LEGL 2700 Lecture Notes - Lecture 9: Security Interest, Financial Institution

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maroongoose48

2 Mar 2017

School

University of Georgia

Department

Legal Studies

Course

LEGL 2700

Professor

N.Grow

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Document Summary

Security interest: an application of property that gives someone an interest in what belongs to another, usually to secure and extension of credit. These include mortgages and secured transactions: security interests in land (mortgages, deeds of trust, and land sales contracts) Mortgage: borrow money from a bank or financial institution and in return give that creditor a security interest called a mortgage on their homes and the land associated with their homes. Held up by a third party called a trustee who holds full legal ownership to the land. Debtor will obtain title when the debt has been repaid. Foreclosure of land sales contracts are simpler and less expensive to exercise than foreclosure of mortgages and deeds of trust. Deficiency: if foreclosure and auction do not produce enough money to satisfy the debt owed by the mortgagor, the creditor can still sue the debtor for the balance owed called the deficiency.

Related Questions

1 of 50

Investments in debt securities, such as bonds, may be classifiedas either current or long-term assets.

	True
	False

Question

2 of 50

Marketable securities that are held until the due date of thesecurities are

	trading and held-to-maturitysecurities.
	available-for sale securities.
	held-to-maturity securities.
	trading securities.

Question

3 of 50

Which of the following business types is most common as measuredby the amount of business transacted?

	Government entities
	Proprietorships
	Partnerships
	Corporations

Question

4 of 50

Depreciation is based upon cost, useful life, and salvagevalue.

	True
	False

Question

5 of 50

Because depreciation is not cash-based, it is NOT reported inthe direct method of the statement of cash flows.

	True
	False

Question

6 of 50

A company has a petty cash fund of $200. At the end of themonth, $6.41 remains in the fund along with $190.96 in variousreceipts. The journal entry to replenish the fund would show adebit(s) to

	various expenses for $190.96 andCash Short of $2.63.
	Cash for $190.96.
	Cash for $193.59.
	various expenses for $190.96 andCash Over of $2.63.

Question

7 of 50

A 12-month, 8% note dated August 1, 2013 for $5,000 would haveaccrued interest payable on December 31, 2013 of $166.67.

	True
	False

Question

8 of 50

Warranty expense must be estimated and matched to revenues.

	True
	False

Question

9 of 50

Upgrading the RAM on a computer would be an example of a(n)

	capital expense.
	betterment.
	ordinary repair.
	extraordinary repair.

Question

10 of 50

The formula for the quick ratio is quick assets divided bynoncurrent assets.

	True
	False

Question

11 of 50

Which of the following are considered to be legal entities thatexist separate and distinct from their owners?

	Sole proprietorships
	Organizations with more than 100partners
	Partnerships
	Corporations

Question

12 of 50

Patents and copyrights can be seen, held, or touched.

	True
	False

Question

13 of 50

Which of the following would be considered part of the cost ofmachinery and equipment?

	Repairs after start-up
	Insurance after purchase
	Maintenance
	Sales taxes

Question

14 of 50

The business or person that signs the note and promises to paythe required amount is called the payee.

	True
	False

Question

15 of 50

Conley Company has a petty cash fund of $300. At the end of themonth, $42.38 remains in the fund along with $260.75 in variousreceipts. The journal entry to replenish the fund would bedebit

	Petty Cash for $257.62 and creditCash for $257.62.
	various expenses, $260.75 andcredit Cash for $260.75.
	various expenses, $260.75, creditCash Over for $3.13, and credit Cash for $257.62.
	various expenses, $254.49, debitCash Short for $3.13, and credit Cash for $257.62.

Question

16 of 50

Neither land nor land improvements are depreciated.

	True
	False

Question

17 of 50

Using a 365-day year, the maturity value of a 180-day note for$2,700 at 9% annual interest is (rounded to the nearest cent)

	$2,819.84.
	$2,821.50.
	$2,943.00.
	$ 119.84.

Question

18 of 50

On January 1, Bestway, Inc. signed a $175,000, 8%, 30-yearmortgage that requires semiannual payments of $7,735 on June 30 andDecember 31 of each year. The journal entry to record the secondsemiannual payment would be (round interest calculation to thenearest dollar) to

	debit Interest expense, $764; debitMortgage payable, $6,971; credit Cash, $7,735.
	debit Mortgage payable, $7,735;credit Cash, $7,735.
	debit Interest expense, $6,971;debit Mortgage expense, $764; credit Cash, $7,735.
	debit Interest expense, $6,971;debit Mortgage payable, $764; credit Cash, $7,735.

Question

19 of 50

Allied Industries purchased a piece of equipment for $65,000with an estimated salvage value of $15,000 on January 1. Itsestimated life is five years. To the nearest dollar, what is theequipment's depreciation using double-declining-balance for yeartwo?

	$ 26,000
	$ 12,000
	$ 20,000
	$ 15,600

Question

20 of 50

Payroll is also called employee compensation and can consist ofmany parts.

	True
	False

Question

21 of 50

The number of shares of stock that a corporation is given theright to sell is called

	authorized stock.
	issued stock.
	outstanding stock.
	capital stock.

Question

22 of 50

Which of the following would NOT be considered part of the costof machinery and equipment?

	In-transit insurance costs
	Delivery charges
	Installation costs
	Repairs and maintenance afterstart-up

Question

23 of 50

Equipment costing $118,000 has accumulated depreciation of$92,000. The equipment is a trade-in for new equipment costing$187,000. If the trade-in value received for the old equipment is$30,000, the journal entry to record this transaction is to

	debit Equipment (New) for $187,000,debit Accumulated Depreciation â Equipment for $92,000, creditEquipment (Old) for $118,000, and credit Cash for $161,000.
	debit Equipment (New) for $187,000and credit Cash for $187,000.
	debit Accumulated Depreciation âTruck for $50,000, debit Loss on Disposal $6,000, and credit Truckfor $56,000.
	debit Equipment (New) for $187,000,debit Accumulated Depreciation â Equipment for $92,000, debit Losson Exchange of Assets for $26,000, credit Equipment (Old) for$118,000 and credit Cash for $187,000.

Question

24 of 50

Liberty Company has declared a $40,000 cash dividend toshareholders. The company has 5,000 shares of $20-par, 6% preferredstock and 10,000 shares of $15-par common stock. The preferredstock is cumulative. How much will be distributed to the preferredand common stockholders on the date of payment if the preferredstock is $12,000 in arrears?

	$18,000 preferred, $22,000common
	$20,000 preferred, $20,000common
	$6,000 preferred, $34,000common
	$40,000 preferred, $0 common

Question

25 of 50

In accounting, what is the meaning of capitalized?

	Capitalized means that a given cityhas been selected as a government center.
	Capitalized means that the cost ofan asset is recorded as a debit (increase) to expense.
	Capitalized means that a liabilityaccount is credited (increase
	Capitalized means that an assetaccount is debited (increased) for the cost of an asset.

Question

26 of 50

Interest is an expense to the debtor and income to thecreditor.

	True
	False

Question

27 of 50

Cash consists of anything that a bank will take as adeposit.

	True
	False

Question

28 of 50

The cost of long-term assets must be allocated to an expense asthe asset is used up.

	True
	False

Question

29 of 50

The process of acquiring merchandise from a supplier begins withthe

	purchase order.
	check for payment.
	receiving report.
	invoice.

Question

30 of 50

Appleway Corporation purchases a machine for $125,000. It has anestimated salvage value of $10,000 and is expected to produce50,000 units in its lifetime. During the first year of operation,it produced 14,500 units. To the nearest dollar, the depreciationfor the first year under the units of production method will be

	$35,500.
	$31,250.
	$36,250.
	$33,350.

Question

31 of 50

Book value is depreciable cost minus accumulateddepreciation.

	True
	False

Question

32 of 50

The records of Inland Equipment showed a net loss of $30,000,depreciation expense of $25,000, and an increase in supplies onhand of $5,000. The amount of net cash flow from operatingactivities using the indirect method is

	($10,000).
	$15,000.
	$20,000.
	($15,000).

Question

33 of 50

Retained earnings represent internally generated capital.

	True
	False

Question

34 of 50

A company issues 15,000 shares of its $25 par common stock for$29 per share. The amount to be debited to Cash is

	$435,000.
	$375,000.
	$405,000.
	$ 60,000.

Question

35 of 50

On September 1, 2012, Juno Corp. lent $2,400 to Bill Askins on asix-month 8% promissory note. The journal entry to record the notefor Juno Corp. would be to:

	debit Note Receivable/Tim, $2,400;credit Cash, $2,400.
	debit Note Receivable/Tim, $96;credit Interest Income, $96.
	debit Note Receivable/Tim, $2,496;credit Cash, $2,496.
	debit Cash, $2,400; credit NotePayable/Tim, $2,400.

Question

36 of 50

Separation of duties is essential for internal control over cashreceipts and cash payments.

	True
	False

Question

37 of 50

Which of the following would indicate poor internal control overaccounts receivable?

	The same person handling cashreceipts also records the accounts receivable transactions.
	The person handling cash receiptspasses the receipts to someone who enters them into accountsreceivable.
	The mailroom employees open themail and give the cash receipts to another employee.
	The person who handles accountsreceivable would not write off accounts as uncollectible.

Question

38 of 50

Limited liability means that the stockholders of a corporationshare a personal liability for all debts of the corporation.

	True
	False

Question

39 of 50

Accumulated depletion is a(n)

	contra-asset account.
	cash account.
	contra-liability account.
	expense account.

Question

40 of 50

Allied Industries reported net income of $52,000, depreciationexpenses of $13,000, a gain on a land sale of $3,000, and adecrease in accounts receivable of $1,500. Under the indirectmethod, net cash flows from operations is

	$63,500.
	$66,500.
	$69,500.
	$60,555.

Question

41 of 50

The portion of stockholders' equity that can be used fordividends is referred to as legal capital.

	True
	False

Question

42 of 50

Franklin Industries had total assets of $560,000; totalliabilities of $250,000; and total stockholders' equity of$310,000. Franklin Industries debt ratio is

	55.4%.
	28.7%.
	44.6%.
	80.6%.

Question

43 of 50

Financial analysis is used to predict the future of abusiness.

	True
	False

Question

44 of 50

Online banking should NOT be used to reconcile the bankaccount.

	True
	False

Question

45 of 50

Costs of testing machinery or equipment before they are usedwould be included in the price of the machinery or theequipment.

	True
	False

Question

46 of 50

There are two methods for accounting for uncollectiblereceivables.

	True
	False

Question

47 of 50

Assets that are NOT expected to provide benefits for a number ofaccounting periods are called

	current assets.
	property, plant, andequipment.
	long-term assets.
	natural resources.

Question

48 of 50

The allowance method of accounting for bad debts is required byGAAP because of the materiality principle.

	True
	False

Question

49 of 50

A stock dividend affects total stockholders' equity.

	True
	False

Question

50 of 50

Realized gains and losses only occur when the security is soldfor more or less than the original cost.

	True
	False

PART A

Jasper is a furniture manufacturer who runs a successful business in Caroline Springs as a sole trader. He owns the land on which his existing factory is built together with plant and equipment including two motor vehicles. He wants to take on partners to help put into effect his grand plans for expansion including the setting up of several more factories. Obviously, he says to himself, I need an injection of funds to finance these great plans.

So Jasper goes to a branch of the Very Accommodating Bank (âVA Bankâ) that has just opened up in his area.

On 31 August he sees the local manager of the VA Bank, a lady called Gloria. He discusses with Gloria the amount of borrowed funds Jasper thinks he will need for his business. They agree that a loan of $750,000.00 would meet Jasperâs immediate needs.

They discuss different types of loans and Gloria says: âWell, Jasper that is all very interesting. Based upon my experience with similar businesses to yours, I can say that the Bank would be very interested in lending you what you need. Of course we would require security. We would certainly require a mortgage over your real property together with a fixed/floating charge over your other assets.â

Jasper says that he doesnât want to pay high fees and requires an interest rate of no more than 7% payable quarterly for the loan. Gloria says: âAs to interest, I can only tell you that our current rate is 7.25%. What do you think about all of this? âJasper says to her: âI will think about it and get back to you.â Gloria says: âWell, donât take too long about it.â

Jasper is getting a little fed up with Gloriaâs over bearing manner and thinks he can get a better deal elsewhere. Unfortunately, he finds that in fact no one else will lend to him. So two weeks later on 14 September Jasper emails Gloria, in which email he states: âI accept your offer of 31 August.â

A week later Jasper phones Gloria to ask when he can access the loan. Gloria says to him: âSorry, Jasper, but there has been a downturn in the Bankâs shares and the interest rate for loans such as yours is now 8.5%.â

(a) Ignoring legislation or Codes of Conduct, advise Jasper as to whether or not VA Bank is obliged to provide him with a loan of $750,000.00 at 7.25%. Give reasons for your answer.â [5 marks]

Although he is dismayed at the Bankâs attitude, Jasper is desperate to get his plans under way and phones Gloria saying: âWe agree to your terms but I have one question of importance to me - Can I have the option of repaying the loan on an interest only basis instead of repaying principal and interest should my circumstances make such a change necessary?â To which Gloria replied: âI am fairly certain you can have that facility.â

Jasper receives the Bankâs standard contract documents for the loan, signs them and returns the documents to Gloria. Unfortunately Jasper was pressed for time and did not actually read the contracts before signing. On reading them the next day he is dismayed to find that they contain the usual obligations to repay regular instalments of principal and interest but there is no reference to an option to pay interest only.

(b) Advise Jasper if he can insist upon the Bank including an option clause in the loan agreement.ââ [3 marks]

Finally, Jasper had previously banked at the âWestfall Bank. In the course of discussions between Gloria and Joe, the Manager of Westfall Bank, Joe tells Gloria that Jasper needs to be kept an eye on as he was always writing cheques in favour of the local casino. Gloria passes this information on to Jasper, who is appalled at this slight on his reputation.

PART B

Chameleon Ltd is a customer of the Caring and Wealthy Bank. It is a very large company and employs more than 100 people and therefore the Code of Banking Practice does not apply to it. When it opened its account with the Caring and Wealthy Bank, Chameleon Ltd agreed to be bound by this Bankâs terms and conditions as notified to it from time to time. Six months after the account is opened Caring and Wealthy Bank sends its statement to Chameleon Ltd together with the following letter:

PLEASE READ THIS LETTER. IT CONTAINS EXCITING NEW INFORMATION ABOUT YOUR ACCOUNT.

Dear Customer (âyouâ),

The Caring and Wealthy Bank (âusâ) is always trying to find new ways to service you.

To enable us to do this, however, we have decided to introduce a new term of the contract between you and us. This is to enable us to reduce costs in one area so we can provide you with exciting new services. The new clause 12 of the contract between you and us is as follows:

The customer (âyouâ) must read each bank statement sent to you. If there are any inconsistencies in the statement you must notify the bank of the inconsistencies within 10 business days. Failure to notify us of such inconsistencies means the amount of the balance contained in the incorrect statement represents what you owe us or what we owe you, as the case may be.

The managing director of Chameleon Ltd receives the bank statement and letter. She doesnât read the bank statement. She starts to read the letter but throws it in the bin after she reads the first sentence thinking the bank is trying to sell new products to the company. âJust another publicity stunt,â she remarks to the office cat.

The bank statement shows that between 1 February and 1 April $1 million has been fraudulently withdrawn from the companyâs bank account. Chameleon Ltd does not notify the bank of the fraudulent withdrawal within 10 business days of receiving the statement. It is later discovered by the bank that an employee of Chameleon Ltd, called Cynthia, had fraudulently withdrawn the $1 million and then proceeded to lose the whole sum at the casino. The bank was then informed.

Two months later on 1 June the managing director becomes aware that on 15 May, Colin, the companyâs accounts clerk, had fraudulently stolen $2,000 from the companyâs current bank account at The Caring and Wealthy Bank by forging company cheques. Colinâs wife had just died and the managing director does not tell the bank about the forgeries. On 30 July, Colin steals a further $1,000 from the company account in the same manner.

After discovering on 30 July what Colin has done, the managing director comes to you and asks you to advise Chameleon Ltd what to do and whether The Caring and Wealthy Bank is entitled to debit the companyâs account for

1. the $1million stolen by Cynthia and

2. the $3,000 in total stolen by Colin.

Advise Chameleon Ltd giving reasons with relevant cases. Consider what effect, if any, the letter from the Bank purporting to introduce a âNEW TERMâ has on the situation? What Duties of the Banker and Customer ,if any,are involved here? â [7 marks]

PART C

Martin Pty Ltd has an account with the Caring and Wealthy Bank named âWages Accountâ used (as Martinâs CEO explained to the Bankâs Manager ) for payment of wages to staff. The balance in credit was $25,000.The company also had a current account in debit to the extent of $10,000 and a loan account so designated in debit to the extent of $15,000.

Can the Bank combine any of these accounts? Explain the concept of Combination of Accounts using case law to illustrate your answer. [3 marks]

This questions are based on FINANCE LAW subject,

If you guys can solve it using IRAC METHOD.

PART A

So Jasper goes to a branch of the Very Accommodating Bank (âVA Bankâ) that has just opened up in his area.

(a) Ignoring legislation or Codes of Conduct, advise Jasper as to whether or not VA Bank is obliged to provide him with a loan of $750,000.00 at 7.25%. Give reasons for your answer.â [5 marks]

(b) Advise Jasper if he can insist upon the Bank including an option clause in the loan agreement.ââ [3 marks]

PART B

PLEASE READ THIS LETTER. IT CONTAINS EXCITING NEW INFORMATION ABOUT YOUR ACCOUNT.

Dear Customer (âyouâ),

The Caring and Wealthy Bank (âusâ) is always trying to find new ways to service you.

1. the $1million stolen by Cynthia and

2. the $3,000 in total stolen by Colin.

PART C

Can the Bank combine any of these accounts? Explain the concept of Combination of Accounts using case law to illustrate your answer. [3 marks]

LEGL 2700 Lecture Notes - Lecture 9: Security Interest, Financial Institution

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