Chapter16 Agency Relationships

True / False
1. A principal has the right to control an agents conduct in matters entrusted to the agent.
a. True
b. Fals
e
ANSWER:
True
POINTS:
DIFFICULTY:
Easy
REFERENCES:
Introduction
LEARNING OBJECTIVE LO - 1
S:
NATIONAL STANDARDS United States - BUSPROG - Analytic - Business knowledge and

:
analytic skills
LOCAL STANDARDS:
United States - OH - Default City - AICPA Legal
KEYWORDS:
Bloom's: Knowledge
2. Through agents, a principal can conduct multiple business operations simultaneously.
a. True
b. Fals
e
ANSWER:
True
POINTS:
DIFFICULTY:
Easy
REFERENCES:
Introduction
S:

:
analytic skills
LOCAL STANDARDS:
KEYWORDS:
Bloom's: Knowledge
3. In a principal-agent relationship, the parties agree that the principal will act on behalf and instead of the agent in
negotiating and transacting business with third persons.
a. True
b. Fals
e
ANSWER:
False
POINTS:
DIFFICULTY:
Easy
REFERENCES:
Agency Relationships
LEARNING OBJECTIVES: LO - 1
NATIONAL STANDARDS: United States - BUSPROG:Analytic
LOCAL STANDARDS:
KEYWORDS:
Bloom's: Knowledge
4. Employees who deal with third parties are agents of their employers.
a. True
b. Fals
e
ANSWER:
True
POINTS:
DIFFICULTY:
Easy
REFERENCES:
S:

:
analytic skills
LOCAL STANDARDS:
KEYWORDS:
Bloom's: Knowledge
5. An employer has no control over an employees work.
a. True
b. Fals
e
ANSWER:
False
POINTS:
DIFFICULTY:
Easy
REFERENCES:
S:

:
analytic skills
LOCAL STANDARDS:
KEYWORDS:
Bloom's: Knowledge
6. Real estate brokers are independent contractors.
a. True
b. Fals
e
ANSWER:
True
POINTS:
DIFFICULTY:
Easy
REFERENCES:
NATIONAL STANDARDS: United States - BUSPROG: Risk Analysis
LOCAL STANDARDS:
KEYWORDS:
Bloom's: Knowledge
7. An independent contractor is an employee.
a. True
b. Fals
e
ANSWER:
False
POINTS:
DIFFICULTY:
Easy
REFERENCES:
S:

:
analytic skills
LOCAL STANDARDS:
KEYWORDS:
Bloom's: Knowledge
8. The relationship between a principal and an independent contractor always involves an agency relationship.
a. True
b. Fals
e
ANSWER:
False
POINTS:
DIFFICULTY:
Easy
REFERENCES:
S:

:
analytic skills
LOCAL STANDARDS:
KEYWORDS:
Bloom's: Knowledge
9. An independent contractor is an employer who controls his or her agents performance.
a. True
b. Fals
e
ANSWER:
False
POINTS:
DIFFICULTY:
Easy
REFERENCES:
S:

:
analytic skills
LOCAL STANDARDS:
KEYWORDS:
Bloom's: Knowledge
10. An agency relationship can only be formed with a written agreement.
a. True
b. Fals
e
ANSWER:
False
POINTS:
DIFFICULTY:
Easy
REFERENCES:
Formation of Agencies
S:

:
analytic skills
LOCAL STANDARDS:
KEYWORDS:
Bloom's: Knowledge
11. A person must have contractual capacity to be an agent.
a. True
b. Fals
e
ANSWER:
True
POINTS:
DIFFICULTY:
Easy
REFERENCES:
S:

:
analytic skills
LOCAL STANDARDS:
KEYWORDS:
Bloom's: Knowledge
12. An agency relationship created for an illegal purpose is enforceable.
a. True
b. Fals
e
ANSWER:
False
POINTS:
DIFFICULTY:
Easy
REFERENCES:
S:

:
analytic skills
LOCAL STANDARDS:
KEYWORDS:
Bloom's: Knowledge
13. An agency relationship must be based on an express or implied agreement that the agent will act for principal and that
the principal agrees to have the agent so act.
a. True
b. Fals
e
ANSWER:
True
POINTS:
DIFFICULTY:
Easy
REFERENCES:
LOCAL STANDARDS:
KEYWORDS:
Bloom's: Knowledge
14. An agency relationship cannot exist in the absence of a formal agreement.
a. True
b. Fals
e
ANSWER:
False
POINTS:
DIFFICULTY:
Easy
REFERENCES:
S:

:
analytic skills
LOCAL STANDARDS:
KEYWORDS:
Bloom's: Knowledge
15. A principal who causes a third person to believe that another person is the principals agent can be estopped from
denying the agency relationship.
a. True
b. Fals
e
ANSWER:
True
POINTS:
DIFFICULTY:
Easy
REFERENCES:
S:

:
analytic skills
LOCAL STANDARDS:
KEYWORDS:
Bloom's: Knowledge
16. An agency relationship may occur by operation of law in a family.
a. True
b. Fals
e
ANSWER:
True
POINTS:
DIFFICULTY:
Easy
REFERENCES:
S:

:
analytic skills
LOCAL STANDARDS:
KEYWORDS:
Bloom's: Knowledge
17. Generally, the agent owes the principal no duties.
a. True
b. Fals
e
ANSWER:
False
POINTS:
DIFFICULTY:
Easy
REFERENCES:
Duties of Agents and Principals
S:

:
analytic skills
LOCAL STANDARDS:
KEYWORDS:
Bloom's: Knowledge
18. Remedies of the agent for breach of duty by the principal arise out of contract and tort law
a. True
b. Fals
e
ANSWER:
True
POINTS:
DIFFICULTY:
Easy
REFERENCES:
LOCAL STANDARDS:
KEYWORDS:
Bloom's: Knowledge
19. It is basic tenet of agency law that notice to the agent is notice to the principal.
a. True
b. Fals
e
ANSWER:
True
POINTS:
DIFFICULTY:
Easy
REFERENCES:
S:

:
analytic skills
LOCAL STANDARDS:
KEYWORDS:
Bloom's: Knowledge
20. An agent has a duty to keep and make available to the principal an account of all property and funds received and paid
out on behalf of the principal.
a. True
b. Fals
e
ANSWER:
True
POINTS:
DIFFICULTY:
Easy
REFERENCES:
S:

:
analytic skills
LOCAL STANDARDS:
United States - OH - Default City - AICPA Critical Thinking
KEYWORDS:
Bloom's: Knowledge
21. If a principal cannot be contacted in an emergency situation, an agent cannot deviate from previously given
instructions.
a. True
b. Fals
e
ANSWER:
False
POINTS:
DIFFICULTY:
Easy
REFERENCES:
S:

:
analytic skills
LOCAL STANDARDS:
KEYWORDS:
Bloom's: Knowledge
22. A principal owes an agent a duty of compensation.
a. True
b. Fals
e
ANSWER:
True
POINTS:
DIFFICULTY:
Easy
REFERENCES:
S:

:
analytic skills
LOCAL STANDARDS:
KEYWORDS:
Bloom's: Knowledge
23. Authority declared in clear, direct, definite terms is express authority.
a. True
b. Fals
e
ANSWER:
True
POINTS:
DIFFICULTY:
Easy
REFERENCES:
LOCAL STANDARDS:
KEYWORDS:
Bloom's: Knowledge
24. Giving an agent a power of attorney confers implied authority.
a. True
b. Fals
e
ANSWER:
False
POINTS:
DIFFICULTY:
Easy
REFERENCES:
Agents Authority
S:

:
analytic skills
LOCAL STANDARDS:
KEYWORDS:
Bloom's: Knowledge
25. The equal dignity rule requires that a principal and agent treat each other with equal dignity.
a. True
b. Fals
e
ANSWER:
False
POINTS:
DIFFICULTY:
Easy
REFERENCES:
Agents Authority
S:

:
analytic skills
LOCAL STANDARDS:
KEYWORDS:
Bloom's: Knowledge
26. For an agents implied authority to be effective, a principal must ratify it.
a. True
b. Fals
e
ANSWER:
False
POINTS:
DIFFICULTY:
Easy
REFERENCES:
Agents Authority
S:

:
analytic skills
LOCAL STANDARDS:
KEYWORDS:
Bloom's: Knowledge
27. If a principal does not ratify an authorized contract, the principal is not bound.
a. True
b. Fals
e
ANSWER:
False
POINTS:
DIFFICULTY:
Easy
REFERENCES:
Agents Authority
S:

:
analytic skills
LOCAL STANDARDS:
KEYWORDS:
Bloom's: Knowledge
28. If a principal ratifies a contract without knowing all of the facts, the principal can rescind the contract.
a. True
b. Fals
e
ANSWER:
True
POINTS:
DIFFICULTY:
Easy
REFERENCES:
Liability in Agency Relationships
S:

:
analytic skills
LOCAL STANDARDS:
KEYWORDS:
Bloom's: Knowledge
29. If a principal does not ratify an unauthorized contract, the principal is not bound.
a. True
b. Fals
e
ANSWER:
True
POINTS:
DIFFICULTY:
Easy
REFERENCES:
S:

:
analytic skills
LOCAL STANDARDS:
KEYWORDS:
Bloom's: Knowledge
30. A disclosed principal is a principal whose identity is not known by the third party at the time the contract is made by
the agent.
a. True
b. Fals
e
ANSWER:
False
POINTS:
DIFFICULTY:
Easy
REFERENCES:
S:

:
analytic skills
LOCAL STANDARDS:
KEYWORDS:
Bloom's: Knowledge
31. A principal is not liable on any contract made by the agent acting outside the scope of his or her authority.
a. True
b. Fals
e
ANSWER:
True
POINTS:
DIFFICULTY:
Easy
REFERENCES:
LOCAL STANDARDS:
KEYWORDS:
Bloom's: Knowledge
32. Under the doctrine of respondeat superior, an agent is liable for the principals negligence.
a. True
b. Fals
e
ANSWER:
False
POINTS:
DIFFICULTY:
Easy
REFERENCES:
S:

:
analytic skills
LOCAL STANDARDS:
KEYWORDS:
Bloom's: Knowledge
33. A principal is responsible for all intentional torts committed by an agent.
a. True
b. Fals
e
ANSWER:
False
POINTS:
DIFFICULTY:
Easy
REFERENCES:
S:

:
analytic skills
LOCAL STANDARDS:
KEYWORDS:
Bloom's: Knowledge
34. An agency can terminate once its purpose is achieved.
a. True
b. Fals
e
ANSWER:
True
POINTS:
DIFFICULTY:
Easy
REFERENCES:
Termination of Agency Relationships
S:

:
analytic skills
LOCAL STANDARDS:
KEYWORDS:
Bloom's: Knowledge
35. When an agency relationship is terminated, the principal has a duty to personally notify third parties who knew of its
existence.
a. True
b. Fals
e
ANSWER:
False
POINTS:
DIFFICULTY:
Easy
REFERENCES:
S:

:
analytic skills
LOCAL STANDARDS:
KEYWORDS:
Bloom's: Knowledge
Multiple Choice
36. Ozzy is an officer of Prudent Financial Corporation. Ozzy serves in a representative capacity for Prudent Financials
owners. With respect to binding Prudent Financial to contracts, Ozzy is
a. an agent and has the authority.
b. an agent but does not have the authority.
c. not an agent and does not have the authority.
d. not an agent but does have the authority.
ANSWER:
POINTS:
DIFFICULTY:
Moderate
REFERENCES:
Introduction
LEARNING OBJECTIVES LO - 1
:
NATIONAL STANDARDS: United States - BUSPROG: ReflectiveReflective - BUSPROG:

Reflective
LOCAL STANDARDS:
KEYWORDS:
Bloom's: Application
37. Jackson Lumber hires Owen to purchase wood from various sources on behalf of Jackson Lumber. In this relationship,
Jackson Lumber is the
a. employee.
b. independent contractor.
c. principal.
d. agent.
ANSWER:
POINTS:
DIFFICULTY:
Moderate
REFERENCES:
Introduction
:

Reflective
LOCAL STANDARDS:
KEYWORDS:
38. KupaJava hires Lola to manage one of KupaJavas seven drive-through coffee stands. KupaJava agrees to pay Lola a
salary, plus commission. KupaJava stipulates the standards that should be observed, the goals that should be attained, and
the methods that should be used. Lola is most likely KupaJavas
a. employee.
b. independent contractor.
c. principal.
d. power of attorney.
ANSWER:
POINTS:
DIFFICULTY:
Moderate
REFERENCES:
:

Reflective
LOCAL STANDARDS:
KEYWORDS:
39. Clara is a salesperson in The Corner Store. When Carla makes a sale to Jenny, the sale is
a. binding on The Corner Store.
b. binding on Carla.
c. binding on The Corner Store only if the owner of The Corner Store is present when
the sale is made.
d. not binding on anyone.
ANSWER:
POINTS:
DIFFICULTY:
Moderate
REFERENCES:
:

Reflective
LOCAL STANDARDS:
KEYWORDS:
40. Genetic Seed Company hires Howie to work on Genetics shipping dock, accepting deliveries and dealing with other
companies drivers. With respect to Genetic, Howie is most likely
a. an agent.
b. an independent contractor.
c. a principal.
d. a work for hire.
ANSWER:
POINTS:
DIFFICULTY:
Moderate
REFERENCES:

Reflective
LOCAL STANDARDS:
KEYWORDS:
41. Ester is a lighting technician who hires out on a per-project basis to film and television production companies, as well
as theatres and other venues that stage dramatic and musical performances. In this capacity, Ester is
a. an agent.
b. an employee.
c. an independent contractor.
d. a principal.
ANSWER:
POINTS:
DIFFICULTY:
Moderate
REFERENCES:
:
Reflective
LOCAL STANDARDS:
KEYWORDS:
Bloom's: Comprehension
42. Delite Candy Company hires Elton to sell Delites products in a certain area. Delite agrees to pay Elton a salary, plus
commission, for a trial period. They also agree that Elton can sell using any methods and during any hours that seem
appropriate. The most important factor in whether Elton is Delites employee is
a. the amount of Eltons salary.
b. the control Delite has over the details of the work.
c. the length of the trial period.
d. the title that designates Eltons position.
ANSWER:
POINTS:
DIFFICULTY:
Moderate
REFERENCES:
:

Reflective
LOCAL STANDARDS:
KEYWORDS:
43. George and James create an agency relationship to facilitate the sale of illegal narcotics. This agency relationship
a. is illegal.
b. is legal.
c. will be recognized by some states, but not others.
d. can exist, but will be subject to sanctions for illegal activity.
ANSWER:
POINTS:
DIFFICULTY:
Moderate
REFERENCES:
Formation of Agency Relationships
:

Reflective
LOCAL STANDARDS:
KEYWORDS:
44. Jim agrees to act on Kits behalf, subject to Kits control, and Kit trusts Jim to so act. This describes a relationship
between
a. a business and its competitors.
b. a government and its governed.
c. a parent and a child.
d. a principal and an agent.
ANSWER:
POINTS:
DIFFICULTY:
Moderate
REFERENCES:
:

Reflective
LOCAL STANDARDS:
KEYWORDS:
45. Sela agrees to act on Thoms behalf, subject to Thoms control, and Thom trusts Sela to so act. They set out the terms
in a written document, which they both sign. This is
a. an agency by agreement.
b. an agency by estoppel.
c. an agency by ratification.
d. not the creation of an agency

relationship.
ANSWER:
POINTS:
DIFFICULTY:
Moderate
REFERENCES:
:

Reflective
LOCAL STANDARDS:
KEYWORDS:
46. Gayla asks Jessie to contract with Jessies high school classmates to babysit for Gaylas new baby. Jessie orally agrees
to do so. This is

relationship.
ANSWER:
POINTS:
DIFFICULTY:
Moderate
REFERENCES:
:

Reflective
LOCAL STANDARDS:
KEYWORDS:
47. Carol is married to Andy. Carol buys food for their childrens lunches and charges the cost to Andys account. This is
a. an agency by operation of law.

relationship.
ANSWER:
POINTS:
DIFFICULTY:
Moderate
REFERENCES:
:

Reflective
LOCAL STANDARDS:
KEYWORDS:
48. Dizzy is not Edwinas agent but enters into a contract with Frida on Edwinas behalf. Edwina later contacts Frida to
affirm the contract. This is

relationship.
ANSWER:
POINTS:
DIFFICULTY:
Moderate
REFERENCES:
:

Reflective
LOCAL STANDARDS:
KEYWORDS:
49. Bernard is an expert on exotic flowers. Fine Floral Fixtures, Inc. (FFF) hires Bernard to order exotic flowers from
various greenhouses. Bernard does not bother to examine the quality of the flowers he purchases on behalf of FFF.
Bernard has breached
a. the duty of performance.
b. the duty of loyalty.
c. no duty.
d. the duty of notification.
ANSWER:
POINTS:
DIFFICULTY:
Moderate
REFERENCES:
:

Reflective
LOCAL STANDARDS:
KEYWORDS:
50. Rita is appointed as an agent for Superior Sales, Inc. The agency agreement is silent as to the level of sales that Rita is
expected to achieve. She must
a. achieve nothing because the agreement says nothing on the

issue.
b. attain the level that Rita achieved with her previous employer.
c. maintain the level Superior attained before Rita became an agent.
d. use reasonable diligence and skill in selling.
ANSWER:
POINTS:
DIFFICULTY:
Moderate
REFERENCES:
:

Reflective
LOCAL STANDARDS:
KEYWORDS:
51. Mackenzie, an agent for Lindsay, signs an agreement with Kirk on Lindsays behalf but neglects to tell her that the agreement
requires the payment of a certain tax. The government prosecutes Lindsay for failing to pay the tax. She is
a. liable, because notice to Mackenzie is notice to Lindsay.
b. liable, because notice to Kirk is notice to Lindsay.
c. not liable, because Mackenzie did not tell Lindsay about the
tax.
d. not liable, because Kirk did not tell Lindsay about the tax.
ANSWER:
POINTS:
DIFFICULTY:
Challenging
REFERENCES:
:

Reflective
LOCAL STANDARDS:
KEYWORDS:
52. Bob, a salesperson at a Carpets Galore store, tells Dita, a customer, Buy your carpet here, and Ill install it for half of
what the store would charge. Dita buys the carpet, which Bob installs for half the stores price. Bob keeps the money.
Bob has breached
a. no duty.
c. the duty of
notification.
d. the duty of obedience.
ANSWER:
POINTS:
DIFFICULTY:
Moderate
REFERENCES:
:

Reflective
LOCAL STANDARDS:
KEYWORDS:
53. Will is an agent for MaryElise. MaryElise gives Will clear instructions to only enter into contracts on Mondays,
Wednesdays, or Fridays. Will enters into a contract on MaryElises behalf on Tuesday. Will has breached
a. the duty of performance.
c. no duty.
d. the duty of obedience.
ANSWER:
POINTS:
DIFFICULTY:
Moderate
REFERENCES:
:

Reflective
LOCAL STANDARDS:
KEYWORDS:
54. Julia is an agent who purchases wool for Karas Knitting Company. In the course of her performance for Karas
Knitting Company, Julia pays for the gas for the company car and for some storage boxes for the wool. Karas Knitting
Company must reimburse Julia because of the principals
a. duty of performance.
b. duty of loyalty.
c. duty of compensation.
d. duty of reimbursement.
ANSWER:
POINTS:
DIFFICULTY:
Moderate
REFERENCES:
:

Reflective
LOCAL STANDARDS:
KEYWORDS:
55. Rangle contracts with Siena to buy a certain horse for her. Rangle makes a deal with Timberline Stables, the owner of
the horse, and makes a down payment. Siena fails to pay the rest of the price. Timberline sues Rangle for breach of
contract. His right to hold Siena liable for any damages that he has to pay is the right of
a. avoidance.
b. cooperation.
c. indemnification.
d. reimbursement.
ANSWER:
POINTS:
DIFFICULTY:
Challenging
REFERENCES:
:

Reflective
LOCAL STANDARDS:
KEYWORDS:
56. Lather Up Soap Products Company grants its agent Kathy an exclusive territory in which to sell Lather Up products.
The firm cannot compete with Kathy in that territory under the principals duty of
a. avoidance.
b. cooperation.
c. indemnification.
d. reimbursement.
ANSWER:
POINTS:
DIFFICULTY:
Moderate
REFERENCES:
:

Reflective
LOCAL STANDARDS:
KEYWORDS:
57. Cory employs Daily Delivery Agency as an agent under a writ-ten agreement that describes the rights and duties of
both parties. This is
a. apparent authority.
b. equal authority.
c. express authority.
d. implied authority.
ANSWER:
POINTS:
DIFFICULTY:
Moderate
REFERENCES:
Agents Authority
:

Reflective
LOCAL STANDARDS:
KEYWORDS:
58. Geoff serves in a representative capacity for Huck. To accomplish the objectives of this relationship, Geoffs authority
can be implied
a. by contradiction.
b. by custom.
c. by lack of reason.
d. under no circumstances.
ANSWER:
POINTS:
DIFFICULTY:
Moderate
REFERENCES:
Agents Authority
:

Reflective
LOCAL STANDARDS:
KEYWORDS:
59. Sonia manages a Tasty Pastry store for United Food Company. To manage the business, Sonias authority can be
implied by
a. an inference from the position Sonia occupies.
b. any inference a reasonable customer or supplier would

make.
c. any inference Sonia chooses to make.
d. no inference.
ANSWER:
POINTS:
DIFFICULTY:
Moderate
REFERENCES:
Agents Authority
:

Reflective
LOCAL STANDARDS:
KEYWORDS:
60. Based on Nans conduct, Odel reasonably believes that Poppy has the authority to act on Nans behalf even though
Poppy does not have the actual authority to do so. In this circumstance, Poppy has
a. apparent authority.
b. express authority.
c. implied authority.
d. no authority.
ANSWER:
POINTS:
DIFFICULTY:
Moderate
REFERENCES:
Agents Authority
:

Reflective
LOCAL STANDARDS:
KEYWORDS:
61. Without authorization, Rolf contracts on behalf of Sari to have Tige paint the interior and exterior of Saris house. Sari
ratifies the contract. Later, Sari tries to rescind the part of the contract relating to the exterior. This attempt will be
a. partly successful.
b. partly unsuccessful.
c. totally successful.
d. totally
unsuccessful.
ANSWER:
POINTS:
DIFFICULTY:
Challenging
REFERENCES:
Agents Authority
:

Reflective
LOCAL STANDARDS:
KEYWORDS:
62. Bud approves on behalf of Codybut without authorizationa contract with Dik to build a new silo. Cody does not
ratify the contract. Later, Dik tries to enforce the deal. This attempt will be
a. partly successful.
b. partly unsuccessful.
c. totally successful.
d. totally
unsuccessful.
ANSWER:
POINTS:
DIFFICULTY:
Challenging
REFERENCES:
Agents Authority
:

Reflective
LOCAL STANDARDS:
KEYWORDS:
63. Iggy hires Joy to act as his agent to purchase Kup-a-Koffee Company. Iggy tells Joy to reveal only that she is buying
the firm on behalf of a third party, without telling Kup-a-Koffees seller who that third party is. Iggy is
a. a disclosed principal.
b. an implied principal.
c. an undisclosed principal.
d. a partially disclosed
principal.
ANSWER:
POINTS:
DIFFICULTY:
Challenging
REFERENCES:
:

Reflective
LOCAL STANDARDS:
KEYWORDS:
64. Joli, acting within the scope of her authority for the Cake Bake Shop, contracts with Valley View Berry Farms to buy
an assortment of fruit. Cake Bake is liable on the contract, and Joli is not, if Cake Bake is
a. a disclosed principal.
b. a partially disclosed
principal.
c. an undisclosed principal.
d. an apparent agent.
ANSWER:
POINTS:
DIFFICULTY:
Challenging
REFERENCES:
:

Reflective
LOCAL STANDARDS:
KEYWORDS:
65. Brad is an employee of Custodial Service, Inc. In deciding whether Brad acts within the scope of his employment
when he commits a tort against Didi, a court will not consider whether
a. Brad was acting within the scope of the agency.
b. Brad was acting within the scope of his employment.
c. Custodial authorized the act.
d. Custodial was personally at fault.
ANSWER:
POINTS:
DIFFICULTY:
Challenging
REFERENCES:
:

Reflective
LOCAL STANDARDS:
KEYWORDS:
66. Picabo drives a truck as an employee for Quik Delivery, Inc. Picabo would most likely be considered acting outside
the scope of her employment if she
a. crashed into a car at the airport while off duty.
b. hit a pedestrian in a parking lot during a working lunch.
c. ran over an attendant at Quiks gas station while refueling the truck.
d. smashed into a store-front while intoxicated on-duty.
ANSWER:
POINTS:
DIFFICULTY:
Moderate
REFERENCES:
:

Reflective
LOCAL STANDARDS:
KEYWORDS:
67. Bayou Development Corporation (BDC) hires Gulfview Brokerage Associates to sell the condominiums in a building
at BDCs coastal resort. The agency will terminate
a. after the condos have been sold.
b. if the prices of the condos must be reduced to sell

them.
c. once BDC obtains insurance to cover the property.
d. when BDC pays Gulfview its first commission.
ANSWER:
POINTS:
DIFFICULTY:
Moderate
REFERENCES:
:

Reflective
LOCAL STANDARDS:
KEYWORDS:
68. Miklos employs Nathalie to handle a list of financial transactions on Mikloss behalf. This power will terminate on
a. any transaction causing a loss to Miklos.
b. Mikloss death or incapacity.
c. Mikloss sixty-fifth birthday.
d. Nathalies handling of one of each stipulated transaction.
ANSWER:
POINTS:
DIFFICULTY:
Moderate
REFERENCES:
:
Reflective
LOCAL STANDARDS:
KEYWORDS:
69. Frida hires Gert, a real estate broker, to act as her agent to sell her house. The house burns down before being sold.
The agency agreement is likely
a. still in force if Frida gives Gert additional

consideration.
b. still in force if Gert does not tell prospective customers.
c. terminated by mutual consent of the parties.
d. terminated by operation of law.
ANSWER:
POINTS:
DIFFICULTY:
Moderate
REFERENCES:
:

Reflective
LOCAL STANDARDS:
KEYWORDS:
70. Treadwell Tire Manufacturing Company employs Uri as an agent. To terminate Uris authority, Treadwell must notify
a. only third parties who are aware of the agency relationship.
b. the public generally.
c. Uri and any third parties who are aware of the agency
relationship.
d. Uri only.
ANSWER:
POINTS:
DIFFICULTY:
Moderate
REFERENCES:
:

Reflective
LOCAL STANDARDS:
KEYWORDS:
Essay
71. Principal Resources Corporation contracts with Quality Construction to build an addition to Principals corporate
office building. Quality contracts with Rite Supply Company for materials for the addition but refuses to pick up the
materials. Meanwhile, Principal hires Skye, a certified public accountant, to work in its cost-accounting division as an
employee, with no authority to hire or supervise others. Skye asks Theo, an outside experienced accountant, to advise her
on certain accounting procedures but fails to pay Theo for the service. Principal also contracts with Uma, a salesperson, to
solicit orders for its products in a designated territory. Uma obtains an order from Verity Industries, Inc., which is assured
the order will be filled soon. But Uma does not follow through with the paperwork and fails to submit the order to
Principal. Verity suffers a loss. Rite Supply, Theo, and Verity Industries claim Principal is liable under agency law.
Discuss fully whether an agency relationship was created by Principal with Quality Construction, Skye, or Uma.
ANSWER:
Whether Principal can be held liable by Rite Supply, Theo, and Verity Industries
depends on the relationship created by Principal in its contracts with Quality
Construction, Skye, and Uma. If the relationship is one of principal-agent, the
parties agree that the agent will act on behalf of the principal, and any proper
contracts made by an agent with a third person are binding on the principal. In
analyzing the agency relationship in this problem, it is important to distinguish
the principal-agent relationship from that of employer employee (master servant)
or employerindependent contractor. Contracts made with third parties by
employees or independent contractors who are not also agents are not binding and
are not enforceable against the employer.
Quality Construction is employed as an independent contractor. It is neither an
agent for Principal nor an employee. Because Quality Construction has no
authority to make contracts on behalf of Principal, Quality is not an agent. In
addition, because Principal has no control over the details of Qualitys conduct,
Quality is not an employee. Therefore, only Quality, not Principal, can be liable
to Rite Supply for nonperformance of contract.
Skye is hired strictly as an employee and has no authority to contract with third
persons. Consequently, Skye is not authorized to hire a consultant on Principals
behalf. Therefore, Theo must look to Skye, not to Principal, for payment for
services.
Uma is both an employee and an agent. As an agent she is hired specifically to
solicit orders for Principals products from third persons. If she has authority to
so contract, Principal is bound by her contract.
POINTS:
DIFFICULTY: Challenging
REFERENCES Agency Relationships

:
LEARNING O LO - 1
BJECTIVES:
NATIONAL ST United States - BUSPROG: ReflectiveReflective - BUSPROG: Reflective

ANDARDS:
LOCAL STAN United States - OH - Default City - AICPA Decision Modeling

DARDS:
KEYWORDS: Bloom's: Application
72. Brenda is a purchasing agent for Commodities Exchange Corporation. Dennis, a Commodities corporate officer, gives
Brenda written authority to buy for the firm as many computers and peripheral devices as necessary. The next day, Dennis
calls Brenda and tells her to buy only fifty notebook computers and nothing else. Brenda shows the written authority to EProducts, Inc., and enters into a contract with E-Products to buy sixty note-book computers and a selection of printers,
scanners, and extra storage media. E-Products ships the order to Commodities. Is Commodities liable to E-Products under
the contract? Is Brenda liable? In each case, if so, why? If not, why not?
ANSWER:
Commodities is liable to E-Products. Brenda is not liable to E-Products. A

principal is liable for the contracts of its agents entered into with actual or
apparent authority. Actual authority may be express or implied. Apparent
authority arises from what the principal causes a third party reasonably to believe
regarding the agents authority to act, even if the agent does not have actual
authority to act. If the third party changes its position in reliance on the
principals representations, the principal is estopped from denying that the agent
had authority. In this problem, Brenda had the actual authority to order fifty
notebook computers and apparent authority to order the rest of the equipment,
according to the written authorization that Dennis gave to Brenda and Brenda
showed to E-Products. E-Productss contract rights are not limited by the limits
placed on that authority by Denniss call to Brenda. Brenda is not liable to EProducts because she acted with apparent authority. Brenda is liable to
Commodities, however, for exceeding her authority.
POINTS:
DIFFICULTY: Challenging
REFERENCES Agents Authority

:
LEARNING O LO - 3
BJECTIVES: LO - 4
NATIONAL ST United States - BUSPROG: ReflectiveReflective - BUSPROG: Reflective

ANDARDS:
LOCAL STAN United States - OH - Default City - AICPA Decision Modeling

DARDS:
KEYWORDS: Bloom's: Application

Chapter16 Agency Relationships

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NATIONAL STANDARDS United States - BUSPROG - Analytic - Business knowledge and

United States - OH - Default City - AICPA Legal

2. Through agents, a principal can conduct multiple business operations simultaneously.

NATIONAL STANDARDS United States - BUSPROG - Analytic - Business knowledge and

United States - OH - Default City - AICPA Legal

NATIONAL STANDARDS: United States - BUSPROG:Analytic

United States - OH - Default City - AICPA Legal

NATIONAL STANDARDS United States - BUSPROG - Analytic - Business knowledge and

United States - OH - Default City - AICPA Legal

5. An employer has no control over an employees work.

NATIONAL STANDARDS United States - BUSPROG - Analytic - Business knowledge and

United States - OH - Default City - AICPA Legal

6. Real estate brokers are independent contractors.

NATIONAL STANDARDS: United States - BUSPROG: Risk Analysis

United States - OH - Default City - AICPA Legal

7. An independent contractor is an employee.

NATIONAL STANDARDS United States - BUSPROG - Analytic - Business knowledge and

United States - OH - Default City - AICPA Legal

NATIONAL STANDARDS United States - BUSPROG - Analytic - Business knowledge and

United States - OH - Default City - AICPA Legal

9. An independent contractor is an employer who controls his or her agents performance.

NATIONAL STANDARDS United States - BUSPROG - Analytic - Business knowledge and

United States - OH - Default City - AICPA Legal

10. An agency relationship can only be formed with a written agreement.

NATIONAL STANDARDS United States - BUSPROG - Analytic - Business knowledge and

United States - OH - Default City - AICPA Legal

11. A person must have contractual capacity to be an agent.

NATIONAL STANDARDS United States - BUSPROG - Analytic - Business knowledge and

United States - OH - Default City - AICPA Legal

12. An agency relationship created for an illegal purpose is enforceable.

NATIONAL STANDARDS United States - BUSPROG - Analytic - Business knowledge and

United States - OH - Default City - AICPA Legal

NATIONAL STANDARDS: United States - BUSPROG:Analytic

United States - OH - Default City - AICPA Legal

14. An agency relationship cannot exist in the absence of a formal agreement.

NATIONAL STANDARDS United States - BUSPROG - Analytic - Business knowledge and

United States - OH - Default City - AICPA Legal

NATIONAL STANDARDS United States - BUSPROG - Analytic - Business knowledge and

United States - OH - Default City - AICPA Legal

16. An agency relationship may occur by operation of law in a family.

NATIONAL STANDARDS United States - BUSPROG - Analytic - Business knowledge and

United States - OH - Default City - AICPA Legal

17. Generally, the agent owes the principal no duties.

Duties of Agents and Principals

NATIONAL STANDARDS United States - BUSPROG - Analytic - Business knowledge and

United States - OH - Default City - AICPA Legal

Duties of Agents and Principals

NATIONAL STANDARDS: United States - BUSPROG:Analytic

United States - OH - Default City - AICPA Legal

Duties of Agents and Principals

NATIONAL STANDARDS United States - BUSPROG - Analytic - Business knowledge and

United States - OH - Default City - AICPA Legal

out on behalf of the principal.

Duties of Agents and Principals

NATIONAL STANDARDS United States - BUSPROG - Analytic - Business knowledge and

United States - OH - Default City - AICPA Critical Thinking

Duties of Agents and Principals

NATIONAL STANDARDS United States - BUSPROG - Analytic - Business knowledge and

United States - OH - Default City - AICPA Legal

22. A principal owes an agent a duty of compensation.

Duties of Agents and Principals

NATIONAL STANDARDS United States - BUSPROG - Analytic - Business knowledge and

United States - OH - Default City - AICPA Legal