filed for a security interest to attach to
collateral. Filing (typically of a financing statement) is a method of perfection of a security interest. Here,
19
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
filing would not even be sufficient for perfection because a security interest in certificate of title property,
such as a car, can be perfected only by notation on the certificate of title.
CPA-01647
Type1 M/C
A-D
Corr Ans: C
PM#18
R 6-02
37. CPA-01647 Lw May 93 #47 Page 32
Mars, Inc. manufactures and sells VCRs on credit directly to wholesalers, retailers, and consumers. Mars
can perfect its security interest in the VCRs it sells without having to file a financing statement or take
possession of the VCRs if the sale is made to:
a.
b.
c.
d.
Retailers.
Wholesalers that sell to distributors for resale.
Consumers.
Wholesalers that sell to buyers in the ordinary course of business.
CPA-01647
Explanation
Choice "c" is correct. A seller who sells goods on credit and retains a security interest in the goods to
secure the purchase price has a purchase money security interest (PMSI). A PMSI in consumer goods is
automatically perfected; there is no need to file.
Choices "a", "b", and "d" are incorrect. If Mars sells to retailers or wholesalers, the collateral is inventory,
since it is held by the debtor for sale to others. A security interest in inventory is not automatically
perfected, even if the secured party has a purchase money secured interest. The fact that a wholesaler
sells to buyers in the ordinary course addresses the question of whether the buyers will be subject to
Mars' security interest and does not affect Mars' need to file.
CPA-01648
Type1 M/C
A-D
Corr Ans: D
PM#19
R 6-02
38. CPA-01648 Lw May 93 #48 Page 31
Which of the following transactions would illustrate a secured party perfecting its security interest by
taking possession of the collateral?
a.
b.
c.
d.
A bank receiving a mortgage on real property.
A wholesaler borrowing to purchase inventory.
A consumer borrowing to buy a car.
A pawnbroker lending money.
CPA-01648
Explanation
Choice "d" is correct. Perfection by taking possession requires the secured party to take possession of
the collateral, and that is what happens when a pawnbroker lends money -- the pawnbroker gives a
person money in exchange for an item of personal property, which the person may redeem by paying
back the pawnbroker.
Choice "a" is incorrect. Mortgages on real estate are not even within Article 9, but in any case, a
mortgagee does not usually take possession of the mortgaged premises; rather the mortgagor usually
retains possession.
Choice "b" is incorrect. A wholesaler usually keeps possession of the inventory collateral, since it is
difficult to sell if the secured party has possession.
Choice "c" is incorrect. Usually when a consumer buys a car, the secured party does not maintain
possession of the collateral.
CPA-01652
Type1 M/C
A-D
Corr Ans: D
PM#20
R 6-02
39. CPA-01652 Lw May 93 #49 Page 33
A party who filed a security interest in inventory on April 1, 1993, would have a superior interest to which
of the following parties?
20
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
a.
b.
c.
d.
A holder of a mechanic's lien whose lien was filed on March 15, 1993.
A holder of a purchase money security interest in after acquired property filed on March 20, 1993.
A purchaser in the ordinary course of business who purchased on April 10, 1993.
A judgment lien creditor who filed its judgment on April 15, 1993.
CPA-01652
Explanation
Choice "d" is correct. A prior perfected security interest has priority over a subsequent judicial lien
creditor.
Choice "a" is incorrect. A perfected security interest is subject to prior perfected liens.
Choice "b" is incorrect. When two security interests in the same collateral conflict, the first to be filed or
perfected has priority.
Choice "c" is incorrect. A buyer in the ordinary course of the seller's business takes free of security
interests in the seller's inventory unless the buyer knows that the sale violates the security agreement.
CPA-01655
Type1 M/C
A-D
Corr Ans: A
PM#21
R 6-02
40. CPA-01655 Lw May 93 #50 Page 38
Under the UCC Secured Transactions Article, which of the following statements is correct concerning the
disposition of collateral by a secured creditor after a debtor's default?
a. A good faith purchaser for value and without knowledge of any defects in the sale takes free of any
subordinate liens or security interests.
b. The debtor may not redeem the collateral after the default.
c. Secured creditors with subordinate claims retain the right to redeem the collateral after the collateral
is sold to a third party.
d. The collateral may only be disposed of at a public sale.
CPA-01655
Explanation
Choice "a" is correct. A sale of the collateral after default to a good faith purchaser destroys subordinate
interests in the collateral.
Choice "b" is incorrect. The debtor generally has the right to redeem until the collateral is sold.
Choice "c" is incorrect. A sale of the collateral after default to a good faith purchaser destroys
subordinate interests in the collateral.
Choice "d" is incorrect. Both public and private sales are permitted, but in any event, the sale must be
commercially reasonable.
CPA-01830
Type1 M/C
41. CPA-01830 Nov 90 #38
A-D
Corr Ans: A
PM#23
R 6-02
Page 28
Which of the following is included within the scope of the secured transactions article of the code?
a.
b.
c.
d.
The outright sale of accounts receivable.
A landlord's lien.
The assignment of a claim for wages.
The sale of chattel paper as a part of the sale of a business out of which it arose.
CPA-01830
Explanation
Choice "a" is correct. The Code specifically includes any sale of accounts receivable within its scope.
Choices "b", "c", and "d" are incorrect. The Code specifically excludes a landlord's lien, the assignment of
a claim for wages, and the sale of chattel paper as a part of the sale of business out of which it arose.
CPA-04781
Type1 M/C
A-D
Corr Ans: D
PM#24
R 6-02
21
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
42. CPA-04781 Released 2005 Page 25
Under the Secured Transactions Article of the UCC, a secured party generally must comply with each of
the following duties, except:
a.
b.
c.
d.
Filing or sending the debtor a termination statement when the debt is paid.
Confirming, at the debtor's request, the unpaid amount of the debt.
Using reasonable care in preserving any collateral in the secured party's possession.
Assigning the security interest to another party at the debtor's request.
CPA-04781
Explanation
Choice "d" is correct. Section 404 of the Secured Transaction Article requires the filing or sending to
debtor a termination statement when the debt is paid. Section 208 of the Secured Transaction Article
allows the Debtor to send to the creditor a statement of the amount of the unpaid debt. The creditor must
confirm the correctness of the unpaid debt within two weeks of receipt. Section 207 of the Secured
Transaction Article requires the creditor to use reasonable care in storing and preserving collateral in the
creditor's possession.
The debtor has no right to require the creditor to assign the security interest to another party. Only the
creditor has the right to assign a debt, not the debtor.
Choices "a", "b", and "c" are required by the Secured Transaction Article. Only choice "d" is not.
CPA-05545
Type1 M/C
A-D
Corr Ans: B
PM#25
R 6-02
43. CPA-05545 Released 2007 Page 31
Under the Secured Transactions Article of the UCC, which of the following statements is (are) correct
regarding the filing of a financing statement?
I. A financing statement must be filed before attachment of the security interest can occur.
II. Once filed, a financing statement is effective for an indefinite period of time provided continuation
statements are timely filed.
a.
b.
c.
d.
I only.
II only.
Both I and II.
Neither I nor II.
CPA-05545
Explanation
Choice "b" is correct. A financing statement relates to perfection of a security interest; it is not relevant to
attachment. Thus, statement I is incorrect. Statement II, however, is correct. A financing statement is
effective for five years, but can be extended for another five years by filing a continuation statement within
six months before the end of the five year period. Successive continuation statements can be filed at the
end of any five year period.
Choices "a", "c", and "d" are incorrect, per the above.
Real Property
CPA-01657
Type1 M/C
44. CPA-01657 Lw R03 #18
A-D
Corr Ans: B
PM#1
R 6-03
Page 44
When the original tenant of real property subleases the property to a third party (sublessee), who is
responsible for the payment of the rent to the owner of the property?
a.
b.
c.
d.
The sublessee only.
The original tenant only.
Either the original tenant or the sublessee.
Both the sublessee and the original tenant.
22
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
CPA-01657
Explanation
Choice "b" is correct. In a sublease, the original tenant retains some of the leased interest and the
sublessee is considered a tenant of the original tenant; the original tenant remains liable to the landlord,
and the sublessee is liable only to the original tenant.
Choices "a", "c", and "d" are incorrect, per the above.
CPA-01660
Type1 M/C
A-D
Corr Ans: D
PM#3
R 6-03
45. CPA-01660 Lw Nov 95 #52 Page 45
A method of transferring ownership of real property that most likely would be considered an arm's-length
transaction is transfer by:
a.
b.
c.
d.
Inheritance.
Eminent domain.
Adverse possession.
Sale.
CPA-01660
Explanation
Choice "d" is correct. An arm's length transaction is one in which parties deal together as equals. A sale
is an arm's-length transaction (i.e., one where the parties are dealing on more or less an equal basis).
Choice "a" is incorrect. An arm's length transaction is one in which parties deal together as equals.
Inheritance primarily is a one-sided transaction -- the landowner dies and his or her property passes by
intestacy or will; it is not an arm's-length transaction.
Choice "b" is incorrect. An arm's length transaction is one in which parties deal together as equals.
Eminent domain involves forced sale to the government, not an arm's-length transaction.
Choice "c" is incorrect. An arm's length transaction is one in which parties deal together as equals.
Adverse possession involves gaining title by remaining on property for a long time, not an arm's-length
transaction between two parties.
CPA-01661
Type1 M/C
A-D
Corr Ans: B
PM#4
R 6-03
46. CPA-01661 Lw Nov 95 #53 Page 43
Which of the following provisions must be included to have an enforceable written residential lease?
a.
b.
c.
d.
A description
of the leased
premises
Yes
Yes
No
No
A due date
for the payment
of rent
Yes
No
Yes
No
CPA-01661
Explanation
Choice "b" is correct. A lease must include a description of the premises to be leased, but the date the
rent is due may be implied.
CPA-01663
Type1 M/C
A-D
Corr Ans: C
PM#5
R 6-03
47. CPA-01663 Lw Nov 95 #54 Page 46
Which of the following elements must be contained in a valid deed?
a.
b.
Purchase
price
Yes
Yes
Description
of the land
Yes
No
23
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
c.
d.
No
No
Yes
No
CPA-01663
Explanation
Choice "c" is correct. A deed must include a description of the property, but no purchase price need be
included -- Indeed, no purchase price is necessary; property may be transferred by gift.
CPA-01664
Type1 M/C
A-D
Corr Ans: B
PM#6
R 6-03
48. CPA-01664 Lw Nov 95 #55 Page 47
Rich purchased property from Sklar for $200,000. Rich obtained a $150,000 loan from Marsh Bank to
finance the purchase, executing a promissory note and a mortgage. By recording the mortgage, Marsh
protects its:
a.
b.
c.
d.
Rights against Rich under the promissory note.
Rights against the claims of subsequent bona fide purchasers for value.
Priority against a previously filed real estate tax lien on the property.
Priority against all parties having earlier claims to the property.
CPA-01664
Explanation
Choice "b" is correct. Recording a mortgage gives subsequent purchasers notice of the mortgagor's
interest and so protects that interest against subsequent purchasers' interests.
Choice "a" is incorrect. Recording fixes rights as against third parties; the rights of the parties are fixed by
the mortgage itself.
Choice "c" is incorrect. Recording a mortgage gives subsequent purchasers notice of the mortgagor's
interest and so protects that interest against subsequent purchasers' interests; it does not provide
protection against previous tax liens.
Choice "d" is incorrect. Recording a mortgage gives subsequent purchasers notice of the mortgagor's
interest and so protects that interest against subsequent purchasers' interests; it does not provide
protection against previously recorded claims to the property.
CPA-01670
Type1 M/C
A-D
Corr Ans: A
PM#8
R 6-03
49. CPA-01670 Lw May 95 #52 Page 43
Which of the following provisions must be included in a residential lease agreement?
a.
b.
c.
d.
A description of the leased premises.
The due date for payment of rent.
A requirement that the tenant have public liability insurance.
A requirement that the landlord will perform all structural repairs to the property.
CPA-01670
Explanation
Choice "a" is correct. An instrument passing an interest in land, including a residential lease, must
describe the premises.
Choice "b" is incorrect. The date rent is due need not be stated; it can be implied.
Choice "c" is incorrect. There is no requirement that residential tenants have liability insurance.
Choice "d" is incorrect. The lease need not include a clause stating that the landlord will perform all
structural repairs; the landlord probably would have this duty in any case.
CPA-01672
Type1 M/C
A-D
Corr Ans: B
PM#9
R 6-03
50. CPA-01672 Lw May 95 #53 Page 46
24
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
For a deed to be effective between a purchaser and seller of real estate, one of the conditions is that the
deed must:
a.
b.
c.
d.
Be recorded within the permissible statutory time limits.
Be delivered by the seller with an intent to transfer title.
Contain the actual sales price.
Contain the signatures of the seller and purchaser.
CPA-01672
Explanation
Choice "b" is correct. To be valid, a deed must be delivered.
Choice "a" is incorrect. Recording protects the purchaser's rights against third parties; the deed is
sufficient to establish the rights of the parties to the deed.
Choice "c" is incorrect. Property may be given away by gift; no sales price is necessary to make a deed
valid.
Choice "d" is incorrect. Like the statute of frauds, the requirements for deeds are only that the grantor
(i.e., the party to be charged) sign.
CPA-01673
Type1 M/C
A-D
Corr Ans: B
PM#10
R 6-03
51. CPA-01673 Lw May 95 #54 Page 49
Generally, which of the following federal acts regulate mortgage lenders?
a.
b.
c.
d.
Real Estate
Settlement
Procedures
Act (RESPA)
Yes
Yes
No
No
Federal
Trade
Commission
Act
Yes
No
Yes
No
CPA-01673
Explanation
Choice "b" is correct. RESPA regulates mortgage lending. The FTCA regulates commercial trade
practices.
CPA-01674
Type1 M/C
A-D
Corr Ans: C
PM#11
R 6-03
52. CPA-01674 Lw May 94 #56 Page 41
Court, Fell, and Miles own a parcel of land as joint tenants with right of survivorship. Court's interest was
sold to Plank. As a result of the sale from Court to Plank:
a.
b.
c.
d.
Fell, Miles, and Plank each own one-third of the land as joint tenants.
Fell and Miles each own one-third of the land as tenants in common.
Plank owns one-third of the land as a tenant in common.
Plank owns one-third of the land as a joint tenant.
CPA-01674
Explanation
Choice "c" is correct. Joint tenancy can arise only when the tenants receive the same title with the same
rights, at the same time, in the same instrument. Otherwise, a tenancy in common arises. Since Plank
received his interest after Court and Miles received their interest, he must be a tenant in common.
Choice "a" is incorrect. Joint tenancy can arise only when the tenants receive the same title with the
same rights, at the same time, in the same instrument. Otherwise, a tenancy in common arises. Since
Plank received his interest after Court and Miles received their interest, he must be a tenant in common.
Choice "b" is incorrect. The sale by Court severs his joint tenancy interest but leaves Fell's and Miles's
interest unaffected. Thus, they remain joint tenants.
25
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
Choice "d" is incorrect. Joint tenancy can arise only when the tenants receive the same title with the
same rights, at the same time, in the same instrument. Otherwise, a tenancy in common arises. Since
Plank received his interest after Court and Miles received their interest, he must be a tenant in common.
CPA-01675
Type1 M/C
A-D
Corr Ans: D
PM#12
R 6-03
53. CPA-01675 Lw May 94 #57 Page 48
Which of the following is a defect in marketable title to real property?
a.
b.
c.
d.
Recorded zoning restrictions.
Recorded easements referred to in the contract of sale.
Unrecorded lawsuit for negligence against the seller.
Unrecorded easement.
CPA-01675
Explanation
Choice "d" is correct. A title is unmarketable if it is not free from unreasonable risk of litigation regarding
its use. An unrecorded easement is a sufficient cloud on title to render title unmarketable.
Choice "a" is incorrect. Courts usually hold that public restrictions, such as zoning regulations, do not
make title unmarketable.
Choice "b" is incorrect. If the easements were referred to in the contract, presumably they were known by
the buyer and so will be considered to be waived as defects in title.
Choice "c" is incorrect. A lawsuit against the seller itself does not constitute a lien on any of the seller's
property. Thus, the mere fact that a seller is involved in a lawsuit will not render title unmarketable.
CPA-01680
Type1 M/C
A-D
Corr Ans: D
PM#14
R 6-03
54. CPA-01680 Lw May 93 #51 Page 6
On July 1, 1992, Quick, Onyx, and Nash were deeded a piece of land as tenants in common. The deed
provided that Quick owned 1/2 the property and Onyx and Nash owned 1/4 each. If Nash dies, the
property will be owned as follows:
a.
b.
c.
d.
Quick 1/2, Onyx 1/2.
Quick 5/8, Onyx 3/8.
Quick 1/3, Onyx 1/3, Nash's heirs 1/3.
Quick 1/2, Onyx 1/4, Nash's heirs 1/4.
CPA-01680
Explanation
Choice "d" is correct. When property is held by tenants in common, there is no right of survivorship.
Thus, after one tenant dies, that tenant's interest in the property goes to the tenant's heirs and the other
tenants in common retain the interests they had. Thus, Quick still owns 1/2 and Onyx still owns 1/4.
Nash's 1/4 goes to Nash's heirs.
CPA-01681
Type1 M/C
A-D
Corr Ans: A
PM#15
R 6-03
55. CPA-01681 Lw May 93 #52 Page 41
Which of the following unities (elements) are required to establish a joint tenancy?
a.
b.
c.
d.
Time
Yes
Yes
No
Yes
CPA-01681
Title
Yes
Yes
No
No
Interest
Yes
No
Yes
Yes
Possession
Yes
No
Yes
No
Explanation
26
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
Choice "a" is correct. The four unities necessary to create a joint tenancy are unity of time, title, interest,
and possession. That is, to create a joint tenancy, all joint tenants must receive their interests at the
same time and by the same instrument, the interests must be equal, and all must be entitled to equal right
to possess the premises.
CPA-01683
Type1 M/C
A-D
Corr Ans: C
PM#16
R 6-03
56. CPA-01683 Lw May 93 #53 Page 46
Which of the following warranties is (are) contained in a general warranty deed?
I. The grantor has the right to convey the property.
II. The grantee will not be disturbed in possession of the property by the grantor or some third party's
lawful claim of ownership.
a.
b.
c.
d.
I only.
II only.
I and II.
Neither I nor II.
CPA-01683
Explanation
Choice "c" is correct. Among other things, the grantor who gives a general warranty deed warrants the
right to convey the property and quiet possession.
CPA-01687
Type1 M/C
A-D
Corr Ans: B
PM#17
R 6-03
57. CPA-01687 Lw May 93 #54 Page 48
A standard title insurance policy will generally insure that:
a.
b.
c.
d.
There are no other deeds to the property.
The purchaser has good record title as of the policy's date.
All taxes and assessments are paid.
The insurance protection will be transferable to a subsequent purchaser.
CPA-01687
Explanation
Choice "b" is correct. Title insurance warrants that the insured has good record title on the policy's date.
If someone comes forward challenging the title, the insurer will defend title and pay all costs involved.
Choice "a" is incorrect. There is no warranty that there are no other deeds, just that there are no
recorded deeds to cloud title.
Choice "c" is incorrect. There is no warranty that all taxes and assessments have been paid; only that no
liens for unpaid taxes and assessments are recorded.
Choice "d" is incorrect. Mortgage insurance is not assignable.
CPA-01689
Type1 M/C
A-D
Corr Ans: D
PM#18
R 6-03
58. CPA-01689 Lw May 93 #55 Page 48
In general, which of the following statements is correct with respect to a real estate mortgage?
a.
b.
c.
d.
The mortgage may not be given to secure an antecedent debt.
The mortgage must contain the actual amount of the underlying debt.
The mortgage must be signed by both the mortgagor (borrower) and mortgagee (lender).
The mortgagee may assign the mortgage to a third party without the mortgagor's consent.
CPA-01689
Explanation
Choice "d" is correct. The mortgagee is free to assign a mortgage without the mortgagor's consent. The
note that the mortgage secures will also be assigned.
27
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
Choice "a" is incorrect. A mortgage can secure a new debt or an old one.
Choice "b" is incorrect. The mortgage is just a security device; it need not include the amount of the debt.
The amount usually is reflected in the note that the mortgage secures.
Choice "c" is incorrect. Under the Statute of Frauds, only the party to be charged (the mortgager) must
sign.
CPA-01691
Type1 M/C
A-D
Corr Ans: C
PM#19
R 6-03
59. CPA-01691 Lw May 93 #56 Page 49
Fern purchased property from Nix for $150,000. Fern obtained a $90,000 loan from Jet Bank to finance
the purchase, executing a promissory note and mortgage. By recording the mortgage, Jet protects its:
a.
b.
c.
d.
Priority against a previously filed real estate tax lien on the property.
Priority against all parties having earlier claims to the property.
Rights against the claims of subsequent bona fide purchasers for value.
Rights against Fern under the promissory note.
CPA-01691
Explanation
Choice "c" is correct. Recording serves as constructive notice to all later purchasers of the recorded
interest in the subject premises.
Choice "a" is incorrect. Previously filed liens have priority over subsequently filed interests in property,
such as a subsequently filed mortgage.
Choice "b" is incorrect. Recording serves as constructive notice to all later purchasers of the recorded
interest in the subject premises. It will not protect against earlier recorded claims.
Choice "d" is incorrect. Recording is not necessary to perfect rights as between the mortgagor and
mortgagee. They are bound by the agreement.
CPA-01820
Type1 M/C
A-D
Corr Ans: D
PM#21
R 6-03
60. CPA-01820 Lw May 93 #58 Page 50
A mortgagor's right of redemption will be terminated by a judicial foreclosure sale unless:
a.
b.
c.
d.
The proceeds from the sale are not sufficient to fully satisfy the mortgage debt.
The mortgage instrument does not provide for a default sale.
The mortgagee purchases the property for market value.
The jurisdiction has enacted a statutory right of redemption.
CPA-01820
Explanation
Choice "d" is correct. Generally, there is an equitable right to redemption until the foreclosure sale. After
the foreclosure sale, there is no right of redemption unless a statutory right is given.
Choice "a" is incorrect. The right to redeem after a foreclosure sale is not dependent on the amount of
proceeds from the sale.
Choice "b" is incorrect. The right to redeem after a foreclosure sale does not depend on whether the
mortgage provides for a default sale.
Choice "c" is incorrect. There is no right to redeem after a foreclosure sale just because the mortgagee
purchased the property.
CPA-01825
Type1 M/C
A-D
Corr Ans: A
PM#22
R 6-03
61. CPA-01825 Lw Nov 91 #56 Page 47
If a mortgagee fails to record its mortgage in a jurisdiction with a notice-race recording statute,
28
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
a. A subsequent recording mortgagee who has no knowledge of the prior mortgage will have a superior
security interest.
b. A subsequent recording mortgagee who has knowledge of the prior mortgage will have a superior
security interest.
c. A subsequent purchaser for value who has no knowledge of the mortgage will take the property
subject to the mortgage.
d. A subsequent purchaser for value who has knowledge of the mortgage will take the property free of
the prior security interest.
CPA-01825
Explanation
Choice "a" is correct. In a notice-race recording jurisdiction, the first person to record a mortgage has
priority over later filers unless the earlier recorder had notice of a prior valid lien.
Choice "b" is incorrect. In a notice-race recording jurisdiction, the first to record has priority over all other
interests except interests of which the recorder had notice.
Choice "c" is incorrect. In a notice-race recording jurisdiction, the first to record has priority over all other
interests except interests he has knowledge of. Thus, if the subsequent purchaser records before the
mortgage is recorded and the purchaser has no knowledge of the mortgage, the purchaser will have
priority.
Choice "d" is incorrect. In a notice-race recording jurisdiction, the first to record has priority over all other
interests except interests of which he has knowledge. Thus, a subsequent purchaser who has knowledge
of a prior unrecorded mortgage will not have priority over the mortgage.
CPA-04787
Type1 M/C
A-D
Corr Ans: D
PM#23
R 6-03
62. CPA-04787 Released 2005 Page 39
Trees were cut down and made into lumber. The lumber was used to build a house. Which of the
following statements best describes the property aspect of these events?
a.
b.
c.
d.
The trees were and remained tangible personal property.
The trees were and remained real property.
The trees were real property, then became and remained personal property.
The trees were real property, became personal property, then reverted to being real property.
CPA-04787
Explanation
Choice "d" is correct. Real property includes land and all things firmly attached to the land. This would
include buildings attached to land, minerals under the land and trees growing on the land. When the
trees were attached to the land, the trees were real property. When the trees were cut down and made
into lumber, the trees became personal property. When the lumber was used to build a house, the house
became real property. Only answer "d" reflects this order.
CPA-05517
Type1 M/C
A-D
Corr Ans: A
PM#24
R 6-03
63. CPA-05517 Released 2007 Page 46
Which of the following requirements must be met, by any type of deed, in order for title to real property to
be transferred?
a.
b.
c.
d.
The deed must be delivered to the purchaser of the property.
The deed must be recorded by the seller of the property.
The deed must include a statement of the property's value.
The deed must include a general warranty of title.
CPA-05517
Explanation
Choice "a" is correct. To be effective, a deed must be in a writing signed by the grantor, it must describe
the premises, and it must be delivered. Thus, choice "a" is correct.
29
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
Choice "b" is incorrect. Recording fixes the rights of the grantee against all third parties by giving them
constructive notice of the grant; it is not required to make a deed effective between the grantor and
grantee.
Choice "c" is incorrect. To be effective, a deed must be in a writing signed by the grantor, it must
describe the premises, and it must be delivered. It need not include a statement of the property's value.
Choice "d" is incorrect. To be effective, a deed must be in a writing signed by the grantor, it must
describe the premises, and it must be delivered. A deed may include a general warranty (i.e., a general
warranty deed) but it need not include any warranty at all (i.e., a bargain and sale deed).
Suretyship & Creditor's Rights (required homework reading)
CPA-01833
Type1 M/C
64. CPA-01833 Lw R02 #14
A-D
Corr Ans: B
PM#1
R 6-04
Page 56
Which of the following events will release a noncompensated surety from liability to the creditor?
a.
b.
c.
d.
The principal debtor was involuntarily petitioned into bankruptcy.
The creditor failed to notify the surety of a partial surrender of the principal debtor's collateral.
The creditor was adjudicated incompetent after the debt arose.
The principal debtor exerted duress to obtain the surety agreement.
CPA-01833
Explanation
Choice "b" is correct. A noncompensated surety will be discharged from liability if the principal debtor and
the creditor modify the terms of the contract in any way. A partial surrender of the debtor's collateral is a
modification that will release a noncompensated surety from liability.
Choice "a" is incorrect. One of the reasons creditors seek sureties is to have someone who can pay the
debt if the principal debtor goes bankrupt. Bankruptcy of the principal debtor will not discharge the surety.
Choice "c" is incorrect. The creditor's becoming insane after the debt arose has no bearing on the liability
of either the debtor or the surety.
Choice "d" is not as good an answer as "b". The principal's duress will discharge the surety's obligation
only if the creditor knew about the duress when the creditor accepted the surety.
CPA-01836
Type1 M/C
A-D
Corr Ans: B
PM#2
R 6-04
65. CPA-01836 Lw Nov 95 #26 Page 58
Which of the following statements is(are) correct regarding debtors' rights?
I.
State exemption statutes prevent all of a debtor's personal property from being sold to pay a federal
tax lien.
II. Federal social security benefits received by a debtor are exempt from garnishment by creditors.
a.
b.
c.
d.
I only.
II only.
Both I and II.
Neither I nor II.
CPA-01836
Explanation
Choice "b" is correct. Federal social security benefits may not be garnished by creditors.
Choice "a" is incorrect. Federal law controls what property is subject to federal tax liens; not state law.
Choice "c" is incorrect. Federal law controls what property is subject to federal tax liens; not state law.
Federal social security benefits may not be garnished by creditors.
Choice "d" is incorrect. Federal social security benefits may not be garnished by creditors.
30
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
CPA-01838
Type1 M/C
A-D
Corr Ans: A
PM#3
R 6-04
66. CPA-01838 Lw Nov 95 #27 Page 59
Which of the following liens generally require(s) the lienholder to give notice of legal action before selling
the debtor's property to satisfy the debt?
a.
b.
c.
d.
Mechanic's lien
Yes
Yes
No
No
Artisan's lien
Yes
No
Yes
No
CPA-01838
Explanation
Choice "a" is correct. A mechanic's lien arises from improvements made on real property. An artisan's
lien arises from improvements made to personal property. Both require notice to the owner of the
property in most states.
CPA-01843
Type1 M/C
A-D
Corr Ans: D
PM#4
R 6-04
67. CPA-01843 Lw Nov 95 #29 Page 56
Which of the following acts always will result in the total release of a compensated surety?
a.
b.
c.
d.
The creditor changes the manner of the principal debtor's payment.
The creditor extends the principal debtor's time to pay.
The principal debtor's obligation is partially released.
The principal debtor's performance is tendered.
CPA-01843
Explanation
Choice "d" is correct. Tender of performance by the principal debtor completely releases the surety, even
a compensated surety.
Choice "a" is incorrect. Changing the manner of payment will release a compensated surety only if the
change increases the surety's risk.
Choice "b" is incorrect. Changing the time of payment will release a compensated surety only if the
change increases the surety's risk.
Choice "c" is incorrect. Partially releasing the principal will only partially release the compensated surety.
CPA-01847
Type1 M/C
A-D
Corr Ans: C
PM#5
R 6-04
68. CPA-01847 Lw Nov 95 #30 Page 53
When a principal debtor defaults and a surety pays the creditor the entire obligation, which of the
following remedies gives the surety the best method of collecting from the debtor?
a.
b.
c.
d.
Exoneration.
Contribution.
Subrogation.
Attachment.
CPA-01847
Explanation
Choice "c" is correct. Subrogation is the right a surety has by which he succeeds to the creditor's rights
against the principal when the surety pays the principal's obligations.
Choice "a" is incorrect. Exoneration is the right a surety has against the debtor to force the solvent debtor
to pay a debt when the debtor refuses to do so.
Choice "b" is incorrect. Contribution is a right one surety has against his co-sureties to force them to pay
their share of the debt.
31
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
Choice "d" is incorrect. Attachment is not a right of suretyship, but rather is a remedy imposed against
property of someone who owes a creditor money.
CPA-01849
Type1 M/C
A-D
Corr Ans: A
PM#6
R 6-04
69. CPA-01849 Lw May 95 #26 Page 57
Green was unable to repay a loan from State Bank when due. State refused to renew the loan unless
Green provided an acceptable surety. Green asked Royal, a friend, to act as surety on the loan. To
induce Royal to agree to become a surety, Green fraudulently represented Green's financial condition
and promised Royal discounts on merchandise sold at Green's store. Royal agreed to act as surety and
the loan was renewed. Later, Green's obligation to State was discharged in Green's bankruptcy. State
wants to hold Royal liable. Royal may avoid liability:
a.
b.
c.
d.
If Royal can show that State was aware of the fraudulent representations.
If Royal was an uncompensated surety.
Because the discharge in bankruptcy will prevent Royal from having a right of reimbursement.
Because the arrangement was void at the inception.
CPA-01849
Explanation
Choice "a" is correct. Fraud on the surety by the principal debtor is not a defense unless the creditor
knew of the fraud.
Choice "b" is incorrect. An uncompensated surety can be bound as long as the surety's promise is made
before consideration passed between the principal debtor and the creditor. Here, State renewed the loan
in exchange for obtaining the surety. Thus, there is sufficient consideration to bind Royal; the fact that
Royal is uncompensated is unavailing.
Choice "c" is incorrect. Discharge in bankruptcy of the principal debtor does not discharge the surety.
Choice "d" is incorrect. Nothing in the facts makes the arrangement here void at the inception.
CPA-01852
Type1 M/C
A-D
Corr Ans: C
PM#7
R 6-04
70. CPA-01852 Lw May 95 #27 Page 55
Wright cosigned King's loan from Ace Bank. Which of the following events would release Wright from the
obligation to pay the loan?
a.
b.
c.
d.
Ace seeking payment of the loan only from Wright.
King is granted a discharge in bankruptcy.
Ace is paid in full by King's spouse.
King is adjudicated mentally incompetent.
CPA-01852
Explanation
Choice "c" is correct. Assuming that this is a suretyship situation and that Wright's only obligation is as a
surety, full payment of the underlying obligation discharges the surety.
Choice "a" is incorrect. Since nothing in the facts says that Wright signed only as a guarantor or
guarantor of collection, Ace had no duty to first seek payment from King and so Ace's failure to do so
does not result in Wrights discharge.
Choice "b" is incorrect. Discharge of the principal debtor for bankruptcy does not discharge a cosigner of
a loan.
Choice "d" is incorrect. Incompetency of the principal debtor does not discharge a cosigner of a loan.
CPA-01855
Type1 M/C
A-D
Corr Ans: C
PM#8
R 6-04
71. CPA-01855 Lw Nov 94 #26 Page 60
32
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
Under the Federal Fair Debt Collection Practices Act, which of the following would a collection service
using improper debt collection practices be subject to?
a.
b.
c.
d.
Abolishment of the debt.
Reduction of the debt.
Civil lawsuit for damages for violating the Act.
Criminal prosecution for violating the Act.
CPA-01855
Explanation
Choice "c" is correct. The FDCPA gives parties injured by unfair collection practices the right to sue for
damages. 15 USC 1692k(a)(1)
Choice "a" is incorrect. The FDCPA gives parties injured by unfair collection practices the right to sue for
damages. It does not provide for abolishment of the debt.
Choice "b" is incorrect. The FDCPA gives parties injured by unfair collection practices the right to sue for
damages. It does not provide for a reduction of the debt.
Choice "d" is incorrect. The FDCPA gives parties injured by unfair collection practices the right to sue for
damages. It does not provide criminal penalties.
CPA-01858
Type1 M/C
A-D
Corr Ans: B
PM#9
R 6-04
72. CPA-01858 Lw Nov 94 #27 Page 57
Which of the following actions between a debtor and its creditors will generally cause the debtor's release
from its debts?
a.
b.
c.
d.
Composition
of creditors
Yes
Yes
No
No
Assignment for the
benefit of creditors
Yes
No
Yes
No
CPA-01858
Explanation
Choice "b" is correct. A composition of creditors is agreement between a debtor and at least two creditors
that the creditors will take less than full payment to discharge their debts. It results in discharge of the
debts in full because a contract is created by the cross-promises of the parties (i.e., the cross-promises
serve as consideration, so the preexisting duty rule is avoided). An assignment for the benefit of creditors
is a transfer of some or all of a debtor's property to a trustee, who then uses the property to pay off
creditors. There is no discharge of debts here because no contract is formed with the creditors to take
less than full payment.
CPA-01862
Type1 M/C
A-D
Corr Ans: A
PM#10
R 6-04
73. CPA-01862 Lw Nov 94 #28 Page 58
Which of the following prejudgment remedies would be available to a creditor when a debtor owns no real
property?
a.
b.
c.
d.
Writ of
attachment
Yes
Yes
No
No
Garnishment
Yes
No
Yes
No
CPA-01862
Explanation
Choice "a" is correct. A writ of attachment is simply an order by the court to a sheriff to seize a person's
property. It can be applied to either personal property or real property, and so it can be used when a
33
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
person owns no real property. Garnishment is an order to a third person who holds property of the debtor
to turn the property over to a creditor. The property involved usually is a debt, such as wages. There is
no requirement that the property be the debtor's real property.
CPA-01869
Type1 M/C
A-D
Corr Ans: C
PM#11
R 6-04
74. CPA-01869 Lw Nov 94 #29 Page 55
Which of the following defenses would a surety be able to assert successfully to limit the surety's liability
to a creditor?
a.
b.
c.
d.
A discharge in bankruptcy of the principal debtor.
A personal defense the principal debtor has against the creditor.
The incapacity of the surety.
The incapacity of the principal debtor.
CPA-01869
Explanation
Choice "c" is correct. A surety may raise his or her own contract defenses to limit his or her liability; thus,
the surety's own incapacity is a defense to the surety promise.
Choice "a" is incorrect. The debtor's discharge in bankruptcy is not available as a defense to the surety.
A debtor's possibility of going bankrupt is one of the main reasons that creditors require sureties.
Choice "b" is incorrect. A surety generally cannot raise the debtor's personal defenses against the
creditor.
Choice "d" is incorrect. A surety cannot raise the debtor's incapacity as a defense against the creditor. A
debtor's infancy or mental incapacity is one of the main reasons why a creditor might require a surety.
CPA-01878
Type1 M/C
A-D
Corr Ans: D
PM#12
R 6-04
75. CPA-01878 Lw Nov 94 #30 Page 53
Which of the following rights does a surety have?
a.
b.
c.
d.
Right to compel
the creditor to
collect from the
principal debtor
Yes
Yes
No
No
Right to compel
the creditor to
proceed against
the principal
debtor's collateral
Yes
No
Yes
No
CPA-01878
Explanation
Choice "d" is correct. A surety generally is primarily liable on the debt the surety agrees to backstop and
has no right to compel the creditor to collect from the principal debtor or to compel the creditor to proceed
against the debtor's collateral. (There is, however, a very limited right to both of these in certain
circumstances.)
CPA-01881
Type1 M/C
A-D
Corr Ans: A
PM#13
R 6-04
76. CPA-01881 Lw Nov 94 #31 Page 56
Ingot Corp. lent Flange $50,000. At Ingot's request, Flange entered into an agreement with Quill and
West for them to act as compensated co-sureties on the loan in the amount of $100,000 each. Ingot
released West without Quill's or Flange's consent, and Flange later defaulted on the loan. Which of the
following statements is correct?
a. Quill will be liable for 50% of the loan balance.
34
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
b. Quill will be liable for the entire loan balance.
c. Ingot's release of West will have no effect on Flange's and Quill's liability to Ingot.
d. Flange will be released for 50% of the loan balance.
CPA-01881
Explanation
Choice "a" is correct. Release of a co-surety is treated the same as release of security-it discharges the
other co-sureties to the extent of the impairment of their rights. Had West not been released, Quill would
have had a right of contribution against West for half of the debt. Thus, Quill is discharged to that extent.
Choice "b" is incorrect. Release of a co-surety is treated the same as release of security-it discharges the
other co-sureties to the extent of the impairment of their rights. Had West not been released, Quill would
have had a right of contribution against West for half of the debt. Thus, Quill is discharged to that extent.
Choice "c" is incorrect. Release of a co-surety is treated the same as release of security-it discharges the
other co-sureties to the extent of the impairment of their rights. Had West not been released, Quill would
have had a right of contribution against West for half of the debt. Thus, Quill is discharged to that extent.
Choice "d" is incorrect. A principal is not discharged from a debt merely because a surety is released.
CPA-01885
Type1 M/C
A-D
Corr Ans: A
PM#14
R 6-04
77. CPA-01885 Lw May 94 #21 Page 59
A debtor may attempt to conceal or transfer property to prevent a creditor from satisfying a judgment.
Which of the following actions will be considered an indication of fraudulent conveyance?
a.
b.
c.
d.
Debtor
remaining in
possession after
conveyance
Yes
No
Yes
Yes
Secret
conveyance
Yes
Yes
Yes
No
Debtor retains an
equitable benefit
in the property
conveyed
Yes
Yes
No
Yes
CPA-01885
Explanation
Choice "a" is correct. Under the Uniform Fraudulent Conveyance Act, all three acts are indicia of a
fraudulent conveyance.
CPA-01890
Type1 M/C
A-D
Corr Ans: D
PM#15
R 6-04
78. CPA-01890 Lw May 94 #22 Page 58
A homestead exemption ordinarily could exempt a debtor's equity in certain property from post-judgment
collection by a creditor. To which of the following creditors will this exemption apply?
a.
b.
c.
d.
Valid home
mortgage lien
Yes
Yes
No
No
Valid IRS
Tax lien
Yes
No
Yes
No
CPA-01890
Explanation
Choice "d" is correct. Generally, a home mortgage lien is not subject to a state homestead exemption if it
is a purchase money mortgage and neither is an IRS tax lien.
CPA-01895
Type1 M/C
79. CPA-01895 May 94 #23
A-D
Corr Ans: D
PM#16
R 6-04
Page 58
35
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
Which of the following methods will allow a creditor to collect money from a debtor's wages?
a.
b.
c.
d.
Arrest.
Mechanic's lien.
Order of receivership.
Writ of garnishment.
CPA-01895
Explanation
Choice "d" is correct. A writ of garnishment will allow a creditor to collect money from a debtor's wages.
Choices "a" and "c" are incorrect, because neither the arrest of the debtor nor an order of receivership will
allow a creditor to collect money from a debtor's wages.
Choice "b" is incorrect. A mechanic's lien is placed on property such as an automobile and will prevent
the owner from transferring "clean" title without paying the "mechanics lien." It does not allow the creditor
to "collect money" from a "debtor wages."
CPA-01898
Type1 M/C
A-D
Corr Ans: B
PM#17
R 6-04
80. CPA-01898 Lw May 94 #24 Page 52
A party contracts to guaranty the collection of the debts of another. As a result of the guaranty, which of
the following statements is correct?
a.
b.
c.
d.
The creditor may proceed against the guarantor without attempting to collect from the debtor.
The guaranty must be in writing.
The guarantor may use any defenses available to the debtor.
The creditor must be notified of the debtor's default by the guarantor.
CPA-01898
Explanation
Choice "b" is correct. The Statute of Frauds requires promises to pay the debts of another to be
evidenced by a writing containing the material terms.
Choice "a" is incorrect. Before seeking payment from a guarantor, a creditor must first attempt to collect
from the principal debtor.
Choice "c" is incorrect. The guarantor may use some, but not all, of the debtor's defenses. For example,
the debtor's minority or bankruptcy is not a defense to the guarantor.
Choice "d" is incorrect. A surety generally has no right to be notified of the debtor's default.
CPA-01902
Type1 M/C
A-D
Corr Ans: B
PM#18
R 6-04
81. CPA-01902 Lw May 94 #25 Page 52
Which of the following events will release a noncompensated surety from liability?
a. Release of the principal debtor's obligation by the creditor but with the reservation of the creditor's
rights against the surety.
b. Modification by the principal debtor and creditor of their contract that materially increases the surety's
risk of loss.
c. Filing of an involuntary petition in bankruptcy against the principal debtor.
d. Insanity of the principal debtor at the time the contract was entered into with the creditor.
CPA-01902
Explanation
Choice "b" is correct. Any variation on an uncompensated surety's risk releases the surety.
Choice "a" is incorrect. If the release includes a reservation of rights against the surety, the surety is not
discharged.
Choice "c" is incorrect. The fact that the principal debtor is bankrupt is not a defense to the surety.
36
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
Choice "d" is incorrect. The fact that the principal debtor was incompetent at the time the contract was
made is not a defense to the surety.
CPA-01920
Type1 M/C
A-D
Corr Ans: C
PM#19
R 6-04
82. CPA-01920 Lw Nov 93 #25 Page 54
Nash, Owen, and Polk are co-sureties with maximum liabilities of $40,000, $60,000 and $80,000,
respectively. The amount of the loan on which they have agreed to act as co-sureties is $180,000. The
debtor defaulted at a time when the loan balance was $180,000. Nash paid the lender $36,000 in full
settlement of all claims against Nash, Owen, and Polk. The total amount that Nash may recover from
Owen and Polk is:
a.
b.
c.
d.
$0
$24,000
$28,000
$140,000
CPA-01920
Explanation
Choice "c" is correct. A co-surety has a right of contribution from co-sureties. Where the debt has been
reduced, although a co-surety remains liable for the entire amount agreed to, the right of contribution
allows him to recover from co-sureties their pro rata share of the payment. Here, Nash satisfied the debt
by paying $36,000. Proportionally, Nash was liable for 2/9 of the original debt, Owen was responsible for
3/9, and Polk was responsible for 4/9. Thus, Nash's pro rata share of the $36,000 is $8,000, Owen's
share is $12,000, and Polk's share is $16,000. Thus, Nash may recover $28,000.
CPA-04789
Type1 M/C
A-D
Corr Ans: C
PM#20
R 6-04
83. CPA-04789 Released 2005 Page 59
The federal Fair Debt Collection Practices Act prohibits a debt collector from engaging in unfair practices.
Under the Act, a debt collector generally can be prevented from:
a.
b.
c.
d.
Contacting a third party to ascertain a debtor's location.
Continuing to collect a debt.
Communicating with a debtor who is represented by an attorney.
Commencing a lawsuit to collect a debt.
CPA-04789
Explanation
Choice "c" is correct. The Fair Debt Collection Practices Act prohibits contacting the debtor directly if an
attorney represents the debtor.
Choice "a" is incorrect because a collection agency can contact a third party to discover a debtor's
whereabouts.
Choice "b" is incorrect because the Act is designed to curb abuses in the collection process. It is not
designed to eliminate the debt.
Choice "d" is incorrect because all creditors have the right to sue debtors to collect debts.
Documents of Title & Letters of Credit (required homework reading)
CPA-01945
Type1 M/C
84. CPA-01945 Reg C04 #1
A-D
Corr Ans: C
PM#1
R 6-05
Page 67
Under UCC Article 5 (Letters of Credit), which of the following must a letter of credit include to be valid?
a. An expiration date.
b. A list of the documents that must be presented.
c. A definite undertaking by an issuer.
37
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
d. The consideration for which it was issued.
CPA-01945
Explanation
Choice "c" is correct. The UCC requires little in order for a document to qualify as a letter of credit: just a
definite undertaking by an issuer at the request or for the account of an applicant.
Choices "a" and "b" are incorrect. While most letters of credit will include an expiration date and a list of
documents that are required, the letter need not include such items to qualify as a letter of credit.
Choice "d" is incorrect because consideration is not required for issuance of a letter of credit. A letter of
credit may be issued gratuitously.
CPA-01946
Type1 M/C
85. CPA-01946 Reg C04 #2
A-D
Corr Ans: B
PM#2
R 6-05
Page 67
When does a perpetual letter of credit expire?
a.
b.
c.
d.
After one year.
After five years.
After seven years.
Never, it lasts perpetually.
CPA-01946
Explanation
Choice "b" is correct. Although one might expect a perpetual document to be valid in perpetuity, the UCC
limits the duration of a perpetual letter of credit to five years.
CPA-01948
Type1 M/C
86. CPA-01948 Reg C04 #3
A-D
Corr Ans: C
PM#3
R 6-05
Page 68
Which of the following will justify a bank's refusal to pay on a letter of credit?
I. The buyer has reliable information that the goods are nonconforming.
II. A discrepancy in the documents.
III. A court-issued injunction against payment.
a.
b.
c.
d.
I and II only.
I and III only.
II and III only.
I, II, and III.
CPA-01948
Explanation
Choice "c" is correct. An issuer should not pay if there is a discrepancy in the documents or a court has
enjoined payment. Reliable information that the goods are nonconforming is not a defense to payment
under the doctrine of independence.
CPA-01972
Type1 M/C
87. CPA-01972 Lw R02 #20
A-D
Corr Ans: C
PM#4
R 6-05
Page 64
Under the Documents of Title Article of the UCC, which of the following statements is(are) correct
regarding a common carrier's duty to deliver goods subject to a negotiable, bearer bill of lading?
I. The carrier may deliver the goods to any party designated by the holder of the bill of lading.
II. A carrier who, without court order, delivers goods to a party claiming the goods under a missing
negotiable bill of lading is liable to any person injured by the misdelivery.
a.
b.
c.
d.
I only.
II only.
Both I and II.
Neither I nor II.
38
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
CPA-01972
Explanation
Choice "c" is correct.
The carrier may deliver goods to any party designated by the holder of the bill of lading. If a carrier
delivers goods to a party who claims to be entitled to them under the terms of a missing negotiable bill of
lading, the common carrier is liable to any injured party if the delivery of goods results in injury.
CPA-01977
Type1 M/C
88. CPA-01977 Lw R99 #16
A-D
Corr Ans: D
PM#5
R 6-05
Page 64
Under the Documents of Title Article of the UCC, which of the following acts may excuse or limit a
common carrier's liability for damage to goods in transit?
a.
b.
c.
d.
Vandalism.
Power outage.
Willful acts of third parties.
Providing for a contractual dollar liability limitation.
CPA-01977
Explanation
Choice "d" is correct. A common carrier may limit liability within the contract if it is reasonable and
agreed to.
Choice "a" is incorrect. Common carriers are generally held to be insurers of the goods during delivery
and are liable for vandalism.
Choice "b" is incorrect. Because common carriers are generally held to be insurers of the goods they
deliver, they are liable for damages arising from power outages.
Choice "c" is incorrect. Because common carriers are generally held to be insurers of the goods they
carry, they are liable for damages to goods in transit, even if the damage was caused by the willful act of
a third party.
CPA-01981
Type1 M/C
89. CPA-01981 Lw R97 #5
A-D
Corr Ans: C
PM#6
R 6-05
Page 63
Under the Documents of Title Article of the UCC, which of the following terms must be contained in a
warehouse receipt?
I.
A statement indicating whether the goods received will be delivered to the bearer, to a specified
person, or to a specified person or his/her order.
II. The location of the warehouse where the goods are stored.
a.
b.
c.
d.
I only.
II only.
Both I and II.
Neither I nor II.
CPA-01981
Explanation
Choice "c" is correct. Under the UCC, a document of title must include a statement of whether the goods
received will be delivered to the bearer, to a specified person, or to a specified person or that person's
order, and the document must include the location of the goods. This is so that the warehouse operator
knows what is required to release the goods, and so that the holder of the receipt knows where the goods
are located.
CPA-02035
Type1 M/C
90. CPA-02035 Lw R96 #15
A-D
Corr Ans: C
PM#7
R 6-05
Page 64
39
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
Under the Documents of Title Article of the UCC, which of the following statements is(are) correct
regarding a common carrier's duty to deliver goods subject to a negotiable, bearer bill of lading?
I. The carrier may deliver the goods to any party designated by the holder of the bill of lading.
II. A carrier, who, without court order, delivers goods to a party claiming the goods under a missing
negotiable bill of lading is liable to any person injured by the misdelivery.
a.
b.
c.
d.
I only.
II only.
Both I and II.
Neither I nor II.
CPA-02035
Explanation
Choice "c" is correct. The carrier may deliver goods to any party designated by the holder of the bill of
lading. If a carrier delivers goods to a party who claims to be entitled to them under the terms of a
missing negotiable bill of lading, the common carrier is liable to any injured party if delivery of the goods
results in an injury.
CPA-02038
Type1 M/C
A-D
Corr Ans: B
PM#8
R 6-05
91. CPA-02038 Lw Nov 93 #46 Page 63
Field Corp. issued a negotiable warehouse receipt to Hall for goods stored in Field's warehouse. Hall's
goods were lost due to Field's failure to exercise such care as a reasonably careful person would under
like circumstances. The state in which this transaction occurred follows the UCC rule with respect to a
warehouseman's liability for lost goods. The warehouse receipt is silent on this point. Under the
circumstances, Field is:
a.
b.
c.
d.
Liable because it is strictly liable for any loss.
Liable because it was negligent.
Not liable because the warehouse receipt was negotiable.
Not liable unless Hall can establish that Field was grossly negligent.
CPA-02038
Explanation
Choice "b" is correct. A warehouseman has a duty to use reasonable care with respect to goods stored.
Negligence breaches this duty, and makes the warehouseman liable for resulting losses. UCC 7-204
Choice "a" is incorrect. A warehouseman must use reasonable care with respect to stored goods; he is
not strictly liable.
Choice "c" is incorrect. A warehouseman must use reasonable care with respect to stored goods whether
the goods are stored pursuant to a negotiable or nonnegotiable warehouse receipt.
Choice "d" is incorrect. A warehouseman must use ordinary care with respect to stored goods. Thus, he
can be liable for ordinary negligence; gross negligence need not be proved.
CPA-02041
Type1 M/C
A-D
Corr Ans: D
PM#9
R 6-05
92. CPA-02041 Lw Nov 93 #47 Page 62
Which of the following statements is correct concerning a bill of lading in the possession of Major Corp.
that was issued by a common carrier and provides that the goods are to be delivered "to bearer?"
a. The carrier's lien for any unpaid shipping charges does not entitle it to sell the goods to enforce the
lien.
b. The carrier will not be liable for delivering the goods to a person other than Major.
c. The carrier may require Major to endorse the bill of lading prior to delivering the goods.
d. The bill of lading can be negotiated by Major by delivery alone and without endorsement.
CPA-02041
Explanation
Choice "d" is correct. Since the bill of lading is deliverable to bearer, it may be negotiated by delivery
alone; no endorsement is necessary. UCC 7-104
40
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
Choice "a" is incorrect. The carrier does have a right to sell the goods to recover unpaid shipping
charges. UCC 7-308.
Choice "b" is incorrect. The carrier must deliver the goods to the person who has the bill of lading. Since
Major possesses the bill, the carrier would be liable for delivery to anyone else.
Choice "c" is incorrect. The carrier has no right to require endorsement of a bearer bill of lading.
CPA-02043
Type1 M/C
A-D
Corr Ans: D
PM#10
R 6-05
93. CPA-02043 Lw May 93 #44 Page 61
Under the UCC, a bill of lading:
a.
b.
c.
d.
Will never be enforceable if altered.
Is issued by a consignee of goods.
Will never be negotiable unless it is endorsed.
Is negotiable if the goods are to be delivered to bearer.
CPA-02043
Explanation
Choice "d" is correct. A bill of lading is negotiable if by its terms the goods are to be delivered to bearer or
to the order of a named person. UCC 7-104
Choice "a" is incorrect. An altered bill of lading is enforceable according to its original terms. UCC 7-208
Choice "b" is incorrect. The carrier issues a bill of lading; the consignee is the person who is to receive
the goods.
Choice "c" is incorrect. No signature is necessary for a bill of lading to be negotiable. UCC 7-104
Supplemental Questions
CPA-02046
Type1 M/C
94. CPA-02046 Nov 89 #40
A-D
Corr Ans: C
PM#1
R 6-99
Page 4
A trade acceptance is an instrument drawn by a:
a.
b.
c.
d.
Seller obligating the seller or designee to make payment.
Buyer obligating the buyer or designee to make payment.
Seller ordering the buyer or designee to make payment.
Buyer ordering the seller or designee to make payment.
CPA-02046
Explanation
Choice "c" is correct. A trade acceptance is a "draft" drawn by the seller of goods on the buyer's account.
The trade acceptance orders the buyer or his/her designee to make payment.
Choices "a", "b", and "d" are incorrect, per the above.
CPA-02049
Type1 M/C
95. CPA-02049 Nov 89 #41
A-D
Corr Ans: C
PM#2
R 6-99
Page 4
For which of the following negotiable instruments is a bank not an acceptor?
a.
b.
c.
d.
Cashier's check.
Certified check.
Certificate of deposit.
Bank acceptance.
CPA-02049
Explanation
41
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
Choice "c" is correct. A "certificate of deposit" is an acknowledgment by a financial institution of receipt of
money and promise to repay it. By definition a "certificate of deposit" is a special type of a 2-party note.
In a "certificate of deposit" the bank is not an "acceptor."
Choice "a" is incorrect. In a "cashier's check" the bank, as both the "drawer" and the "drawee," is an
"acceptor."
Choice "b" is incorrect. In a "certified check the bank, as an "acceptor," becomes primarily liable to the
holder upon "certification."
Choice "d" is incorrect. By definition a bank becomes an "acceptor" when it issues a bank acceptance.
CPA-02051
Type1 M/C
96. CPA-02051 Nov 89 #42
A-D
Corr Ans: D
PM#3
R 6-99
Page 5
Which of the following is required to make an instrument negotiable?
a.
b.
c.
d.
Stated date of issue.
An endorsement by the payee.
Stated location for payment.
Payment only in legal tender.
CPA-02051
Explanation
Choice "d" is correct. To be negotiable, an instrument must be in writing; be signed by the maker (note)
or drawer (draft); contain an unconditional promise (note) or order (draft) to pay a fixed amount of money
(legal tender); be payable on demand or at a definite time; be payable to order ot to bearer; and contain
no other unauthorized undertaking or instruction. Thus, the only choice that reflects a required element is
"d".
Choice "a" is incorrect. An instrument need not state a date of issuance to be negotiable.
Choice "b" is incorrect. Negotiability is determined by the "face" of the instrument and not by whether or
not it includes and endorsement by a payee; indeed, a negotiable instrument drawn "in blank" need never
be endorsed.
Choice "c" is incorrect. An instrument does not have to state a location for payment to be "negotiable."
CPA-02055
Type1 M/C
97. CPA-02055 Nov 89 #43
A-D
Corr Ans: A
PM#4
R 6-99
Page 21
Blare bought a house and provided the required funds in the form of a certified check from a bank. Which
of the following statements correctly describes the legal liability of Blare and the bank?
a.
b.
c.
d.
The bank has accepted; therefore, Blare is without liability.
The bank has not accepted; therefore, Blare has primary liability.
The bank has accepted, but Blare has secondary liability.
The bank has not accepted, but Blare has secondary liability.
CPA-02055
Explanation
Choice "a" is correct. When a bank accepts a check, all previous parties on the check are discharged
from their liability and the bank becomes primarily liable. Certification is a type of acceptance. Therefore,
the bank has accepted. Blare is without liability and choices "b", "c", and "d" are incorrect.
CPA-02056
Type1 M/C
98. CPA-02056 Nov 90 #46
A-D
Corr Ans: D
PM#5
R 6-99
Page 5
Union Co. possesses the following instrument:
42
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
Holt, MT
$4,000
April 15, 1990
Fifty days after date, or sooner, the undersigned promises to pay to the order of:
Union Co.
Four Thousand Dollars
at Salem Bank, Holt, MT
Ten percent interest per annum.
This instrument is secured by the maker's business inventory.
EASY, INC.
By:
Thomas Foy
Thomas Foy, President
Assuming all other requirements of negotiability are satisfied, this instrument is:
a.
b.
c.
d.
Not negotiable because of a lack of a definite time for payment.
Not negotiable because the amount due is unspecified.
Negotiable because it is secured by the maker's inventory.
Negotiable because it calls for payment of a fixed amount of money.
CPA-02056
Explanation
Choice "d" is correct. To be negotiable, an instrument must call for the payment of a fixed amount of
money. The instrument here calls for the payment of $4,000 plus interest, which qualifies as a fixed
amount.
Choice "a" is incorrect. To be negotiable, an instrument must be payable on demand or at a definite time.
The instrument here states that it is payable in 50 days or sooner. Because it states the latest date it is
due, it is treated as being payable at a definite time, and the acceleration clause ("or sooner") does not
affect its negotiability.
Choice "b" is incorrect. The instrument does specify the amount due -- $4,000 plus ten percent interest.
An instrument is not made non-negotiable simply because it is payable with interest.
Choice "c" is incorrect. The fact that the instrument states that it is secured does not affect its
negotiability.
CPA-02065
Type1 M/C
99. CPA-02065 May 90 #35
A-D
Corr Ans: A
PM#6
R 6-99
Page 3
Which of the following negotiable instruments is subject to the provisions of the UCC Commercial Paper
Article?
a.
b.
c.
d.
Installment note payable on the first day of each month.
Warehouse receipt.
Bill of lading payable to order.
Corporate bearer bond with a maturity date of January 1, 1999.
CPA-02065
Explanation
Choice "a" is correct. The commercial paper article (Article 3) applies to notes.
Choice "b" is incorrect. A warehouse receipt is subject to Article 7 of the UCC.
Choice "c" is incorrect. A bill of lading is subject to Article 7 of the UCC.
Choice "d" is incorrect. Bonds are subject to Article 8 of the UCC.
CPA-02067
Type1 M/C
A-D
Corr Ans: C
PM#7
R 6-99
43
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
100. CPA-02067
May 90 #39
Page 20
A holder in due course will take free of which of the following defenses?
a.
b.
c.
d.
Infancy, to the extent that it is a defense to a simple contract.
Discharge of the maker in bankruptcy.
A wrongful filling-in of the amount payable that was omitted from the instrument.
Duress of a nature that renders the obligation of the party a nullity.
CPA-02067
Explanation
Choice "c" is correct. The wrongful filling-in of the amount of an otherwise negotiable instrument -unauthorized completion -- is a personal defense, which cannot be used against a HDC.
Choice "a" is incorrect. Infancy (incapacity) is a real defense, which can be used against a HDC.
Choice "b" is incorrect. Discharge in bankruptcy is a real defense, which can be used against a HDC.
Choice "d" is incorrect. Duress that would render the instrument void is a real defense which can be used
against a HDC.
CPA-02071
Type1 M/C
101. CPA-02071
A-D
Nov 90 #47
Corr Ans: B
PM#8
R 6-99
Page 16
A $5,000 promissory note payable to the order of Neptune is discounted to Bane by blank endorsement
for $4,000. King steals the note from Bane and sells it to Ott who promises to pay King $4,500. After
paying King $3,600, Ott learns that King stole the note. Ott makes no further payment to King. Ott is:
a.
b.
c.
d.
A holder in due course to the extent of $5,000.
A holder in due course to the extent of $4,000.
A holder in due course to the extent of $3,60.
An ordinary holder to the extent of $0.
CPA-02071
Explanation
Choice "b" is correct. Because the note was endorsed in blank, it can be transferred by delivery alone, so
Ott became a holder of the note when King delivered it to him. To become a holder in due course
("HDC"), Ott had to take the note for value, in good faith and without notice of any defense or claim on the
note. Where, as here, the holder pays part of the agreed upon value and then receives notice of a
defense or claim, he is considered an HDC in proportion to the consideration paid toward the agreed
upon price. Here, Ott paid $3,600 of the $4,500 agreed upon price, so he is an HDC in 4/5s of the $5,000
note, or $4,000.
Choices "a", "c", and "d" are incorrect, per the above.
CPA-02123
Type1 M/C
102. CPA-02123
A-D
Nov 91 #46
Corr Ans: A
PM#9
R 6-99
Page 3
May 19,1991
I promise to pay to the order of A. B. Shark $1,100 (One thousand, one hundred
dollars) with interest thereon at the rate of 12% per annum.
T. T. Tile
T. T. Tile
Guaranty
I personally guaranty payment by T. T. Tile.
N. A. Abner
N. A. Abner
44
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
The instrument is a:
a.
b.
c.
d.
Promissory demand note.
Sight draft.
Check.
Trade acceptance.
CPA-02123
Explanation
Choice "a" is correct. The instrument here contains a promise to pay rather than an order to pay. Thus, it
is a promissory note rather than any type of draft (drafts involve an order to a third party to pay rather
than a promise to pay). Moreover, the instrument does not state a due date, so it is treated as being
payable on demand.
Choice "b" is incorrect. A sight draft is three party paper (i.e., an instrument containing the drawer's order
to the drawee to pay the payee) due on demand. The instrument here contains a promise to pay rather
than an order, and so is a note.
Choice "c" is incorrect. A check is a type of draft (one ordering a bank to pay, and which is payable on
demand). The instrument here contains a promise rather than an order to pay and it is not drawn on a
bank.
Choice "d" is incorrect. A trade acceptance is three party order paper, usually drawn by the seller of
goods on the buyer. Here we have a promise to pay and no facts indicating that this would be a trade
acceptance.
CPA-02127
Type1 M/C
103. CPA-02127
A-D
Nov 91 #47
Corr Ans: C
PM#10
R 6-99
Page 5
May 19,1991
I promise to pay to the order of A. B. Shark $1,100 (One thousand, one hundred
dollars) with interest thereon at the rate of 12% per annum.
T. T. Tile
T. T. Tile
Guaranty
I personally guaranty payment by T. T. Tile.
N. A. Abner
N. A. Abner
The instrument is:
a.
b.
c.
d.
Nonnegotiable even though it is payable on demand.
Nonnegotiable because the numeric amount differs from the written amount.
Negotiable even though a payment date is not specified.
Negotiable because of Abner's guaranty.
CPA-02127
Explanation
Choice "c" is correct. To be negotiable, an instrument must be in writing; be signed by the maker (note)
or drawer (draft); contain an unconditional promise (note) or order (draft) to pay; be for a fixed amount of
money; be payable on demand or at a definite time; be payable to bearer; and contain no unauthorized
undertaking or instruction. The instrument here meets all of the requirements. It is in writing; it is signed
by the maker (Abner); it contains an unconditional promise to pay; it is for a fixed amount ($1,100 - the
words control over the numbers when there is a discrepancy, and the fact that the instrument includes
45
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
interest does not affect negotiability); it is payable on demand because it does not state a date for
payment; it is payable to order; and it does not contain any undertaking not authorized by the UCC. The
fact that it is guaranteed does not affect negotiability.
Choices "a", "b", and "d" are incorrect, per the above.
CPA-02129
Type1 M/C
104. CPA-02129
A-D
Nov 91 #49
Corr Ans: D
PM#11
R 6-99
Page 20
Cobb gave Garson a signed check with the amount payable left blank. Garson was to fill in, as the
amount, the price of fuel oil Garson was to deliver to Cobb at a later date. Garson estimated the amount
at $700, but told Cobb it would be no more than $900. Garson did not deliver the fuel oil, but filled in the
amount of $1,000 on the check. Garson then negotiated the check to Josephs in satisfaction of a $500
debt with the $500 balance paid to Garson in cash. Cobb stopped payment and Josephs is seeking to
collect $1,000 from Cobb. Cobb's maximum liability to Josephs will be:
a.
b.
c.
d.
$0
$500
$900
$1,000
CPA-02129
Explanation
Choice "d" is correct. $1,000. This is a case of unauthorized completion rather than a case of alteration.
While alteration is a real defense except to the extent of the original amount, unauthorized completion is a
personal defense not available against a holder in due course. Josephs appears to be a holder in due
course because he appears to have taken the check for value, in good faith, and without notice of the
unauthorized completion. Thus, Cobb cannot raise his defense against Josephs and is liable for the full
$1,000.
Moral of the story: Do not sign blank checks!
CPA-02135
Type1 M/C
105. CPA-02135
A-D
Nov 91 #50
Corr Ans: C
PM#12
R 6-99
Page 22
A subsequent holder of a negotiable instrument may cause the discharge of a prior holder of the
instrument by any of the following actions by the subsequent holder, except:
a.
b.
c.
d.
Unexcused delay in presentment of a time draft.
Procuring certification of a check.
Giving notice of dishonor the day after dishonor.
Material alteration of a note.
CPA-02135
Explanation
Choice "c" is correct. A holder of a negotiable instrument will not cause the discharge of a prior holder by
giving the prior holder notice of dishonor. The prior holder remains potentially liable.
Choice "a" is incorrect. Unexcused delay in presenting a time draft by the subsequent holder will cause
the discharge of a prior holder.
Choice "b" is incorrect. Certification of a check by subsequent holder will cause the discharge of all prior
holders.
Choice "d" is incorrect. Material alteration of a note by the subsequent holder will cause the discharge of
all prior holders.
CPA-02137
Type1 M/C
106. CPA-02137
A-D
May 92 #46
Corr Ans: D
PM#13
R 6-99
Page 12
46
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
The following endorsements appear on the back of a negotiable promissory note made payable "to
bearer." Clark has possession of the note.
Pay to Sam North
Alice Fox
Sam North
(without recourse)
Which of the following statements is correct?
a.
b.
c.
d.
Clark's unqualified endorsement is required to further negotiate the note.
To negotiate the note, Clark must have given value for it.
Clark is not a holder because North's qualified endorsement makes the note nonnegotiable.
Clark can negotiate the note by delivery alone.
CPA-02137
Explanation
Choice "d" is correct. Sam North's endorsement, while "qualified" is in blank (i.e., it did not name a new
payee). Therefore, it makes the instrument bearer paper. Bearer paper can be negotiated by mere
delivery alone.
Choice "a" is incorrect. Bearer paper does not require the holder's endorsement. The instrument is
bearer paper because Sam North did not name a new payee when he endorsed (i.e., he endorsed in
blank).
Choice "b" is incorrect. No such rule. A negotiable instrument can be transferred without consideration.
Choice "c" is incorrect. The qualified endorsement (without recourse) does not prevent further negotiation
and it does not render the instrument non-negotiable.
CPA-02143
Type1 M/C
107. CPA-02143
A-D
Nov 92 #40
Corr Ans: D
PM#14
R 6-99
Page 20
A maker of a note will have a real defense against a holder in due course as a result of any of the
following conditions, except:
a.
b.
c.
d.
Discharge in bankruptcy.
Forgery.
Fraud in the execution.
Lack of consideration.
CPA-02143
Explanation
Choice "d" is correct. Lack of consideration is a personal defense and not a real defense.
The following defenses are real:
a. Discharge in bankruptcy.
b. Forgery.
c. Fraud in the execution.
CPA-02152
Type1 M/C
108. CPA-02152
A-D
Nov 92 #33
Corr Ans: B
PM#15
R 6-99
Page 3
Which of the following negotiable instruments is subject to the UCC Commercial Paper Article?
a. Corporate bearer bond with a maturity date of January 1, 2001.
b. Installment note payable on the first day of each month.
c. Warehouse receipt.
47
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
d. Bill of lading payable to order.
CPA-02152
Explanation
Choice "b" is correct. The UCC Commercial Paper Article (Article 3) generally concerns notes and drafts.
Thus, it governs installment notes.
Choice "a" is incorrect. Bearer bonds are governed by Article 8.
Choice "c" is incorrect. Warehouse receipts are governed by Article 7.
Choice "d" is incorrect. Bills of lading are governed by Article 7.
CPA-02154
Type1 M/C
109. CPA-02154
A-D
R98 #10
Corr Ans: B
PM#16
R 6-99
Page 16
Under the Negotiable Instruments Article of the UCC, which of the following parties will be a holder but
not be entitled to the rights of a holder in due course?
a. A party who, knowing of a real defense to payment, received an instrument from a holder in due
course.
b. A party who found an instrument payable to bearer.
c. A party who received, as a gift, an instrument from a holder in due course.
d. A party who, in good faith and without notice of any defect, gave value for an instrument.
CPA-02154
Explanation
Choice "b" is correct. To qualify as a holder in due course ("HDC"), in addition to being the holder of the
instrument, the holder must also take the instrument in good faith without notice of any claims or defenses
and must give value for the instrument. Finding the instrument does not constitute giving value.
Choices "a" and "c" are incorrect, because under the "shelter rule," a person who takes the instrument
from an HDC acquires the rights of the HDC even if the holder does not give value or even if the holder
takes the instrument with knowledge of a claim or defense (even a "real defense"). If the maker, drawer
or endorser has a real defense, though, the HDC rights are not very valuable.
Choice "d" is incorrect, because a holder who in good faith and without notice of any defect gave value for
the instrument would qualify as an HDC.
CPA-02167
Type1 M/C
110. CPA-02167
A-D
Nov 89 #53
Corr Ans: C
PM#17
R 6-99
Page 30
Perfection of a security interest permits the secured party to protect its interest by:
a.
b.
c.
d.
Avoiding the need to file a financing statement.
Preventing another creditor from obtaining a security interest in the same collateral.
Establishing priority over the claims of most subsequent secured creditors.
Denying the debtor the right to possess the collateral.
CPA-02167
Explanation
Choice "c" is correct. The act of "perfection" of a security interest establishes a priority over claims of
most subsequent secured creditors.
Choice "a" is incorrect. In many cases the act of "perfection" requires the filing of a financing statement.
Choice "b" is incorrect. The act of "perfection" does not necessarily give the secured party a priority over
all other parties (e.g., buyers of inventory in the ordinary course of business have superior rights). (Again,
watch out for all inclusive words such as "all.")
Choice "d" is incorrect. In most cases the secured party (creditor) obtains "perfection" while the debtor
possesses the collateral.
48
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
CPA-02169
Type1 M/C
111. CPA-02169
A-D
Nov 89 #54
Corr Ans: A
PM#18
R 6-99
Page 36
Roth and Dixon both claim a security interest in the same collateral. Roth's security interest attached on
January 1, 1989, and was perfected by filing on March 1, 1989. Dixon's security interest attached on
February 1, 1989, and was perfected on April 1, 1989, by taking possession of the collateral. Which of
the following statements is correct?
a. Roth's security interest has priority because Roth perfected before Dixon perfected.
b. Dixon's security interest has priority because Dixon's interest attached before Roth's interest was
perfected.
c. Roth's security interest has priority because Roth's security interest attached before Dixon's security
interest attached.
d. Dixon's security interest has priority because Dixon is in possession of the collateral.
CPA-02169
Explanation
Choice "a" is correct. When there is a conflict between perfected security interests, generally the secured
party who was first to file or perfect has priority. Roth filed and perfected before Dixon perfected.
Choices "b" and "c" are incorrect per the above.
Choice "d" is incorrect. Roth's security interest is superior to Dixon's, because Roth was first to file or
perfect. The fact that Dixon is in possession of the collateral is irrelevant.
CPA-02181
Type1 M/C
112. CPA-02181
A-D
May 90 #49
Corr Ans: A
PM#19
R 6-99
Page 32
Sun, Inc. manufactures and sells household appliances on credit directly to wholesalers, retailers, and
consumers. Sun can perfect its security interest in the appliances without having to file a financing
statement or take possession of the appliances if the sale is made by Sun to:
a.
b.
c.
d.
Consumers.
Wholesalers that sell to buyers in the ordinary course of business.
Retailers.
Wholesalers that sell to distributors for resale.
CPA-02181
Explanation
Choice "a" is correct. Perfection is automatic with attachment in the case of a PMSI (Purchase Money
Security Interest) in consumer goods.
Choices "b", "c", and "d" are incorrect. The appliances in the hands of wholesalers or retailers, who sell
to either buyers in the ordinary course of business or distributors for resale, would be inventory. A
purchase money security interest in inventory is not automatically perfected. Sun would have to file to
perfect its interest in the wholesalers' or retailers' inventory.
CPA-02183
Type1 M/C
113. CPA-02183
A-D
May 91 #57
Corr Ans: C
PM#20
R 6-99
Page 29
Pix Co., which is engaged in the business of selling appliances, borrowed $18,000 from Lux Bank. Pix
executed a promissory note for that amount and pledged all of its customer installment receivables as
collateral for the loan. Pix executed a security agreement that described the collateral, but Lux did not file
a financing statement. With respect to this transaction:
a. Attachment of the security interest did not occur because Pix failed to file a financing statement.
b. Perfection of the security interest occurred despite Lux's failure to file a financing statement.
c. Attachment of the security interest took place when the loan was made and Pix executed the security
agreement.
d. Perfection of the security interest did not occur because accounts receivable are intangibles.
49
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
CPA-02183
Explanation
Choice "c" is correct. Attachment of a security interest takes place when three events have been
completed:
1. Agreement between creditor and debtor,
2. Value is given by creditor, and
3. Debtor has rights in collateral
Here, attachment took place when the loan was made and the debtor signed the security agreement.
Choice "a" is incorrect. The filing of a financing agreement is not a requirement for an "attachment."
Choice "b" is incorrect. "Perfection" here would require the filing of the financing statement; although a
small scale assignment of accounts is automatically perfected, here the assignment was of all of Pix Co.'s
accounts.
Choice "d" is incorrect. A security interest in intangibles, such as accounts receivable, can be perfected.
However, "perfection" did not occur here because there was no filing.
CPA-02190
Type1 M/C
114. CPA-02190
A-D
Nov 92 #46
Corr Ans: D
PM#21
R 6-99
Page 29
Under the UCC Secured Transactions Article, when collateral is in a secured party's possession, which of
the following conditions must also be satisfied to have attachment?
a.
b.
c.
d.
There must be a written security agreement.
The public must be notified.
The secured party must receive consideration.
The debtor must have rights to the collateral.
CPA-02190
Explanation
Choice "d" is correct. The term attachment refers to the relationship between the debtor and the secured
party (creditor).
There are 3 requirements for an attachment:
1. Agreement of the parties.
2. Value is given by creditor.
3. Debtor has rights in the collateral.
Attachment does not take place until all 3 events have happened. Of the possible selections "d" is the
only one of the 3 elements.
Choice "a" is incorrect. Attachment does not require a written security agreement; possession of the
collateral is an alternative for proving the agreement.
Choice "b" is incorrect. Attachment (rights between debtor and creditor) does not require that the public
be notified.
Choice "c" is incorrect. Attachment does not require that the secured party receive consideration; the
secured party/creditor is the one who must give value in exchange for the security interest.
CPA-02192
Type1 M/C
115. CPA-02192
A-D
Nov 92 #47
Corr Ans: D
PM#22
R 6-99
Page 30
Under the UCC Secured Transaction Article, what is the effect of perfecting a security interest by filing a
financing statement?
a. The secured party can enforce its security interest against the debtor.
b. The secured party has permanent priority in the collateral even if the collateral is removed to another
state.
50
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
c.
The debtor is protected against all other parties who acquire an interest in the collateral after the
filing.
d. The secured party has priority in the collateral over most creditors who acquire a security interest in
the same collateral after the filing.
CPA-02192
Explanation
Choice "d" is correct. The best way to think of perfection is that it is a loose rope around collateral.
Sometimes when the secured party goes to call it in it's there - sometimes it's not. As the answer states,
perfection will give the secured party priority over most creditors.
Choice "a" is incorrect. Perfection is needed to protect the secured party from third parties, not from the
debtor. Attachment protects the creditor from the debtor.
Choice "b" is incorrect. Perfection does not give the secured party permanent 100% priority if the
collateral is moved to another state; filing in the new state generally is required for protection to last
beyond four months. Moreover, perfection generally lasts five years unless extended.
Choice "c" is incorrect. As noted above in answer "d", the secured party who obtains perfection gets
priority over most parties but not necessarily from all parties (e.g., a buyer of inventory in the ordinary
course of business may have rights superior to the secured party's rights).
CPA-02196
Type1 M/C
116. CPA-02196
A-D
Nov 92 #48
Corr Ans: A
PM#23
R 6-99
Page 31
A secured creditor wants to file a financing statement to perfect its security interest. Under the UCC
Secured Transactions Article, which of the following must be included in the financing statement?
a.
b.
c.
d.
A listing or description of the collateral.
An after-acquired property provision.
The creditor's signature.
The collateral's location.
CPA-02196
Explanation
Choice "a" is correct. Under the UCC Secured Transactions Article (Article 9) a financing statement must
contain a general description of the collateral in which the security interest is being sought.
Choice "b" is incorrect. While an after-acquired property clause is permitted, it is not required.
Choice "c" is incorrect. A financing statement must include the creditor's name and address, but it need
not be signed by either the creditor or the debtor.
Choice "d" is incorrect. A financing statement may provide for the location of the collateral but this is not
a requirement.
CPA-02200
Type1 M/C
117. CPA-02200
A-D
May 90 #52
Corr Ans: D
PM#24
R 6-99
Page 41
Ivor, Queen, and Lear own a building as joint tenants with the right of survivorship. Ivor donated his
interest in the building to Day Charity by executing and delivering a deed to Day. Both Queen and Lear
refused to consent to Ivor's transfer to Day. Subsequently, Queen and Lear died. After their deaths,
Day's interest in the building consisted of:
a.
b.
c.
d.
Total ownership due to the deaths of Queen and Lear.
No interest because Queen and Lear refused to consent to the transfer.
A 1/3 interest as a joint tenant.
A 1/3 interest as a tenant in common.
CPA-02200
Explanation
Choice "d" is correct. If one of three or more parties to a joint tenancy makes an inter vivos (during
lifetime) conveyance (by sale or gift), the joint tenancy is destroyed with respect to the new party and the
51
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
new party holds title as a tenant in common. However, a joint tenancy still exists between the two original
parties remaining. Thus, after the donation, Day held a 1/3 interest as a tenant in common and Queen
and Lear each held a 1/3 interest as joint tenants. A tenant in common does not have a right of
survivorship, thus Queen's and Lear's interests did not transfer to Day upon their deaths.
Choice "a" is incorrect. As a tenant in common, Day is not entitled to Queen's share or Lear's share upon
their death.
Choice "b" is incorrect. Consent is not necessary to convey an undivided interest in a joint tenancy;
however, the transfer severs the joint tenancy as to the transferred interest and the transferee holds as a
tenant in common.
Choice "c" is incorrect. An inter vivos (lifetime) transfer of a joint tenant's interest severs the joint tenancy
as to the interest transferred and the transferee holds as a tenant in common.
CPA-02201
Type1 M/C
118. CPA-02201
A-D
May 90 #54
Corr Ans: C
PM#25
R 6-99
Page 44
Delta Corp. leased 60,000 square feet in an office building from Tanner under a written 25-year lease.
Which of the following statements is correct?
a. Tanner's death will terminate the lease and Delta will be able to recover any resulting damages from
Tanner's estate.
b. Tanner's sale of the office building will terminate the lease unless both Delta and the buyer consented
to the assumption of the lease by the buyer.
c. In the absence of a provision in the lease to the contrary, Delta does not need Tanner's consent to
assign the lease to another party.
d. In the absence of a provision in the lease to the contrary, Delta would need Tanner's consent to enter
into a sublease with another party.
CPA-02201
Explanation
Choice "c" is correct. The right to assign a lease is implied unless specifically prohibited by the lease
agreement. Thus, the tenant does not need the landlord's consent to assign the lease.
Choice "a" is incorrect. A lease is an estate in real property. Death of the "landlord" does not terminate a
lease.
Choice "b" is incorrect. A lease is an estate in a real property. The sale of a leased building by the
landlord does not terminate the lease.
Choice "d" is incorrect. The right to sublease is implied unless specifically prohibited by the lease
agreement. Thus, the tenant does not need the landlord's consent to sublease.
CPA-02209
Type1 M/C
119. CPA-02209
A-D
May 90 #55
Corr Ans: B
PM#26
R 6-99
Page 47
On February 2, Mazo deeded a warehouse to Parko for $450,000. Parko did not record the deed. On
February 12, Mazo deeded the same warehouse to Nexis for $430,000. Nexis was aware of the prior
conveyance to Parko. Nexis recorded its deed before Parko recorded. Who would prevail under the
following recording statutes?
a.
b.
c.
d.
Notice
statute
Nexis
Parko
Parko
Parko
Race
statute
Parko
Nexis
Nexis
Parko
Race-notice
statute
Parko
Parko
Nexis
Nexis
CPA-02209
Explanation
Choice "b" is correct. Parko - Nexis - Parko.
52
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
Under a notice-type recording statute, a subsequent purchaser prevails, even without recording, unless
that person had notice of a prior conveyance. Nexis was aware of the prior conveyance (had notice).
Thus, Parko will prevail.
Under a race-type recording statute, the first person to record prevails; notice is irrelevant. Nexis was first
to record. Thus, Nexis will prevail.
Under a race-notice-type recording statute, the first person to record prevails unless that person had
notice of a prior conveyance. Nexis was first to record; but she was aware of the prior conveyance.
Thus, Parko will prevail.
CPA-02214
Type1 M/C
120. CPA-02214
A-D
May 90 #57
Corr Ans: D
PM#27
R 6-99
Page 50
Sussex, Inc. had given a first mortgage when it purchased its plant and warehouse. Sussex needed
additional working capital. It decided to obtain financing by giving a second mortgage on the plant and
warehouse. Which of the following statements is true with respect to the mortgages?
a.
b.
c.
d.
Default on payment of the second mortgage will constitute default on the first mortgage.
The second mortgage may not be prepaid without the consent of the first mortgagee.
The second mortgagee may not pay off the first mortgage to protect its security.
If both mortgages are foreclosed, the first mortgage must be fully paid before paying the second
mortgage.
CPA-02214
Explanation
Choice "d" is correct. "Satisfaction in full" is made in order of priority upon foreclosure; thus, the first
mortgage must be fully paid before paying the second mortgage.
Choice "a" is incorrect. Default on the second mortgage does not constitute default on the first mortgage.
Choice "b" is incorrect. The second mortgage may be prepaid without the consent of the first mortgagee.
Choice "c" is incorrect. The second mortgagee may pay off the first mortgage to protect its security.
CPA-02216
Type1 M/C
121. CPA-02216
A-D
May 90 #58
Corr Ans: B
PM#28
R 6-99
Page 50
If a mortgagor defaults in the payment of a purchase money mortgage, and the mortgagee forecloses, the
mortgagor may do any of the following, except:
a. Obtain any excess monies resulting from a judicial sale after payment of the mortgagee.
b. Remain in possession of the property after a foreclosure sale if the equity in the property exceeds the
balance due on the mortgage.
c. Refinance the mortgage with another lender and repay the original mortgage.
d. Assert the equitable right of redemption by paying the mortgagee.
CPA-02216
Explanation
Choice "b" is correct. After the property is sold, the mortgagor (former owner) is no longer entitled to
possession. The new owner is entitled to possession.
Choice "a" is incorrect. The mortgagor may obtain any excess monies resulting from a judicial sale
(called "equity").
Choice "c" is incorrect. The mortgagor may refinance the mortgage with another lender and repay the
original mortgage.
Choice "d" is incorrect. The equitable right of redemption is available after default but prior to foreclosure.
The equity of redemption gives the mortgagor the right to pay off all monies owed before a sale is held in
order to regain the premises.
53
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
CPA-02218
Type1 M/C
122. CPA-02218
A-D
Nov 90 #24
Corr Ans: B
PM#29
R 6-99
Page 50
Omega Corp. owned a factory that was encumbered by a mortgage securing Omega's note to Eagle
Bank. Omega sold the factory to Spear, Inc., which assumed the mortgage note. Later, Spear defaulted
on the note, which had an outstanding balance of $15,000. To recover the outstanding balance, Eagle:
a.
b.
c.
d.
May sue Spear only after suing Omega.
May sue either Spear or Omega.
Must sue both Spear and Omega.
Must sue Spear first and then proceed against Omega for any deficiency.
CPA-02218
Explanation
Choice "b" is correct. A creditor/mortgagee (Eagle Bank) may sue either the original debtor/mortgagor
(Omega) or the assuming grantee (Spear) upon default.
Choices "a" and "d" are incorrect. Eagle Bank does not have to sue either Spear or Omega first. When a
buyer assumes an existing mortgage, both the original mortgagor and the assuming buyer are personally
liable on the mortgage; the creditor may sue either one for the balance after default. (Avoid answers
using words like "only," "must," "always," and "never.")
Choice "c" is incorrect. When a buyer assumes an existing mortgage, both the original mortgagor and the
assuming buyer are personally liable on the mortgage; the creditor may sue either one for the balance
after default. Eagle Bank may sue either Spear or Omega. ("Must is incorrect.")
CPA-02221
Type1 M/C
123. CPA-02221
A-D
Nov 90 #53
Corr Ans: B
PM#30
R 6-99
Page 48
Unless an exception to title is noted in the title insurance policy, a title insurance company will be liable to
a land purchaser for not discovering:
a.
b.
c.
d.
Closing costs.
Recorded easements.
Unrecorded assessments.
Zoning violations.
CPA-02221
Explanation
Choice "b" is correct. Unless excepted in the policy, a title insurance company is liable for any title defect
that it should have discovered during its title search (e.g., a recorded easement).
Choice "a" is incorrect. Closing costs are a matter between the buyer and seller; the title insurance policy
is not intended to pay them.
Choices "c" and "d" are incorrect. Although a title insurance company is generally liable for any title
defect that it did not discover during its title search, e.g., an unrecorded easement, it is not liable for liens
or restrictions imposed by law, such as assessments or zoning ordinances (whether or not recorded).
CPA-02224
Type1 M/C
124. CPA-02224
A-D
Nov 91 #51
Corr Ans: C
PM#31
R 6-99
Page 45
A tenant's personal property will become a fixture and belong to the landlord if its removal would:
a.
b.
c.
d.
Increase the value of the personal property.
Cause a material change to the personal property.
Result in substantial harm to the landlord's property.
Change the use of the landlord's property back to its prior use.
CPA-02224
Explanation
Choice "c" is correct. If the removal of personal property would result in substantial harm to real property,
it has become a fixture (real property).
54
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
Choice "a" is incorrect. Whether something is a fixture depends on the intent of the parties; value of the
personal property is not relevant.
Choice "b" is incorrect. Only a material change to the "real" property, not personal property, is a criteria of
whether it should become a "fixture" (real property) and belong to the landlord.
Choice "d" is incorrect. Changing the use of the landlord's property back to its prior use is a reason to
consider the removal of tenant's personal property as "personal property" and not a fixture (real property).
CPA-02226
Type1 M/C
125. CPA-02226
A-D
Nov 91 #52
Corr Ans: D
PM#32
R 6-99
Page 41
Konrad, Van, and Star own a parcel of land as joint tenants with right of survivorship. Konrad's interest
was sold to Dawson. As a result of the sale from Konrad to Dawson:
a.
b.
c.
d.
Van and Star each own one-third of the land as tenants in common.
Van, Star, and Dawson each own one-third of the land as joint tenants.
Dawson owns one-third of the land as a joint tenant.
Dawson owns one-third of the land as a tenant in common.
CPA-02226
Explanation
Choice "d" is correct. If one of three or more parties to a joint tenancy makes an intervivos (during
lifetime) conveyance, the "joint tenancy" is destroyed with respect to the new party and the new party
holds title as a tenant in common. However, a joint tenancy still exists between the two original parties
remaining.
Choice "a" is incorrect. If one of three or more parties to a joint tenancy makes a lifetime transfer of his
interest, the transferee takes as a tenant in common, but the joint tenancy between the other two original
parties is not destroyed. Thus, Van and Star each own one-third of the land as joint tenants.
Choice "b" is incorrect. If one of three or more parties to a joint tenancy makes a lifetime transfer of his
interest, the transferee takes as a tenant in common, but the joint tenancy between the other two original
parties is not destroyed. Thus, Van and Star are joint tenants. Dawson owns one-third of the land as a
tenant in common.
Choice "c" is incorrect. If one of three or more parties to a joint tenancy makes a lifetime transfer of his
interest, the transferee takes as a tenant in common, but the joint tenancy between the other two original
parties is not destroyed. Thus, Dawson owns one-third of the land as a tenant in common.
CPA-02228
Type1 M/C
126. CPA-02228
A-D
Nov 91 #53
Corr Ans: B
PM#33
R 6-99
Page 44
To be enforceable, a residential real estate lease for 6 months must:
a.
b.
c.
d.
Require the tenant to obtain liability insurance.
Entitle the tenant to exclusive possession of the leased property.
Specify a due date for rent.
Be in writing.
CPA-02228
Explanation
Choice "b" is correct. A tenant is entitled to exclusive possession of the leased premises.
Choice "a" is incorrect. The tenant does not have to obtain liability insurance.
Choice "c" is incorrect. If the rent is not specified, the law will imply an obligation to pay reasonable value
for use and occupation.
Choice "d" is incorrect. A lease agreement must be in writing only if it is over one year (statute of frauds).
CPA-02229
Type1 M/C
A-D
Corr Ans: B
55
PM#34
R 6-99
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
127. CPA-02229
Nov 91 #54
Page 45
A purchaser who obtains real estate title insurance will:
a. Have coverage for the title exceptions listed in the policy.
b. Be insured against all defects of record other than those excepted in the policy.
c. Have coverage for title defects that result from events that happen after the effective date of the
policy.
d. Be entitled to transfer the policy to subsequent owners.
CPA-02229
Explanation
Choice "b" is correct. Title insurance protects a purchaser against all defects of record other than those
defects discovered during the title search. The title insurer will not insure the purchaser against known
defects; thus such defects will be excepted from the title insurance policy.
Choice "a" is incorrect. As the word exceptions suggests, the exceptions listed in a title insurance policy
are the defects that are not covered (i.e., excepted from coverage).
Choice "c" is incorrect. The title insurer does not insure against defects that happen after the effective
date of the policy.
Choice "d" is incorrect. Unlike most contract rights, the policyholder's rights in a title insurance contract
are not assignable.
CPA-02233
Type1 M/C
128. CPA-02233
A-D
Nov 91 #55
Corr Ans: D
PM#35
R 6-99
Page 46
A mortgage on real property must:
a.
b.
c.
d.
Be acknowledged by the mortgagee.
State the exact amount of the debt.
State the consideration given for the mortgage.
Be delivered to the mortgagee.
CPA-02233
Explanation
Choice "d" is correct. A mortgage must be delivered to the mortgagee to be effective.
Choice "a" is incorrect. The mortgage does not need to be acknowledged by the mortgagee, although it
must be acknowledged by the mortgator.
Choices "b" and "c" are incorrect. Like deeds, the actual amount of the debt or the consideration for the
mortgage is often not stated on the mortgage so that it does not become public knowledge when it is
recorded. The promissory note states the exact amount of the debt.
CPA-02235
Type1 M/C
129. CPA-02235
A-D
Nov 92 #53
Corr Ans: D
PM#36
R 6-99
Page 43
Which of the following forms of tenancy will be created if a tenant stays in possession of the leased
premises without the landlord's consent, after the tenant's one-year written lease expires?
a.
b.
c.
d.
Tenancy at will.
Tenancy for years.
Tenancy from period to period.
Tenancy at sufferance.
CPA-02235
Explanation
Choice "d" is correct. A holdover tenant without consent is a tenancy at sufferance.
Choice "a" is incorrect, because a tenancy at will is a tenancy with consent that can be terminated by
either party with notice.
56
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
Choice "b" is incorrect, because a tenancy for years is a tenancy with consent for any definite period of
time.
Choice "c" is incorrect, because a tenancy from period to period is a tenancy with consent from year to
year.
CPA-02240
Type1 M/C
130. CPA-02240
A-D
Nov 92 #59
Corr Ans: B
PM#37
R 6-99
Page 47
On February 1, Frost bought a building from Elgin, Inc. for $250,000. To complete the purchase, Frost
borrowed $200,000 from Independent Bank and gave Independent a mortgage for that amount; gave
Elgin a second mortgage for $25,000; and paid $25,000 in cash. Independent recorded its mortgage on
February 2 and Elgin recorded its mortgage on March 12.
The following transaction also took place:
• On March 1, Frost gave Scott a $20,000 mortgage on the building to secure a personal loan Scott had
previously made to Frost.
• On March 10, Scott recorded this mortgage.
• On March 15, Scott learned about both prior mortgages.
• On June 1, Frost stopped making payments on all the mortgages.
• On August 1, the mortgages were foreclosed. Frost, on that date, owed Independent, $195,000; Elgin,
$24,000; and Scott, $19,000.
A judicial sale of the building resulted in proceeds of $220,000 after expenses were deducted and Scott
was given $19,000 of the proceeds. The above transactions took place in a notice-race jurisdiction.
Why would Scott receive this amount?
a.
b.
c.
d.
Scott knew of the Elgin mortgage.
Scott's mortgage was recorded before Elgin's and before Scott knew of Elgin's mortgage.
Elgin's mortgage was first in time.
After Independent is fully paid, Elgin and Scott share the remaining proceeds equally.
CPA-02240
Explanation
Choice "b" is correct. In a notice-race jurisdiction, the first to record prevails unless that person was
aware (had "notice") of a prior conveyance or a prior mortgage, as applicable. A recorded mortgage
gives all subsequent purchasers or mortgagees "constructive notice" of the prior mortgage. Thus, Scott
knew of Independent's prior mortgage because Independent recorded on February 2 but did not have
constructive knowledge or actual knowledge of Elgin's mortgage until he learned of Elgin's mortgage on
March 15, which was 5 days after Scott recorded his mortgage.
Choice "a" is incorrect, because Scott did not know of Elgin's prior mortgage until after he made his loan
to Frost.
Choice "c" is incorrect, because even though Elgin's mortgage was first in time, notice-race statutes
require prior mortgagees to record to protect their interest against subsequent purchasers or mortgagee's
without notice.
Choice "d" is incorrect, because satisfaction in full is made in "order of priority."
CPA-02242
Type1 M/C
131. CPA-02242
A-D
Nov 92 #60
Corr Ans: C
PM#38
R 6-99
Page 50
On February 1, Frost bought a building from Elgin, Inc. for $250,000. To complete the purchase, Frost
borrowed $200,000 from Independent Bank and gave Independent a mortgage for that amount; gave
Elgin a second mortgage for $25,000; and paid $25,000 in cash. Independent recorded its mortgage on
February 2 and Elgin recorded its mortgage on March 12.
The following transaction also took place:
57
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
• On March 1, Frost gave Scott a $20,000 mortgage on the building to secure a personal loan Scott had
previously made to Frost.
• On March 10, Scott recorded this mortgage.
• On March 15, Scott learned about both prior mortgages.
• On June 1, Frost stopped making payments on all the mortgages.
• On August 1, the mortgages were foreclosed. Frost, on that date, owed Independent, $195,000; Elgin,
$24,000; and Scott, $19,000.
A judicial sale of the building resulted in proceeds of $220,000 after expenses were deducted. The above
transactions took place in a notice-race jurisdiction.
Frost may redeem the property before the judicial sale only if:
a.
b.
c.
d.
There is a statutory right of redemption.
It is probable that the sale price will result in a deficiency.
All mortgages are paid in full.
All mortgagees are paid a penalty fee.
CPA-02242
Explanation
Choice "c" is correct. Frost may not redeem the property unless all mortgages are paid in full.
Choice "a" is incorrect, because a statutory right of redemption is necessary for redemption after the
judicial (foreclosure) sale; before the judicial sale there is an equitable right to redeem.
Choices "b" and "d" are incorrect. No such rules.
CPA-02245
Type1 M/C
132. CPA-02245
A-D
R98 #13
Corr Ans: C
PM#39
R 6-99
Page 44
Which of the following rights is(are) generally given to a lessee of residential property?
I. A covenant of quiet enjoyment.
II. An implied warranty of habitability.
a.
b.
c.
d.
I only.
II only.
Both I and II.
Neither I nor II.
CPA-02245
Explanation
Choice "c" is correct. "Both I and II." In all leases, the landlord implicitly covenants to quiet enjoyment of
the property. In most states, a residential lease includes an implied warranty by the landlord to keep the
premises in a habitable condition.
CPA-02247
Type1 M/C
133. CPA-02247
A-D
R98 #14
Corr Ans: D
PM#40
R 6-99
Page 40
What interest in real property generally gives the holder of that interest the right to sell the property?
a.
b.
c.
d.
Easement.
Leasehold.
License.
Fee simple.
CPA-02247
Explanation
Choice "d" is correct. Ownership of property in "fee simple" is ownership of the complete bundle of rights
in real property. A fee simple owner has the right to sell the property, to lease the property, to leave it to
heirs, etc.
58
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
Choice "a" is incorrect. An easement is a nonpossessory interest in land that gives its holder the right to
use the land; it does not give the holder the right to sell the underlying property.
Choice "b" is incorrect. A leasehold is a contract right to possess property. It may be assigned or sublet,
but it does not give the leasehold tenant the right to sell the real property involved.
Choice "c" is incorrect. A license is not an interest in land. It gives the holder a personal, nontransferable
right to go onto another's land. It does not give the holder the right to sell the underlying land.
CPA-02249
Type1 M/C
134. CPA-02249
A-D
Nov 90 #26
Corr Ans: D
PM#41
R 6-99
Page 52
Sorus and Ace have agreed, in writing, to act as guarantors of collection on a debt owed by Pepper to
Towns, Inc. The debt is evidenced by a promissory note. If Pepper defaults, Towns will be entitled to
recover from Sorus and Ace unless:
a.
b.
c.
d.
Sorus and Ace are in the process of exercising their rights against Pepper.
Sorus and Ace prove that Pepper was insolvent at the time the note was signed.
Pepper dies before the note is due.
Towns has not attempted to enforce the promissory note against Pepper.
CPA-02249
Explanation
Choice "d" is correct. Sorus and Ace have agreed to be guarantors of collection. Thus, Towns, the
creditor, must pursue the debtor - Pepper - before he is entitled to recover from them.
Choice "a" is incorrect. Towns, the creditor, will be entitled to recover from Sorus and Ace, the sureties,
even if the sureties are in the process of exercising their rights against the debtor (i.e., "right of
exoneration").
Choice "b" is incorrect. Insolvency of the debtor, either at the time the note was signed, or at the time of
default, is not a defense of a surety.
Choice "c" is incorrect. Death of the debtor is not a defense of a surety.
CPA-02250
Type1 M/C
135. CPA-02250
A-D
May 91 #26
Corr Ans: C
PM#42
R 6-99
Page 54
Edwards Corp. lent Lark $200,000. At Edwards' request, Lark entered into an agreement with Owen and
Ward for them to act as compensated co-sureties on the loan in the amount of $200,000 each. If
Edwards releases Ward without Owen's or Lark's consent, and Lark later defaults, which of the following
statements is correct?
a.
b.
c.
d.
Lark will be released for 50% of the loan balance.
Owen will be liable for the entire loan balance.
Owen will be liable for 50% of the loan balance.
Edwards' release of Ward will have no effect on Lark's and Owen's liability to Edwards.
CPA-02250
Explanation
Choice "c" is correct. Owen will be liable for 50% of the loan balance. The release of one co-surety
(Ward) without the consent of the other co-surety (Owen) discharges the remaining co-surety's (Owen)
right of contribution from the released co-surety (Ward) and discharges the remaining co-surety to the
extent the released party was liable. Owen and Ward were equally liable on the debt. Thus, Ward's
release will release Owen from 50% of Owen's liability.
Choice "a" is incorrect. A release of a surety does not affect the liability of the principal debtor. Thus,
because Lark is the principal debtor, the release of Ward (the surety) does not affect Lark's liability.
Choices "b" and "d" are incorrect. The release of one co-surety without the consent of the other co-surety
discharges the remaining co-surety to the extent the released party was liable. Ward was equally liable
59
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
on the debt with Owen. Thus, the release of Ward releases Owen from liability for half of the loan
balance.
CPA-02251
Type1 M/C
136. CPA-02251
A-D
May 91 #27
Corr Ans: B
PM#43
R 6-99
Page 54
Lane promised to lend Turner $240,000 if Turner obtained sureties to secure the loan. Turner agreed
with Rivers, Clark, and Zane for them to act as co-sureties on the loan from Lane. The agreement
between Turner and the co-sureties provided that compensation be paid to each of the co-sureties. It
further indicated that the maximum liability of each co-surety would be as follows: Rivers $240,000, Clark
$80,000, and Zane $160,000. Lane accepted the commitments of the sureties and made the loan to
Turner. After paying ten installments totaling $100,000, Turner defaulted. Clark's debts, including the
surety obligation to Lane on the Turner loan, were discharged in bankruptcy. Later, Rivers properly paid
the entire outstanding debt of $140,000. What amount may Rivers recover from Zane?
a.
b.
c.
d.
$0
$56,000
$70,000
$84,000
CPA-02251
Explanation
Choice "b" is correct. $56,000. When one of several co-sureties becomes bankrupt, the other co-sureties
are liable on the debt to the extent each agreed and are liable in contribution to each other in proportion
to the amount each agreed to pay. Here, Clark was discharged in bankruptcy, leaving Rivers and Zane
as co-sureties. Rivers agreed to pay up to $240,000 and Zane agreed to pay up to $160,000, so their
proportional liability is 3:2 respectively. Thus, Zane is liable for 40% of the $140,000 ($56,000).
CPA-02253
Type1 M/C
137. CPA-02253
A-D
Nov 91 #26
Corr Ans: B
PM#44
R 6-99
Page 56
Mane Bank lent Eller $120,000 and received securities valued at $30,000 as collateral. At Mane's
request, Salem and Rey agreed to act as uncompensated co-sureties on the loan. The agreement
provided that Salem's and Rey's maximum liability would be $120,000 each. Mane released Rey without
Salem's consent. Eller later defaulted when the collateral held by Mane was worthless and the loan
balance was $90,000. Salem's maximum liability is:
a.
b.
c.
d.
$30,000
$45,000
$60,000
$90,000
CPA-02253
Explanation
Choice "b" is correct. $45,000.
A release of a co-surety without the other co-surety's consent and without "reservation of rights" against
the other co-surety results in the remaining co-surety losing the right of contribution against the released
co-surety. Thus, the remaining surety is discharged to the extent that the surety could have recovered
from the released surety. Here the sureties were liable for the debt equally. Thus, Salem is liable for half
of the $90,000 debt ($45,000).
CPA-02255
Type1 M/C
138. CPA-02255
A-D
Nov 92 #17
Corr Ans: D
PM#45
R 6-99
Page 52
On June 1, 1992, Decker orally guaranteed the payment of a $5,000 note Decker's cousin owed Baker.
Decker's agreement with Baker provided that Decker's guaranty would terminate in 18 months. On June
3, 1992, Baker wrote Decker confirming Decker's guaranty. Decker did not object to the confirmation. On
60
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Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
August 23, 1992, Decker's cousin defaulted on the note and Baker demanded that Decker honor the
guaranty. Decker refused. Which of the following statements is correct?
a. Decker is liable under the oral guaranty because Decker did not object to Baker's June 3 letter.
b. Decker is not liable under the oral guaranty because it expired more than one year after June 1.
c. Decker is liable under the oral guaranty because Baker demanded payment within one year of the
date the guaranty was given.
d. Decker is not liable under the oral guaranty because Decker's promise was not in writing.
CPA-02255
Explanation
Choice "d" is correct. Under the Statute of Frauds a promise to pay the debt or default of another (a
"surety" contract) must be evidenced by a writing signed by the surety (the party to be charged). Decker
orally guaranteed his cousin's debt. Thus, his promise is not enforceable. Baker's confirmation is
irrelevant.
Choices "a" and "c" are incorrect, because Decker is not liable under the oral guaranty. It must be
evidenced by a writing signed by Decker to be enforceable. Unlike a confirmation between merchants in
a sale of goods contract, Baker's confirmation is irrelevant here.
Choice "b" is incorrect, because although Decker is not liable, he is not liable due to the lack of a signed
writing, not because promise expired one year after his guarantee.
CPA-02261
Type1 M/C
139. CPA-02261
A-D
Nov 92 #28
Corr Ans: C
PM#46
R 6-99
Page 54
A distinction between a surety and a co-surety is that only a co-surety is entitled to:
a.
b.
c.
d.
Reimbursement (Indemnification).
Subrogation.
Contribution.
Exoneration.
CPA-02261
Explanation
Choice "c" is correct. Only a co-surety has the right of contribution against other co-sureties.
Contribution results in the sharing of liability on a pro-rata basis among co-sureties.
Choice "a" is incorrect, because reimbursement or indemnification is the right of the surety to be repaid by
the debtor for payment by the surety made to the creditor.
Choice "b" is incorrect, because subrogation is the right of a surety, which has paid the creditor to "stand
in the shoes of the creditor" and sue the debtor for payment.
Choice "d" is incorrect, because exoneration is the right of a surety to bring an action against a debtor
who has assets but has failed to pay the creditor.
CPA-02264
Type1 M/C
140. CPA-02264
A-D
Nov 92 #43
Corr Ans: D
PM#47
R 6-99
Page 62
Under a nonnegotiable bill of lading, a carrier who accepts goods for shipment must deliver the goods to:
a.
b.
c.
d.
Any holder of the bill of lading.
Any party subsequently named by the seller.
The seller who was issued the bill of lading.
The consignee of the bill of lading.
CPA-02264
Explanation
Choice "d" is correct. Under a nonnegotiable bill of lading, a carrier who accepts goods for shipment must
deliver the goods to the consignee of the bill of lading.
Choices "a", "b", and "c" are incorrect, per the above.
61
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Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
CPA-02267
Type1 M/C
141. CPA-02267
A-D
May 91 #47
Corr Ans: C
PM#48
R 6-99
Page 62
Which of the following statements is correct concerning a common carrier that issues a bill of lading
stating that the goods are to be delivered "to the order of Ajax?"
a. The carrier's lien on the goods covered by the bill of lading for storage or transportation expenses is
ineffective against the bill of lading's purchaser.
b. The carrier may not, as a matter of public policy, limit its liability for the goods by the terms of the bill.
c. The carrier must deliver the goods only to Ajax or to a person who presents the bill of lading properly
endorsed by Ajax.
d. The carrier would have liability only to Ajax because the bill of lading is nonnegotiable.
CPA-02267
Explanation
Choice "c" is correct. A bill of lading that provides that the goods are to be delivered "to the order of a
named payee" is treated as a negotiable document of title. The carrier must deliver the goods to the party
named (Ajax) or one who holds the instrument properly endorsed by Ajax.
Choice "a" is incorrect. The carrier's lien continues to be effective against the purchaser of the bill of
lading.
Choice "b" is incorrect. The carrier may limit its liability in the bill of lading and usually does. Otherwise
the carrier is an "insurer".
Choice "d" is incorrect. The bill of lading is a negotiable document of title. The carrier has potential
liability beyond Ajax.
CPA-02269
Type1 M/C
142. CPA-02269
A-D
May 92 #49
Corr Ans: A
PM#49
R 6-99
Page 61
Under the UCC, a warehouse receipt:
a. Is negotiable if, by its terms, the goods are to be delivered to bearer or to the order of a named
person.
b. Will not be negotiable if it contains a contractual limitation on the warehouser's liability.
c. May qualify as both a negotiable warehouse receipt and negotiable commercial paper if the
instrument is payable either in cash or by the delivery of goods.
d. May be issued only by a bonded and licensed warehouser.
CPA-02269
Explanation
Choice "a" is correct. Under the UCC a warehouse receipt is negotiable if, by its terms, the goods are to
be delivered to bearer or order. (Note: The law is similar to the law of negotiable instruments.)
Choice "b" is incorrect. A warehouse receipt can be negotiable even if it contains a contractual limitation
on the warehouser's liability. Such a limitation does not affect the instrument's negotiability.
Choice "c" is incorrect. A warehouse receipt cannot qualify as both a negotiable warehouse receipt and
negotiable commercial paper where the instrument is payable either in cash or by the delivery of goods.
To be negotiable, commercial paper must be payable only in money.
Choice "d" is incorrect. The UCC does not require that warehouse receipts be issued only by a bonded
and licensed warehouser.
(Watch out for restrictive words such as "only," "never," and all inclusive terms such as "always.")
CPA-02271
Type1 M/C
143. CPA-02271
A-D
Nov 92 #42
Corr Ans: A
PM#50
R 6-99
Page 61
62
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
Burke stole several negotiable warehouse receipts from Grove Co. The receipts were deliverable to
Grove's order. Burke endorsed Grove's name and sold the warehouse receipts to Federated
Wholesalers, a bona fide purchaser. In an action by Federated against Grove:
a. Grove will prevail, because Burke cannot validly negotiate the warehouse receipts.
b. Grove will prevail, because the warehouser must be notified before any valid negotiation of a
warehouse receipt is effective.
c. Federated will prevail, because the warehouse receipts were converted to bearer instruments by
Burke's endorsement.
d. Federated will prevail, because it took the negotiable warehouse receipts as a bona fide purchaser for
value.
CPA-02271
Explanation
Choice "a" is correct. Burke's endorsement of Grove's name constitutes a forgery, which is a real
defense.
The rules governing the negotiability of warehouse receipts are similar to those governing other forms of
negotiable instruments. The defenses, both real and personal, are therefore similar. Forgery is a real
defense. Grove Co. is not liable because the endorsement is a forgery.
Choice "b" is incorrect. No such rule!
Choice "c" is incorrect. The warehouse receipts were order paper and required Grove's genuine
signature for valid negotiation. Burke's forgery was ineffective to transfer the instrument.
Choice "d" is incorrect. The warehouse receipts were order paper and required Grove's genuine
signature for valid negotiation. Burke's forgery was ineffective to transfer the instrument. Lack of
knowledge does not protect the holder from the defense of forgery.
CPA-02274
Type1 M/C
144. CPA-02274
A-D
Nov 97 #15
Corr Ans: D
PM#51
R 6-99
Page 62
Under the Documents of Title Article of the UCC, a negotiable document of title is "duly negotiated" when
it is negotiated to:
a.
b.
c.
d.
Any holder by endorsement.
Any holder by delivery.
A holder who takes the document in payment of a money obligation.
A holder who takes the document for value, in good faith, and without notice of any defense or claim
to it.
CPA-02274
Explanation
Choice "d" is correct. The holder of a duly negotiated document is like a holder in due course, and the
requirements for attaining that status are similar. A document can be negotiated by mere endorsement or
delivery, but neither alone is sufficient to make the instrument duly negotiated and neither is mere
payment of money. Thus, "a", "b", and "c" are incorrect.
CPA-04125
Type1 M/C
145. CPA-04125
A,B,C Corr Ans: C
PM#52
R 6-99
Lw May 92 #2 1 Page 47
On June 10, 1990, Bond sold real property to Edwards for $100,000. Edwards assumed the $80,000
recorded mortgage Bond had previously given to Fair Bank and gave a $20,000 purchase money
mortgage to Heath Finance. Heath did not record this mortgage. On December 15, 1991, Edwards sold
the property to Ivor for $115,000. Ivor bought the property subject to the Fair mortgage but did not know
about the Heath mortgage. Ivor borrowed $50,000 from Knox Bank and gave Knox a mortgage on the
property. Knox knew of the unrecorded Heath mortgage when its mortgage was recorded. Ivor,
Edwards, and Bond defaulted on the mortgages. Fair, Heath, and Knox foreclosed and the property was
sold at a judicial foreclosure sale for $60,000. At the time of the sale, the outstanding balance of principal
63
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Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
and accrued interest on the Fair mortgage was $75,000. The Heath mortgage balance was $18,000 and
the Knox mortgage was $47,500.
Fair, Heath, and Knox all claim that their mortgages have priority and should be satisfied first from the
sale proceeds. Bond, Edwards and Ivor all claim that they are not liable for any deficiency resulting from
the sale.
The above transactions took place in a jurisdiction that has a notice-race recording statute and allows
foreclosure deficiency judgments.
Indicate (A) if the mortgage has first priority, indicate (B) if the mortgage has second priority, and indicate
(C) if the mortgage had third priority. What is the priority of the mortgage for Knox Bank?
a. First priority.
b. Second priority.
c. Third priority.
CPA-04125
Explanation
Choice "c, Third priority" is correct. Generally, a mortgage has priority over subsequently acquired
interests in the mortgaged property, including subsequent mortgages, and must be paid in full before any
subsequent mortgage. However, this priority scheme is affected by the jurisdiction's recording statute.
Under a notice-race recording statute, a mortgagee is protected against subsequent interests in the
mortgaged property except a subsequent person who takes an interest in the mortgaged property without
notice of the prior mortgage and who records before the prior mortgagee records. Here, Fair Bank's
mortgage arose and was recorded before any other mortgage interest in the facts was created. Thus, it
has first priority over the subsequent mortgages. Moreover, Knox Bank's interest was created and Knox
Bank had actual knowledge of Heath Finance's mortgage. Thus, Heath Finance's mortgage has priority
over Knox Bank's mortgage, giving Knox Bank a third priority position.
CPA-04129
Type1 M/C
146. CPA-04129
A,B,C Corr Ans: B
PM#53
R 6-99
Lw May 92 #2 2 Page 47
On June 10, 1990, Bond sold real property to Edwards for $100,000. Edwards assumed the $80,000
recorded mortgage Bond had previously given to Fair Bank and gave a $20,000 purchase money
mortgage to Heath Finance. Heath did not record this mortgage. On December 15, 1991, Edwards sold
the property to Ivor for $115,000. Ivor bought the property subject to the Fair mortgage but did not know
about the Heath mortgage. Ivor borrowed $50,000 from Knox Bank and gave Knox a mortgage on the
property. Knox knew of the unrecorded Heath mortgage when its mortgage was recorded. Ivor,
Edwards, and Bond defaulted on the mortgages. Fair, Heath, and Knox foreclosed and the property was
sold at a judicial foreclosure sale for $60,000. At the time of the sale, the outstanding balance of principal
and accrued interest on the Fair mortgage was $75,000. The Heath mortgage balance was $18,000 and
the Knox mortgage was $47,500.
Fair, Heath, and Knox all claim that their mortgages have priority and should be satisfied first from the
sale proceeds. Bond, Edwards and Ivor all claim that they are not liable for any deficiency resulting from
the sale.
The above transactions took place in a jurisdiction that has a notice-race recording statute and allows
foreclosure deficiency judgments.
Indicate (A) if the mortgage has first priority, indicate (B) if the mortgage has second priority, and indicate
(C) if the mortgage had third priority. What is the priority of the mortgage for Heath Finance?
a. First priority.
b. Second priority.
c. Third priority.
CPA-04129
Explanation
Choice "b, Second priority" is correct. Generally, a mortgage has priority over subsequently acquired
interests in the mortgaged property, including subsequent mortgages, and must be paid in full before any
64
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Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
subsequent mortgage. However, this priority scheme is affected by the jurisdiction's recording statute.
Under a notice-race recording statute, a mortgagee is protected against subsequent interests in the
mortgaged property except a subsequent person who takes an interest in the mortgaged property without
notice of the prior mortgage and who records before the prior mortgagee records. Here, Fair Bank's
mortgage arose and was recorded before any other mortgage interest in the facts was created. Thus, it
has first priority over the subsequent mortgages. Moreover, Knox Bank's interest was created after Heath
Finance's interest, but Knox Bank had actual knowledge of Heath Bank's interest. Thus, Heath Bank has
a second priority under a notice-race statute.
CPA-04131
Type1 M/C
147. CPA-04131
A,B,C Corr Ans: A
PM#54
R 6-99
Lw May 92 #2 3 Page 47
On June 10, 1990, Bond sold real property to Edwards for $100,000. Edwards assumed the $80,000
recorded mortgage Bond had previously given to Fair Bank and gave a $20,000 purchase money
mortgage to Heath Finance. Heath did not record this mortgage. On December 15, 1991, Edwards sold
the property to Ivor for $115,000. Ivor bought the property subject to the Fair mortgage but did not know
about the Heath mortgage. Ivor borrowed $50,000 from Knox Bank and gave Knox a mortgage on the
property. Knox knew of the unrecorded Heath mortgage when its mortgage was recorded. Ivor,
Edwards, and Bond defaulted on the mortgages. Fair, Heath, and Knox foreclosed and the property was
sold at a judicial foreclosure sale for $60,000. At the time of the sale, the outstanding balance of principal
and accrued interest on the Fair mortgage was $75,000. The Heath mortgage balance was $18,000 and
the Knox mortgage was $47,500.
Fair, Heath, and Knox all claim that their mortgages have priority and should be satisfied first from the
sale proceeds. Bond, Edwards and Ivor all claim that they are not liable for any deficiency resulting from
the sale.
The above transactions took place in a jurisdiction that has a notice-race recording statute and allows
foreclosure deficiency judgments.
Indicate (A) if the mortgage has first priority, indicate (B) if the mortgage has second priority, and indicate
(C) if the mortgage had third priority. What is the priority of the mortgage for Fair Bank?
a. First priority.
b. Second priority.
c. Third priority.
CPA-04131
Explanation
Choice "a, First priority" is correct. Generally, a mortgage has priority over subsequently acquired
interests in the mortgaged property, including subsequent mortgages, and must be paid in full before any
subsequent mortgage. However, this priority scheme is affected by the jurisdiction's recording statute.
Under a notice-race recording statute, a mortgagee is protected against subsequent interests in the
mortgaged property except a subsequent person who takes an interest in the mortgaged property without
notice of the prior mortgage and who records before the prior mortgagee records. Here, Fair Bank's
mortgage arose and was recorded before any other mortgage interest in the facts was created. Thus, it
has first priority interest.
CPA-04134
Type1 M/C
148. CPA-04134
A-E
Corr Ans: D
PM#55
R 6-99
Lw May 92 #2 4 Page 47
On June 10, 1990, Bond sold real property to Edwards for $100,000. Edwards assumed the $80,000
recorded mortgage Bond had previously given to Fair Bank and gave a $20,000 purchase money
mortgage to Heath Finance. Heath did not record this mortgage. On December 15, 1991, Edwards sold
the property to Ivor for $115,000. Ivor bought the property subject to the Fair mortgage but did not know
about the Heath mortgage. Ivor borrowed $50,000 from Knox Bank and gave Knox a mortgage on the
property. Knox knew of the unrecorded Heath mortgage when its mortgage was recorded. Ivor,
65
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
Edwards, and Bond defaulted on the mortgages. Fair, Heath, and Knox foreclosed and the property was
sold at a judicial foreclosure sale for $60,000. At the time of the sale, the outstanding balance of principal
and accrued interest on the Fair mortgage was $75,000. The Heath mortgage balance was $18,000 and
the Knox mortgage was $47,500.
Fair, Heath, and Knox all claim that their mortgages have priority and should be satisfied first from the
sale proceeds. Bond, Edwards and Ivor all claim that they are not liable for any deficiency resulting from
the sale.
The above transactions took place in a jurisdiction that has a notice-race recording statute and allows
foreclosure deficiency judgments.
Determine the priority (first, second, or third) of the mortgage for Knox Bank and then select a reason for
its priority from the list below.
a.
b.
c.
d.
An unrecorded mortgage has priority over any subsequently recorded mortgage.
A recorded mortgage has priority over any unrecorded mortgage.
The first recorded mortgage has priority over all subsequent mortgages.
An unrecorded mortgage has priority over a subsequently recorded mortgage if the subsequent
mortgagee knew of the unrecorded mortgage.
e. A purchase money mortgage has priority over a previously recorded mortgage.
CPA-04134
Explanation
Choice "d" is correct. In a notice-race jurisdiction, unrecorded mortgage has priority over a subsequently
recorded mortgage if the subsequent mortgagee knew of the unrecorded mortgage" is correct. Knox
knew of Heath's unrecorded mortgage; therefore, Heath is protected in a notice-race jurisdiction.
CPA-04136
Type1 M/C
149. CPA-04136
A-E
Corr Ans: D
PM#56
R 6-99
Lw May 92 #2 5 Page 47
On June 10, 1990, Bond sold real property to Edwards for $100,000. Edwards assumed the $80,000
recorded mortgage Bond had previously given to Fair Bank and gave a $20,000 purchase money
mortgage to Heath Finance. Heath did not record this mortgage. On December 15, 1991, Edwards sold
the property to Ivor for $115,000. Ivor bought the property subject to the Fair mortgage but did not know
about the Heath mortgage. Ivor borrowed $50,000 from Knox Bank and gave Knox a mortgage on the
property. Knox knew of the unrecorded Heath mortgage when its mortgage was recorded. Ivor,
Edwards, and Bond defaulted on the mortgages. Fair, Heath, and Knox foreclosed and the property was
sold at a judicial foreclosure sale for $60,000. At the time of the sale, the outstanding balance of principal
and accrued interest on the Fair mortgage was $75,000. The Heath mortgage balance was $18,000 and
the Knox mortgage was $47,500.
Fair, Heath, and Knox all claim that their mortgages have priority and should be satisfied first from the
sale proceeds. Bond, Edwards and Ivor all claim that they are not liable for any deficiency resulting from
the sale.
The above transactions took place in a jurisdiction that has a notice-race recording statute and allows
foreclosure deficiency judgments.
Determine the priority (first, second, or third) of the mortgage for Heath Finance and then select a reason
for its priority from the list below.
a.
b.
c.
d.
An unrecorded mortgage has priority over any subsequently recorded mortgage.
A recorded mortgage has priority over any unrecorded mortgage.
The first recorded mortgage has priority over all subsequent mortgages.
An unrecorded mortgage has priority over a subsequently recorded mortgage if the subsequent
mortgagee knew of the unrecorded mortgage.
e. A purchase money mortgage has priority over a previously recorded mortgage.
CPA-04136
Explanation
Choice "d" is correct. In a notice-race jurisdiction, an unrecorded mortgage has priority over a
subsequently recorded mortgage if the subsequent mortgagee knew of the unrecorded mortgage" is
66
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
correct. Notice-race jurisdictions only protect a subsequent mortgagee if the subsequent mortgagee is
unaware of a prior lien.
CPA-04138
Type1 M/C
150. CPA-04138
A-E
Corr Ans: C
PM#57
R 6-99
Lw May 92 #2 6 Page 47
On June 10, 1990, Bond sold real property to Edwards for $100,000. Edwards assumed the $80,000
recorded mortgage Bond had previously given to Fair Bank and gave a $20,000 purchase money
mortgage to Heath Finance. Heath did not record this mortgage. On December 15, 1991, Edwards sold
the property to Ivor for $115,000. Ivor bought the property subject to the Fair mortgage but did not know
about the Heath mortgage. Ivor borrowed $50,000 from Knox Bank and gave Knox a mortgage on the
property. Knox knew of the unrecorded Heath mortgage when its mortgage was recorded. Ivor,
Edwards, and Bond defaulted on the mortgages. Fair, Heath, and Knox foreclosed and the property was
sold at a judicial foreclosure sale for $60,000. At the time of the sale, the outstanding balance of principal
and accrued interest on the Fair mortgage was $75,000. The Heath mortgage balance was $18,000 and
the Knox mortgage was $47,500.
Fair, Heath, and Knox all claim that their mortgages have priority and should be satisfied first from the
sale proceeds. Bond, Edwards and Ivor all claim that they are not liable for any deficiency resulting from
the sale.
The above transactions took place in a jurisdiction that has a notice-race recording statute and allows
foreclosure deficiency judgments.
Determine the priority (first, second, or third) of the mortgage for Fair Bank and then select a reason for its
priority from the list below.
a.
b.
c.
d.
An unrecorded mortgage has priority over any subsequently recorded mortgage.
A recorded mortgage has priority over any unrecorded mortgage.
The first recorded mortgage has priority over all subsequent mortgages.
An unrecorded mortgage has priority over a subsequently recorded mortgage if the subsequent
mortgagee knew of the unrecorded mortgage.
e. A purchase money mortgage has priority over a previously recorded mortgage.
CPA-04138
Explanation
Choice "c" is correct. The first recorded mortgage has priority over all subsequent mortgages" is correct
in a notice-race jurisdiction. Priorities of mortgages are necessary to protect lien holder interests.
CPA-04141
Type1 M/C
151. CPA-04141
A-G
Corr Ans: A
PM#58
R 6-99
Lw May 92 #2 7 Page 50
On June 10, 1990, Bond sold real property to Edwards for $100,000. Edwards assumed the $80,000
recorded mortgage Bond had previously given to Fair Bank and gave a $20,000 purchase money
mortgage to Heath Finance. Heath did not record this mortgage. On December 15, 1991, Edwards sold
the property to Ivor for $115,000. Ivor bought the property subject to the Fair mortgage but did not know
about the Heath mortgage. Ivor borrowed $50,000 from Knox Bank and gave Knox a mortgage on the
property. Knox knew of the unrecorded Heath mortgage when its mortgage was recorded. Ivor,
Edwards, and Bond defaulted on the mortgages. Fair, Heath, and Knox foreclosed and the property was
sold at a judicial foreclosure sale for $60,000. At the time of the sale, the outstanding balance of principal
and accrued interest on the Fair mortgage was $75,000. The Heath mortgage balance was $18,000 and
the Knox mortgage was $47,500.
Fair, Heath, and Knox all claim that their mortgages have priority and should be satisfied first from the
sale proceeds. Bond, Edwards and Ivor all claim that they are not liable for any deficiency resulting from
the sale.
The above transactions took place in a jurisdiction that has a notice-race recording statute and allows
foreclosure deficiency judgments.
67
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
For the Knox Bank mortgage, select from the list below the amount of the sale proceeds that each
mortgagee would be entitled to receive.
a.
b.
c.
d.
e.
f.
g.
$0
$12,500
$18,000
$20,000
$42,000
$47,500
$60,000
CPA-04141
Explanation
Choice "a, $0" is correct. Generally, a mortgage has priority over subsequently acquired interests in the
mortgaged property, including subsequent mortgages, and must be paid in full before any subsequent
mortgage. However, this priority scheme is affected by the jurisdiction's recording statute. Under a
notice-race recording statute, a mortgagee is protected against subsequent interests in the mortgaged
property except a subsequent person who takes an interest in the mortgaged property without notice of
the prior mortgage and who records before the prior mortgagee records. Here, Fair Bank's interest arose
and was recorded before any other mortgage in the facts; thus, it has a first priority and the right to be
paid in full before any subsequent mortgage can be paid. The foreclosure sale netted only $60,000 and
Fair Bank was still owed $75,000. Thus, its claim will exhaust the sale proceeds and the subsequent
mortgagees will receive nothing.
CPA-04143
Type1 M/C
152. CPA-04143
A-G
Corr Ans: A
PM#59
R 6-99
Lw May 92 #2 8 Page 50
On June 10, 1990, Bond sold real property to Edwards for $100,000. Edwards assumed the $80,000
recorded mortgage Bond had previously given to Fair Bank and gave a $20,000 purchase money
mortgage to Heath Finance. Heath did not record this mortgage. On December 15, 1991, Edwards sold
the property to Ivor for $115,000. Ivor bought the property subject to the Fair mortgage but did not know
about the Heath mortgage. Ivor borrowed $50,000 from Knox Bank and gave Knox a mortgage on the
property. Knox knew of the unrecorded Heath mortgage when its mortgage was recorded. Ivor,
Edwards, and Bond defaulted on the mortgages. Fair, Heath, and Knox foreclosed and the property was
sold at a judicial foreclosure sale for $60,000. At the time of the sale, the outstanding balance of principal
and accrued interest on the Fair mortgage was $75,000. The Heath mortgage balance was $18,000 and
the Knox mortgage was $47,500.
Fair, Heath, and Knox all claim that their mortgages have priority and should be satisfied first from the
sale proceeds. Bond, Edwards and Ivor all claim that they are not liable for any deficiency resulting from
the sale.
The above transactions took place in a jurisdiction that has a notice-race recording statute and allows
foreclosure deficiency judgments.
For the Heath Finance mortgage, select from the list below the amount of the sale proceeds that each
mortgagee would be entitled to receive.
a.
b.
c.
d.
e.
f.
g.
$0
$12,500
$18,000
$20,000
$42,000
$47,500
$60,000
CPA-04143
Explanation
Choice "a, $0" is correct. Generally, a mortgage has priority over subsequently acquired interests in the
mortgaged property, including subsequent mortgages, and must be paid in full before any subsequent
mortgage. However, this priority scheme is affected by the jurisdiction's recording statute. Under a
68
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Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
notice-race recording statute, a mortgagee is protected against subsequent interests in the mortgaged
property except a subsequent person who takes an interest in the mortgaged property without notice of
the prior mortgage and who records before the prior mortgagee records. Here, Fair Bank's interest arose
and was recorded before any other mortgage in the facts; thus, it has first priority and the right to be paid
in full before any subsequent mortgage can be paid. The foreclosure sale netted only $60,000 and Fair
Bank was still owed $75,000. Thus, its claim will exhaust the sale proceeds and the subsequent
mortgagees will receive nothing.
CPA-04146
Type1 M/C
153. CPA-04146
A-G
Corr Ans: G
PM#60
R 6-99
Lw May 92 #2 9 Page 50
On June 10, 1990, Bond sold real property to Edwards for $100,000. Edwards assumed the $80,000
recorded mortgage Bond had previously given to Fair Bank and gave a $20,000 purchase money
mortgage to Heath Finance. Heath did not record this mortgage. On December 15, 1991, Edwards sold
the property to Ivor for $115,000. Ivor bought the property subject to the Fair mortgage but did not know
about the Heath mortgage. Ivor borrowed $50,000 from Knox Bank and gave Knox a mortgage on the
property. Knox knew of the unrecorded Heath mortgage when its mortgage was recorded. Ivor,
Edwards, and Bond defaulted on the mortgages. Fair, Heath, and Knox foreclosed and the property was
sold at a judicial foreclosure sale for $60,000. At the time of the sale, the outstanding balance of principal
and accrued interest on the Fair mortgage was $75,000. The Heath mortgage balance was $18,000 and
the Knox mortgage was $47,500.
Fair, Heath, and Knox all claim that their mortgages have priority and should be satisfied first from the
sale proceeds. Bond, Edwards and Ivor all claim that they are not liable for any deficiency resulting from
the sale.
The above transactions took place in a jurisdiction that has a notice-race recording statute and allows
foreclosure deficiency judgments.
For the Fair Bank mortgage, select from the list below the amount of the sale proceeds that each
mortgagee would be entitled to receive.
a.
b.
c.
d.
e.
f.
g.
$0
$12,500
$18,000
$20,000
$42,000
$47,500
$60,000
CPA-04146
Explanation
Choice "g, $60,000" is correct. Generally, a mortgage has priority over subsequently acquired interests in
the mortgaged property, including subsequent mortgages, and must be paid in full before any subsequent
mortgage. However, this priority scheme is affected by the jurisdiction's recording statute. Under a
notice-race recording statute, a mortgagee is protected against subsequent interests in the mortgaged
property except a subsequent person who takes an interest in the mortgaged property without notice of
the prior mortgage and who records before the prior mortgagee records. Here, Fair Bank's interest arose
and was recorded before any other mortgage in the facts; thus, it has a first priority and the right to be
paid in full before any subsequent mortgage can be paid. The foreclosure sale netted only $60,000 and
Fair Bank was still owed $75,000. Thus, its claim will exhaust the $60,000 sale proceeds.
CPA-04148
Type1 M/C
154. CPA-04148
A-D
Corr Ans: B
Lw May 92 #2 10
PM#61
R 6-99
Page 50
On June 10, 1990, Bond sold real property to Edwards for $100,000. Edwards assumed the $80,000
recorded mortgage Bond had previously given to Fair Bank and gave a $20,000 purchase money
mortgage to Heath Finance. Heath did not record this mortgage. On December 15, 1991, Edwards sold
69
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
the property to Ivor for $115,000. Ivor bought the property subject to the Fair mortgage but did not know
about the Heath mortgage. Ivor borrowed $50,000 from Knox Bank and gave Knox a mortgage on the
property. Knox knew of the unrecorded Heath mortgage when its mortgage was recorded. Ivor,
Edwards, and Bond defaulted on the mortgages. Fair, Heath, and Knox foreclosed and the property was
sold at a judicial foreclosure sale for $60,000. At the time of the sale, the outstanding balance of principal
and accrued interest on the Fair mortgage was $75,000. The Heath mortgage balance was $18,000 and
the Knox mortgage was $47,500.
Fair, Heath, and Knox all claim that their mortgages have priority and should be satisfied first from the
sale proceeds. Bond, Edwards and Ivor all claim that they are not liable for any deficiency resulting from
the sale.
The above transactions took place in a jurisdiction that has a notice-race recording statute and allows
foreclosure deficiency judgments.
Determine whether Edwards would be liable to pay a mortgage foreclosure deficiency judgment on the
Fair Bank mortgage. If Edwards would be held liable, select from the list below the reason for Edwards'
liability. If you determine that there is no liability, indicate (D).
a.
b.
c.
d.
Original mortgagor.
Assumed the mortgage.
Took subject to the mortgage.
Not liable.
CPA-04148
Explanation
Choice "b, Assumed the mortgage" is correct. A purchaser who assumes a prior mortgage becomes
personally liable on the mortgage. Thus, by assuming Bond's mortgage to Fair Bank, Edwards assumed
the duty to pay Bond's $80,000 note.
CPA-04151
Type1 M/C
155. CPA-04151
A-D
Corr Ans: A
Lw May 92 #2 11
PM#62
R 6-99
Page 50
On June 10, 1990, Bond sold real property to Edwards for $100,000. Edwards assumed the $80,000
recorded mortgage Bond had previously given to Fair Bank and gave a $20,000 purchase money
mortgage to Heath Finance. Heath did not record this mortgage. On December 15, 1991, Edwards sold
the property to Ivor for $115,000. Ivor bought the property subject to the Fair mortgage but did not know
about the Heath mortgage. Ivor borrowed $50,000 from Knox Bank and gave Knox a mortgage on the
property. Knox knew of the unrecorded Heath mortgage when its mortgage was recorded. Ivor,
Edwards, and Bond defaulted on the mortgages. Fair, Heath, and Knox foreclosed and the property was
sold at a judicial foreclosure sale for $60,000. At the time of the sale, the outstanding balance of principal
and accrued interest on the Fair mortgage was $75,000. The Heath mortgage balance was $18,000 and
the Knox mortgage was $47,500.
Fair, Heath, and Knox all claim that their mortgages have priority and should be satisfied first from the
sale proceeds. Bond, Edwards and Ivor all claim that they are not liable for any deficiency resulting from
the sale.
The above transactions took place in a jurisdiction that has a notice-race recording statute and allows
foreclosure deficiency judgments.
Determine whether Bond would be liable to pay a mortgage foreclosure deficiency judgment on the Fair
Bank mortgage. If Bond would be held liable, select from the list below the reason for Bond's liability. If
you determine that there is no liability, indicate (D).
a.
b.
c.
d.
Original mortgagor.
Assumed the mortgage.
Took subject to the mortgage.
Not liable.
CPA-04151
Explanation
70
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
Choice "a, Original mortgagor" is correct. Even after a mortgage is assumed, the original mortgagor
remains personally liable on the underlying note. Thus, even though Edwards assumed Bond's
mortgage, Bond has the obligation to pay the entire balance of the note including any deficiency resulting
from the sale of the secured property.
CPA-04153
Type1 M/C
156. CPA-04153
A-D
Corr Ans: D
Lw May 92 #2 12
PM#63
R 6-99
Page 50
On June 10, 1990, Bond sold real property to Edwards for $100,000. Edwards assumed the $80,000
recorded mortgage Bond had previously given to Fair Bank and gave a $20,000 purchase money
mortgage to Heath Finance. Heath did not record this mortgage. On December 15, 1991, Edwards sold
the property to Ivor for $115,000. Ivor bought the property subject to the Fair mortgage but did not know
about the Heath mortgage. Ivor borrowed $50,000 from Knox Bank and gave Knox a mortgage on the
property. Knox knew of the unrecorded Heath mortgage when its mortgage was recorded. Ivor,
Edwards, and Bond defaulted on the mortgages. Fair, Heath, and Knox foreclosed and the property was
sold at a judicial foreclosure sale for $60,000. At the time of the sale, the outstanding balance of principal
and accrued interest on the Fair mortgage was $75,000. The Heath mortgage balance was $18,000 and
the Knox mortgage was $47,500.
Fair, Heath, and Knox all claim that their mortgages have priority and should be satisfied first from the
sale proceeds. Bond, Edwards and Ivor all claim that they are not liable for any deficiency resulting from
the sale.
The above transactions took place in a jurisdiction that has a notice-race recording statute and allows
foreclosure deficiency judgments.
Determine whether Ivor would be liable to pay a mortgage foreclosure deficiency judgment on the Fair
Bank mortgage. If Ivor would be held liable, select from the list below the reason for Ivor's liability. If you
determine that there is no liability, indicate (D).
a.
b.
c.
d.
Original mortgagor.
Assumed the mortgage.
Took subject to the mortgage.
Not liable.
CPA-04153
Explanation
Choice "d, Not liable" is correct. A person who takes subject to an existing mortgage agrees that the
property can be taken if there is a default on the existing mortgage but does not agree to become
personally liable on the mortgage. Thus, Ivor is not liable since the property was merely taken subject to
the Fair mortgage.
CPA-04155
Type1 M/C
157. CPA-04155
A-D
Corr Ans: A
Lw May 92 #2 13
PM#64
R 6-99
Page 50
On June 10, 1990, Bond sold real property to Edwards for $100,000. Edwards assumed the $80,000
recorded mortgage Bond had previously given to Fair Bank and gave a $20,000 purchase money
mortgage to Heath Finance. Heath did not record this mortgage. On December 15, 1991, Edwards sold
the property to Ivor for $115,000. Ivor bought the property subject to the Fair mortgage but did not know
about the Heath mortgage. Ivor borrowed $50,000 from Knox Bank and gave Knox a mortgage on the
property. Knox knew of the unrecorded Heath mortgage when its mortgage was recorded. Ivor,
Edwards, and Bond defaulted on the mortgages. Fair, Heath, and Knox foreclosed and the property was
sold at a judicial foreclosure sale for $60,000. At the time of the sale, the outstanding balance of principal
and accrued interest on the Fair mortgage was $75,000. The Heath mortgage balance was $18,000 and
the Knox mortgage was $47,500.
Fair, Heath, and Knox all claim that their mortgages have priority and should be satisfied first from the
sale proceeds. Bond, Edwards and Ivor all claim that they are not liable for any deficiency resulting from
the sale.
71
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
The above transactions took place in a jurisdiction that has a notice-race recording statute and allows
foreclosure deficiency judgments.
Determine whether Edwards would be liable to pay a mortgage foreclosure deficiency judgment on the
Heath Finance mortgage. If Edwards would be held liable, select from the list below the reason for
Edwards' liability. If you determine that there is no liability, indicate (D).
a.
b.
c.
d.
Original mortgagor.
Assumed the mortgage.
Took subject to the mortgage.
Not liable.
CPA-04155
Explanation
Choice "a, Original mortgagor" is correct. Edwards gave Heath Finance a $20,000 mortgage on the real
property and so has the obligation to pay the entire balance of the note, including any deficiency resulting
from the sale of the secured property.
CPA-04157
Type1 M/C
158. CPA-04157
A-D
Corr Ans: D
Lw May 92 #2 14
PM#65
R 6-99
Page 48
On June 10, 1990, Bond sold real property to Edwards for $100,000. Edwards assumed the $80,000
recorded mortgage Bond had previously given to Fair Bank and gave a $20,000 purchase money
mortgage to Heath Finance. Heath did not record this mortgage. On December 15, 1991, Edwards sold
the property to Ivor for $115,000. Ivor bought the property subject to the Fair mortgage but did not know
about the Heath mortgage. Ivor borrowed $50,000 from Knox Bank and gave Knox a mortgage on the
property. Knox knew of the unrecorded Heath mortgage when its mortgage was recorded. Ivor,
Edwards, and Bond defaulted on the mortgages. Fair, Heath, and Knox foreclosed and the property was
sold at a judicial foreclosure sale for $60,000. At the time of the sale, the outstanding balance of principal
and accrued interest on the Fair mortgage was $75,000. The Heath mortgage balance was $18,000 and
the Knox mortgage was $47,500.
Fair, Heath, and Knox all claim that their mortgages have priority and should be satisfied first from the
sale proceeds. Bond, Edwards and Ivor all claim that they are not liable for any deficiency resulting from
the sale.
The above transactions took place in a jurisdiction that has a notice-race recording statute and allows
foreclosure deficiency judgments.
Determine whether Bond would be liable to pay a mortgage foreclosure deficiency judgment on the Heath
Finance mortgage. If Bond would be held liable, select from the list below the reason for Bond's liability.
If you determine that there is no liability, indicate (D).
a.
b.
c.
d.
Original mortgagor.
Assumed the mortgage.
Took subject to the mortgage.
Not liable.
CPA-04157
Explanation
Choice "d, Not liable" is correct. Bond is only liable for Bond's executed mortgages. Bond is not liable for
subsequent mortgages.
CPA-04159
Type1 M/C
159. CPA-04159
A-D
Corr Ans: D
Lw May 92 #2 15
PM#66
R 6-99
Page 50
On June 10, 1990, Bond sold real property to Edwards for $100,000. Edwards assumed the $80,000
recorded mortgage Bond had previously given to Fair Bank and gave a $20,000 purchase money
mortgage to Heath Finance. Heath did not record this mortgage. On December 15, 1991, Edwards sold
the property to Ivor for $115,000. Ivor bought the property subject to the Fair mortgage but did not know
72
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
about the Heath mortgage. Ivor borrowed $50,000 from Knox Bank and gave Knox a mortgage on the
property. Knox knew of the unrecorded Heath mortgage when its mortgage was recorded. Ivor,
Edwards, and Bond defaulted on the mortgages. Fair, Heath, and Knox foreclosed and the property was
sold at a judicial foreclosure sale for $60,000. At the time of the sale, the outstanding balance of principal
and accrued interest on the Fair mortgage was $75,000. The Heath mortgage balance was $18,000 and
the Knox mortgage was $47,500.
Fair, Heath, and Knox all claim that their mortgages have priority and should be satisfied first from the
sale proceeds. Bond, Edwards and Ivor all claim that they are not liable for any deficiency resulting from
the sale.
The above transactions took place in a jurisdiction that has a notice-race recording statute and allows
foreclosure deficiency judgments.
Determine whether Ivor would be liable to pay a mortgage foreclosure deficiency judgment on the Heath
Finance mortgage. If Ivor would be held liable, select from the list below the reason for Ivor's liability. If
you determine that there is no liability, indicate (D).
a.
b.
c.
d.
Original mortgagor.
Assumed the mortgage.
Took subject to the mortgage.
Not liable.
CPA-04159
Explanation
Choice "d, Not liable" is correct. Ivor is not liable for unrecorded mortgages unknown to Ivor at the time of
purchase in a notice-race jurisdiction.
CPA-04160
Type1 M/C
160. CPA-04160
A-D
Corr Ans: D
Lw May 92 #2 16
PM#67
R 6-99
Page 48
On June 10, 1990, Bond sold real property to Edwards for $100,000. Edwards assumed the $80,000
recorded mortgage Bond had previously given to Fair Bank and gave a $20,000 purchase money
mortgage to Heath Finance. Heath did not record this mortgage. On December 15, 1991, Edwards sold
the property to Ivor for $115,000. Ivor bought the property subject to the Fair mortgage but did not know
about the Heath mortgage. Ivor borrowed $50,000 from Knox Bank and gave Knox a mortgage on the
property. Knox knew of the unrecorded Heath mortgage when its mortgage was recorded. Ivor,
Edwards, and Bond defaulted on the mortgages. Fair, Heath, and Knox foreclosed and the property was
sold at a judicial foreclosure sale for $60,000. At the time of the sale, the outstanding balance of principal
and accrued interest on the Fair mortgage was $75,000. The Heath mortgage balance was $18,000 and
the Knox mortgage was $47,500.
Fair, Heath, and Knox all claim that their mortgages have priority and should be satisfied first from the
sale proceeds. Bond, Edwards and Ivor all claim that they are not liable for any deficiency resulting from
the sale.
The above transactions took place in a jurisdiction that has a notice-race recording statute and allows
foreclosure deficiency judgments.
Determine whether Edwards would be liable to pay a mortgage foreclosure deficiency judgment on the
Knox Bank mortgage. If Edwards would be held liable, select from the list below the reason for Edwards'
liability. If you determine there is no liability, indicate (D).
a.
b.
c.
d.
Original mortgagor.
Assumed the mortgage.
Took subject to the mortgage.
Not liable.
CPA-04160
Explanation
Choice "d, Not liable" is correct. Edwards is only liable for mortgages Edwards executed; Edwards is not
liable for the subsequent mortgage given to Knox Bank by Ivor.
73
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
CPA-04161
Type1 M/C
161. CPA-04161
A-D
Corr Ans: D
Lw May 92 #2 17
PM#68
R 6-99
Page 48
On June 10, 1990, Bond sold real property to Edwards for $100,000. Edwards assumed the $80,000
recorded mortgage Bond had previously given to Fair Bank and gave a $20,000 purchase money
mortgage to Heath Finance. Heath did not record this mortgage. On December 15, 1991, Edwards sold
the property to Ivor for $115,000. Ivor bought the property subject to the Fair mortgage but did not know
about the Heath mortgage. Ivor borrowed $50,000 from Knox Bank and gave Knox a mortgage on the
property. Knox knew of the unrecorded Heath mortgage when its mortgage was recorded. Ivor,
Edwards, and Bond defaulted on the mortgages. Fair, Heath, and Knox foreclosed and the property was
sold at a judicial foreclosure sale for $60,000. At the time of the sale, the outstanding balance of principal
and accrued interest on the Fair mortgage was $75,000. The Heath mortgage balance was $18,000 and
the Knox mortgage was $47,500.
Fair, Heath, and Knox all claim that their mortgages have priority and should be satisfied first from the
sale proceeds. Bond, Edwards and Ivor all claim that they are not liable for any deficiency resulting from
the sale.
The above transactions took place in a jurisdiction that has a notice-race recording statute and allows
foreclosure deficiency judgments.
Determine whether Bond would be liable to pay a mortgage foreclosure deficiency judgment on the Knox
Bank mortgage. If Bond would be held liable, select from the list below the reason for Bond's liability. If
you determine there is no liability, indicate (D).
a.
b.
c.
d.
Original mortgagor.
Assumed the mortgage.
Took subject to the mortgage.
Not liable.
CPA-04161
Explanation
Choice "d, Not liable" is correct. Bond is only liable for mortgages executed by Bond; Bond is not liable
for a mortgage subsequently given by Ivor.
CPA-04162
Type1 M/C
162. CPA-04162
A-D
Corr Ans: A
Lw May 92 #2 18
PM#69
R 6-99
Page 50
On June 10, 1990, Bond sold real property to Edwards for $100,000. Edwards assumed the $80,000
recorded mortgage Bond had previously given to Fair Bank and gave a $20,000 purchase money
mortgage to Heath Finance. Heath did not record this mortgage. On December 15, 1991, Edwards sold
the property to Ivor for $115,000. Ivor bought the property subject to the Fair mortgage but did not know
about the Heath mortgage. Ivor borrowed $50,000 from Knox Bank and gave Knox a mortgage on the
property. Knox knew of the unrecorded Heath mortgage when its mortgage was recorded. Ivor,
Edwards, and Bond defaulted on the mortgages. Fair, Heath, and Knox foreclosed and the property was
sold at a judicial foreclosure sale for $60,000. At the time of the sale, the outstanding balance of principal
and accrued interest on the Fair mortgage was $75,000. The Heath mortgage balance was $18,000 and
the Knox mortgage was $47,500.
Fair, Heath, and Knox all claim that their mortgages have priority and should be satisfied first from the
sale proceeds. Bond, Edwards and Ivor all claim that they are not liable for any deficiency resulting from
the sale.
The above transactions took place in a jurisdiction that has a notice-race recording statute and allows
foreclosure deficiency judgments.
Determine whether Ivor would be liable to pay a mortgage foreclosure deficiency judgment on the Knox
Bank mortgage. If Ivor would be held liable, select from the list below the reason for Ivor's liability. If you
determine there is no liability, indicate (D).
74
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Becker CPA Review, PassMaster Questions
Lecture: Regulation 6
a.
b.
c.
d.
Original mortgagor.
Assumed the mortgage.
Took subject to the mortgage.
Not liable.
CPA-04162
Explanation
Choice "a, Original mortgagor" is correct. Ivor gave Knox Bank a $50,000 mortgage when Ivor purchased
the real property. Thus, Ivor has the obligation to pay the entire balance of the note, including any
deficiency resulting from the sale of the secured property.
75
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.