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Comprehensive Text and Cases Diverse, Ethical, Online, and Global Environment Miller 10th Edition Test Bank

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Chapter 10 Consideration

N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows.

N A question new to this edition of the Test Bank. + A question modified from the previous edition of the Test Bank, = A question included in the previous edition of the Test Bank.

TRUE/FALSE QUESTIONS

1. Consideration is the value given in return for a promise.

ANSWER: T PAGE: 260

BUSPROG: Analytic AICPA: BB-Legal

TYPE: N

2. In contract law, the term consideration refers to the serious thought that underlies a party’s intent to enter into a contract.

ANSWER: F PAGE: 260

BUSPROG: Analytic AICPA: BB-Legal

TYPE: N

3 Consideration in bilateral contracts normally consists of a promise in return for a performance.

ANSWER: F PAGE: 261

TYPE: N

BUSPROG: Analytic AICPA: BB-Critical Thinking

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4. A determination of whether consideration exists depends on a comparison of the values of the things exchanged.

ANSWER: F PAGE: 261

BUSPROG: Reflective AICPA: BB-Legal

TYPE: N

5 Forbearance is the act of refraining from doing something that one has a legal right to do.

ANSWER: T PAGE: 261 TYPE: N

BUSPROG: Analytic AICPA: BB-Legal

6. Adequacy of consideration refers to how much consideration is given.

ANSWER: T PAGE: 261 TYPE: N

BUSPROG: Analytic AICPA: BB-Legal

7 In general, courts consider the fairness of a contract when deciding if the contract is binding.

ANSWER: F PAGE: 261 TYPE: N

BUSPROG: Analytic AICPA: BB-Legal

8. Inadequate consideration always indicates undue influence.

ANSWER: F PAGE: 261

BUSPROG: Analytic AICPA: BB-Legal

TYPE: N

9. For consideration to have “legally sufficient value,” it must consist of goods or money.

ANSWER: F PAGE: 261 TYPE: N

BUSPROG: Analytic AICPA: BB-Legal

10 A promise by one party to pay another for refraining from an action that one has a legal right to undertake is enforceable.

ANSWER: T PAGE: 261 TYPE: N

BUSPROG: Reflective AICPA: BB-Legal

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11. The element of bargained-for exchange distinguishes contracts from gifts.

ANSWER: F PAGE: 261 TYPE: N

BUSPROG: Reflective AICPA: BB-Legal

12. A transaction that lacks a bargained-for exchange lacks an element of consideration.

ANSWER: T PAGE: 261 TYPE: N

BUSPROG: Analytic AICPA: BB-Legal

13. A preexisting duty may arise from a previous contract.

ANSWER: T PAGE: 262 TYPE: N

BUSPROG: Analytic AICPA: BB-Legal

14. A promise to do what one already has a legal duty to do constitutes legally sufficient consideration.

ANSWER: F PAGE: 262 TYPE: N

BUSPROG: Analytic AICPA: BB-Legal

15 If, during the performance of a contract, extraordinary difficulties arise that were totally unforeseen at the time the contract was formed, a court may allow an exception to the preexisting duty rule.

ANSWER: T PAGE: 263 TYPE: N

BUSPROG: Analytic AICPA: BB-Legal

16 Rescission is the unmaking of a contract so as to return the parties to the positions they occupied before the contract was made.

ANSWER: T PAGE: 263 TYPE: N

BUSPROG: Analytic AICPA: BB-Legal

17 A promise made in return for an act or event that has yet taken place is unenforceable.

ANSWER: F PAGE: 263 TYPE: N

BUSPROG: Analytic AICPA: BB-Legal

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18 Past consideration can be legally sufficient consideration.

ANSWER: F PAGE: 263

BUSPROG: Analytic AICPA: BB-Legal

TYPE: N

19 It is illegal for two parties to mutually agree to rescind a valid contract.

ANSWER: F PAGE: 263 TYPE: N

BUSPROG: Analytic AICPA: BB-Legal

20 Risks ordinarily assumed in business constitute consideration for the modification of a contract.

ANSWER: F PAGE: 263 TYPE: N

BUSPROG: Analytic AICPA: BB-Legal

21 An illusory promise is an enforceable promise

ANSWER: F PAGE: 265

BUSPROG: Analytic AICPA: BB-Legal

TYPE: N

22 A contract that one party retains the exclusive right to cancel at any time is unenforceable.

ANSWER: T PAGE: 265

BUSPROG: Analytic AICPA: BB-Legal

TYPE: N

23 If a debt is liquidated, accord and satisfaction cannot take place.

ANSWER: T PAGE: 265 TYPE: N

BUSPROG: Reflective AICPA: BB-Legal

24 Even if the terms of a contract express such uncertainty of performance that the promisor has not definitely promised to do anything, the promise binds the promisor.

ANSWER: F PAGE: 265 TYPE: N

BUSPROG: Analytic AICPA: BB-Legal

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25. There can be no satisfaction unless there is first an accord.

ANSWER: T PAGE: 265 TYPE: N

BUSPROG: Reflective AICPA: BB-Legal

26. For accord and satisfaction to occur, the amount of the debt cannot be in dispute.

ANSWER: F PAGE: 266 TYPE: N

BUSPROG: Reflective AICPA: BB-Legal

27. A release bars any further recovery beyond the terms stated in the release.

ANSWER: T PAGE: 266 TYPE: N

BUSPROG: Analytic AICPA: BB-Legal

28 In many states, a release contract must be in a signed writing.

ANSWER: T PAGE: 266 TYPE: N

BUSPROG: Analytic AICPA: BB-Legal

29 A covenant not to sue is against public policy.

ANSWER: F PAGE: 266 TYPE: N

BUSPROG: Analytic AICPA: BB-Legal

30. A release does not require consideration to be legally binding.

ANSWER: F PAGE: 266

BUSPROG: Analytic AICPA: BB-Legal

31. A covenant not to sue does not always bar further recovery.

ANSWER: T PAGE: 266

BUSPROG: Analytic AICPA: BB-Legal

TYPE: N

TYPE: N

32 The doctrine of promissory estoppel does not apply if there exists a clear and definite promise.

ANSWER: F PAGE: 268 TYPE: N

BUSPROG: Analytic AICPA: BB-Legal

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33. Under the doctrine of promissory estoppel, a promise will not be enforced unless it is supported by consideration.

ANSWER: F PAGE: 268

BUSPROG: Analytic AICPA: BB-Legal

TYPE: N

34 A debtor who promises to pay a previous debt even though recovery is barred by a statute of limitations makes an enforceable promise.

ANSWER: T PAGE: 269

BUSPROG: Reflective AICPA: BB-Legal

TYPE: N

35 Statutes of limitations in all states require a debtor to pay a debt within a specified period of time.

ANSWER: T

PAGE: 269

BUSPROG: Analytic AICPA: BB-Legal

MULTIPLE CHOICE QUESTIONS

TYPE: N

1. Kingston promises to pay Melina $500 to install a sump pump in his warehouse. Melina completes the installation. The act of installing the pump

a. imposes a moral obligation on Kingston to pay Melina.

b. imposes no obligation on Kingston unless he is satisfied with the job.

c. is not sufficient consideration because it is not goods or money.

d. is the consideration that creates Kingston’s obligation to pay Melina.

ANSWER: D PAGE: 261

BUSPROG: Reflective AICPA: BB-Legal

TYPE: N

2 Jenilee promises to pay Kyle $500 because “he does not have as much money as other people.” Jenilee’s promise is

a. enforceable because society wants people to keep their promises.

b. enforceable because the redistribution of wealth is a valid social goal.

c. not enforceable because Jenilee could have paid Kyle more.

d. not enforceable because Kyle has not given consideration in return.

ANSWER: D PAGE: 261

BUSPROG: Reflective AICPA: BB-Legal

TYPE: N

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3 Henry promises not to open his restaurant before 10:00 A M. if Suzy, who owns a bakery next door to him, promises to close her bakery by 4:00 P.M. Henry’s consideration is

a. the destruction of a legal relationship.

b. the creation of a legal relationship

c. a forbearance.

d. an exchange of money.

ANSWER: C PAGE: 261

BUSPROG: Reflective AICPA: BB-Legal

TYPE: N

4 Rollo promises to perform, for a price, shoe repair services in affiliation with Togs ‘n Things, a clothing store. To support a contract, the consideration exchanged by the parties must be

a. adequately considerate.

b. equally valuable.

c. legally sufficient.

d. wisely priced.

ANSWER: C PAGE: 261

BUSPROG: Analytic AICPA: BB-Legal

TYPE: N

5 Aron questions whether there is consideration for his contract with Banquet Hall to exchange his musical performance of country tunes at select social events for Banquet’s payment of a certain amount. To constitute consideration, the value of whatever is exchanged must be

a. objectively worthy.

b. precisely adequate.

c. legally sufficient.

d. practically sound.

ANSWER: C PAGE: 261

BUSPROG: Reflective AICPA: BB-Legal

TYPE: N

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6. Sparky offers Teodora $1,000 for her collection of rare coins. She accepts. If a dispute arises, a court would likely

a. enforce the deal after questioning the adequacy of consideration.

b. not question the adequacy of the consideration.

c. rewrite the deal after questioning the adequacy of consideration.

d. set aside the deal after questioning the adequacy of consideration

ANSWER: B PAGE: 261

BUSPROG: Reflective AICPA: BB-Legal

TYPE: N

7. Quentin questions whether there is consideration for his contract with Rainey to exchange his performance with the Symphonic Saxophone Sextet for her payment of a certain amount. To constitute consideration, there must be

a. a payment.

b. a performance.

c. a bargained-for exchange.

d. serious thought underlying each party’s intent to contract.

ANSWER: C PAGE: 261

BUSPROG: Reflective AICPA: BB-Legal

TYPE: N

8. Valley Paragliders Association files a suit against Wing Designers, Inc., claiming that the consideration for their contract is inadequate. The court will most likely not examine the adequacy of the consideration if

a. there is a large disparity in the amount of consideration exchanged.

b. the consideration involves the performance of services.

c. something of value passed between the parties.

d. the consideration is worth less than $100.

ANSWER: C PAGE: 261

BUSPROG: Reflective AICPA: BB-Legal

TYPE: N

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9. Mobile Minutes Company offers Nate an unlimited number of monthly phone minutes for $4.50 per month. Nate accepts. If a dispute arises, a court would likely

a. enforce the deal after questioning the adequacy of the consideration.

b. not question the adequacy of the consideration.

c. rewrite the deal after questioning the adequacy of the consideration.

d. set aside the deal after questioning the adequacy of the consideration.

ANSWER: B PAGE: 261

BUSPROG: Reflective AICPA: BB-Legal

Fact Pattern 10–1 (Questions 10–12 apply)

TYPE: N

Bridey defends against a suit for breach of contract by Continental Mortgage Company by claiming that their deal a mortgage loan secured by Bridey’s purchase of a house was unfair because the consideration for their contract was inadequate.

10 Refer to Fact Pattern 10–1 “Adequacy” of consideration refers to

a. “how much” consideration is given.

b. legally sufficient value in the eyes of the law.

c. the intangible value to a contracting party of a thing exchanged.

d. the substantiality of the consideration exchanged.

ANSWER: A PAGE: 261

BUSPROG: Analytic AICPA: BB-Legal

TYPE: N

11. Refer to Fact Pattern 10–1. The court is most likely to evaluate the adequacy of consideration if

a. one of the parties claims that they entered into an unwise contract.

b. something exchanged is not of direct economic or financial value.

c. the items exchanged are of unequal value.

d. there is a large disparity in the amount or value of the consideration exchanged.

ANSWER: D PAGE: 261

BUSPROG: Analytic AICPA: BB-Legal

TYPE: N

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12. Refer to Fact Pattern 10–1. If, as Bridey claims, the consideration for this contract is inadequate, it may indicate a lack of

a. market value for Bridey’s house.

b. voluntary consent to the contract on Bridey’s part.

c. appraisal by a third party on behalf of Continental.

d. standards for the granting of credit on Continental’s part.

ANSWER: B PAGE: 261

BUSPROG: Reflective AICPA: BB-Legal

TYPE: N

13. Under a contract with Valley Vineyard, Walsh begins grading a terraced hillside for the planting of grapes. Halfway through the project, Walsh asks for $5,000 over the contract price, claiming an increase in the “cost of doing business.” Valley agrees but later refuses to pay. Their agreement is

a. unenforceable because Walsh’s performance was a preexisting duty.

b. unenforceable because Valley’s promise was illusory.

c. enforceable.

d. unenforceable because Walsh’s request modified the contract.

ANSWER: A PAGE: 262

BUSPROG: Reflective AICPA: BB-Legal

TYPE: N

14 Frisco offers to buy a Gibson guitar owned by Hayden for twice what she paid for it. She accepts and hands the guitar to Frisco. Her delivery of the guitar is

a. not consideration because her voluntary consent may be lacking.

b. not consideration because the exchange is not a bargain.

c. consideration.

d. not consideration because the value is not legally sufficient.

ANSWER: C PAGE: 262

BUSPROG: Reflective AICPA: BB-Legal

TYPE: N

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Fact Pattern 10–2 (Questions 15–17 apply)

Teatro Restoration, Inc., begins renovating an old theater for Urban Edge Productions, but after three months Teatro demands an extra $250,000. Urban Edge agrees to pay.

15 Refer to Fact Pattern 10–2. If Teatro offers no reason for the extra $250,000, but says only that it will stop work if it is not paid, the agreement is

a. enforceable as the consideration is past.

b. enforceable because of unforeseen difficulties.

c. unenforceable as an illusory promise.

d. unenforceable due to the preexisting duty rule.

ANSWER: D

PAGE: 262

BUSPROG: Reflective AICPA: BB-Legal

TYPE: N

16 Refer to Fact Pattern 10–2. If Teatro says it is asking for the extra $250,000 because ordinary business expenses have increased, the agreement is

a. enforceable as the consideration is past.

b. enforceable because of unforeseen difficulties.

c. unenforceable as an illusory promise.

d. unenforceable due to the preexisting duty rule.

ANSWER: D PAGE: 262

BUSPROG: Reflective AICPA: BB-Legal

TYPE: N

17. Refer to Fact Pattern 10–2. If Teatro says it is asking for the extra $250,000 because it has encountered extraordinary unforeseen difficulties that will add considerable cost to the project, the agreement is

a. enforceable as the consideration is past.

b. enforceable because of unforeseen difficulties.

c. unenforceable as an illusory promise.

d. unenforceable due to the preexisting duty rule.

ANSWER: B PAGE: 263

BUSPROG: Reflective AICPA: BB-Legal

TYPE: N

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Fact Pattern 10-3 (Questions 18–19 apply)

Sally contracts with Tasty Pizza Company to deliver its products. Both parties change their minds, however, and inform each other that they would like to cancel the contract.

18. Refer to Fact Pattern 10-3. The next day, Sally changes her mind and again offers to deliver Tasty’s products. Tasty is willing to deal, but for a new price. Sally and Tasty

a. may agree to a new contract, but it cannot include a new price.

b. may agree to a new contract that includes the new price.

c. must perform their original contract.

d. must perform the part of their original contract that is executory.

ANSWER: B

PAGE: 263

BUSPROG: Reflective AICPA: BB-Legal

19 Refer to Fact Pattern 10-3 Sally and Tasty

a. may rescind their entire contract.

TYPE: N

b. may rescind their contract to the extent that it is executory.

c. must perform their entire contract.

d. must perform the part of their contract that is executory.

ANSWER: B PAGE: 263

BUSPROG: Reflective AICPA: BB-Legal

TYPE: N

20 Mariah promises to pay her assistant Nadine $10,000 in consideration of the services she provided over the years. Mariah never pays Nadine. Mariah is

a. liable for payment of the $10,000.

b. liable only if Nadine still works for Mariah.

c. not liable, because the consideration is in the past.

d. not liable, because the consideration was unintentional.

ANSWER: C PAGE: 263

BUSPROG: Reflective AICPA: BB-Legal

TYPE: N

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21. Industrial Engineering, Inc., promises to give stock options to Jasmine for processes she has already designed for the firm. This promise is enforceable

a. because it is a new contract.

b. because it is an illusory promise.

c. because it is supported by past consideration.

d. under no circumstances.

ANSWER: D PAGE: 263

BUSPROG: Reflective AICPA: BB-Legal

TYPE: N

22 Mobile Media Company contracts to hire Nada for one year at $35 per hour, reserving the right to cancel the contract at any time after Nada begins performance by giving two weeks’ notice. This promise is

a. an enforceable contract.

b. an illusory promise.

c. an option-to-cancel clause.

d. a requirement contract.

ANSWER: A PAGE: 265

BUSPROG: Reflective AICPA: BB-Legal

TYPE: N

23. Dave’s uncle tells Dave that if “he feels that Dave deserves it,” he will give Dave $1,000 when Dave graduates from college. Dave’s uncle’s promise is

a. illusory.

b. enforceable.

c. a forbearance.

d. a preexisting duty.

ANSWER: A PAGE: 265

BUSPROG: Reflective AICPA: BB-Legal

TYPE: N

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24. Sully signs a contract to borrow $200,000 from Riverside Bank to buy a house. In the contract, Sully agrees to pay a certain rate of interest on the amount of borrowed funds at monthly intervals for thirty years. This debt is

a. an illusory promise.

b. liquidated.

c. past consideration.

d. unliquidated.

ANSWER: B PAGE: 265

BUSPROG: Reflective AICPA: BB-Legal

TYPE: N

25. Produce Packaging Company promises its employees a 10 percent raise at the end of the year if productivity has increased and management feels the raise is warranted. Produce Packaging must

a. do nothing.

b. give the employees a 10 percent raise only at the end of the year.

c. give the employees a 10 percent raise only if productivity increases.

d. give the employees a 10 percent raise under any circumstances.

ANSWER: A

PAGE: 265

BUSPROG: Reflective AICPA: BB-Legal

TYPE: N

26 Gustaf and Hilltop Country Club disagree as to the exact amount Hilltop owes Gustaf for his landscaping work. They form a new agreement that, on fulfillment, will discharge the prior obligation. This is

a. a covenant not to sue.

b an accord and satisfaction.

c. a release.

d. promissory estoppel.

ANSWER: B PAGE: 265 TYPE: N

BUSPROG: Reflective AICPA: BB-Legal

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27. Apple & Pear Orchards contracts to hire Brigit for one year to tend the fruit in its commercial orchards but reserves the right to cancel the employment on thirty days’ notice at any time after Brigit begins work. This promise is

a. enforceable.

b. illusory.

c. unliquidated.

d. unforeseen.

ANSWER: A PAGE: 265

BUSPROG: Reflective AICPA: BB-Legal

TYPE: N

28. Qiana writes a check to Payday Loans, Inc., in an amount that represents half of her debt to the lender. On the back of the check, Qiana includes the words “payment in full.” Payday agrees to accept the lesser sum and cashes the check. This discharges the entire debt

a. if the debt is liquidated.

b. if the debt is past due.

c. if the debt is unliquidated.

d. under no circumstances.

ANSWER: C PAGE: 266

BUSPROG: Reflective AICPA: BB-Legal

TYPE: N

29 Franzea is injured in an accident caused by Gentry. Gentry agrees to pay Franzea $2,500 if she agrees to release him from further liability. She agrees. If Franzea’s damages ultimately exceed $2,500, she can collect

a. the balance from Gentry in a breach-of-contract suit.

b. the balance from Gentry in a tort suit.

c. the balance from Gentry on the ground of unforeseen difficulties.

d. nothing more from Gentry.

ANSWER: D PAGE: 266 TYPE: N

BUSPROG: Reflective AICPA: BB-Legal

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30. After an accident with a driver for Onyx Security Company, Paul signs a covenant not to sue Onyx for damages in a tort action if it pays for the damage to his car. This covenant

a. bars recovery only if Onyx pays.

b. is an illusory contract.

c. is barred by the preexisting duty rule.

d. is unconscionable.

ANSWER: A PAGE: 266

BUSPROG: Reflective AICPA: BB-Legal

TYPE: N

31. Twyla’s dock is damaged in an accident caused by Ulric’s negligence. Twyla agrees not to sue him if he will pay for the damage. If Ulric fails to pay, Twyla can bring an action for breach of contract. This agreement is

a. a covenant not to sue.

b. an accord and satisfaction.

c. unliquidated.

d. a release.

ANSWER: A PAGE: 266

BUSPROG: Reflective AICPA: BB-Legal

TYPE: N

32. Marketing Solutions Inc. promises to employ Niki as a software engineer. In reliance on the promise, Niki quits her job with Online Ad Company, but Marketing Solutions does not hire her. Most likely, Marketing Solutions is

a. liable to Niki under the concept of accord and satisfaction.

b. liable to Niki under the doctrine of promissory estoppel.

c. liable to Niki under the preexisting duty rule.

d. not liable to Niki.

ANSWER: B PAGE: 268

BUSPROG: Reflective AICPA: BB-Legal

TYPE: N

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33. Rudy files a suit against Shakes & Shingles, Roofing Contractor, Inc., under the doctrine of promissory estoppel. Rudy must show that

a. he justifiably refused to fulfill a promise to Shakes & Shingles.

b. he justifiably relied on Shakes & Shingles’ promise to his detriment.

c. Shakes & Shingles justifiably refused to fulfill a promise to him.

d. Shakes & Shingles justifiably relied on his promise to its detriment.

ANSWER: B PAGE: 268

BUSPROG: Reflective AICPA: BB-Legal

TYPE: N

34. Lea signs a contract with Metro Business Loans, Inc., to borrow $25,000 to remodel Lea’s Hair Care Salon. Lea does not repay the loan. Metro fails to sue within the time prescribed by the applicable statute of limitations. Later Lea promises to pay the debt. To be enforceable, this promise needs

a. bargained-for consideration.

b. no consideration.

c. legally sufficient consideration.

d. adequate consideration.

ANSWER: B PAGE: 269

BUSPROG: Reflective AICPA: BB-Legal

TYPE: N

35 Claudia pledges to donate $10,000 to Disaster Relief & Recovery Inc. (DR&R). On the basis of the pledge, DR&R orders additional supplies. If Claudia does not fulfill the pledge, a court may enforce it

a. under the preexisting duty rule.

b. on the basis of unforeseen difficulties.

c. as a requirement contract.

d. under the doctrine of promissory estoppel.

ANSWER: D PAGE: 269 TYPE: N

BUSPROG: Reflective AICPA: BB-Legal

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ESSAY QUESTIONS

1. Centre City Properties, Inc., owns and manages a warehouse. DIY Home Improvement Stores agrees to lease the warehouse for six years. Under the lease, DIY is obligated to pay all of the utility costs. Two years into the term, DIY asks Centre City to modify the lease to provide that the utility costs will be split equally between them. The landlord agrees, but later decides it does not want to share the costs and refuses to pay. Is Centre City bound to its agreement to share the utility costs? Why or why not?

ANSWER: Centre City Properties, Inc., the landlord, is not bound to its agreement to share utility costs with DIY Home Improvement Stores, its tenant. Under the preexisting duty rule, a promise to do what one already has a legal duty to do does not constitute legally sufficient consideration. The preexisting legal duty may arise out of a previous contract. And if a party is already bound by contract to perform a certain duty, that duty cannot serve as consideration for a second contract. Thus, a modification of a contract requires consideration to be binding.

In this question, the agreement to split the utility costs was a modification of the original terms of the parties’ lease. Centre City is not bound because the landlord did not receive any consideration in exchange for the agreement to split the utility costs.

PAGES: 262–263

TYPE: N BUSPROG: Reflective AICPA: BB-Decision Modeling

2. Chris promises Dina $40,000 if she graduates from Eagle College. Dina enrolls in Eagle, attends full-time for four years, and graduates. When Dina asks Chris for $40,000, Chris says, “I don’t remember promising you $40,000. But if there was a promise, it’s not enforceable, because we didn’t bargain for it. And even if there was a promise that would otherwise be enforceable, I revoke it now.” Can Dina enforce Chris’s “promise”? Why or why not?

ANSWER: Chris’s promise is binding and Dina is entitled to payment without regard to whether their performance was bargained for. Under the doctrine of promissory estoppel (or detrimental reliance), a person who relies on the promise of another may recover in the absence of consideration if (1) the promise was clear and definite, (2) reliance on the promise was justifiable, (3) the promisor knew or had reason to believe that the promisee would rely on the promise, (4) the reliance induced a change of a substantial and definite character, and (5) justice would be better served by enforcement of the

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promise. In this question, there was a promise on which the promisee relied, the reliance was substantial and definite (the promisee went to college full-time for four years, incurring considerable expenses, and graduated), and it would only be fair to enforce the promise.

PAGES: 268–269

TYPE: =

BUSPROG: Reflective AICPA: BB-Decision Modeling

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