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Study Guide for Test 2      BA 335

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Formation of sales contracts


Concept of Title and Transfer of Title


Seller Delivery

Conditional Sales Agreements

Sale on Approval

            Responsibility for Loss

Perfect Tender Rule

Remedies of Seller and Buyer



Definition of Warranty

Types of Warranties

Breach of Warranty



Definition of Tort

Types of Torts and applicability to business



Who may be sued (Chain of manufacture)

Why may they be sued- theories of liability ( negligence  and strict liability) 

Applicable Law- Common Law, state statutes (UCC Article 2), Federal Statutes

Elements of a product liability lawsuit

D under a legal duty (chain of manufacture)

D breached duty (remember type of defects)

P suffered injury as a result of breach

                         Role of Federal Regulation

Defenses to a product liability lawsuit


Types of Business Organizations

How to form each

Advantages/Disadvantages of each

           Partnership Operations and Types (Limited and General)

Limited Liability Company formation and operation (generally)



Designation of Subchapter S

Records required

Role of Shareholders, Directors, Officers

Piercing the Corporate Veil

Issues regarding shareholder relations

Termination and Liquidation of Corporations






 PLEASE NOTE:  These are samples only. The actual test will be longer, have more questions and cover more subjects. This sample is being made available to you to allow you to get a preview of the types of questions that will be in the test. The answer key is posted separately.


I. Multiple Choice. Please answer the following by circling the letter that corresponds to the correct answer.



1. Elmer Fudd goes to a pet store seeking to purchase a hunting dog. At the store, he asks the store clerk to show him a hunting dog that would be an “exceptional hunter”. The clerk shows him a dog from a breed that are usually good hunters. The store has made

a. An express warranty

b. An implied warranty of merchantability

c. A warranty of Fitness for particular purpose

d. No warranty


2. The federal agency that regulates prescription drug testing is 

a. Food and Drug Administration

b.  Drug Testing Commission

c. American Scientific Commission

d.  United States Pharmaceutical Association



3. Alan ships product to Baylor by a trucking company with terms that are FOB Destination. The trucking company has an accident on the highway while travelling with the product to Baylor’s business. Under these circumstances

a. Alan must ship new product to Baylor for no additional cost

b. Baylor must pay Alan for another shipment

c. Neither Baylor nor Alan is obligated under the sales agreement

d. Bayor and Alan must split the cost of the new shipment of product.

4. Excellent Tools manufactures power tools for women that are lightweight and in bright colors.  Their new product, the Hot Gun Drill allows the user to drill holes and inject hot glue at the same time. After the product has been for sale for several months, Excellent Tools begins to get feedback that the guns are overheating after they get stuck drilling in fast drying glue. This problem is most likely

a. Design defect

b. Manufacturing defect

c. Marketing defect

d. Not a defect


5. Which of the following must be voted on by shareholders of a corporation?

a. Election of Directors

b.Election of Officers

c. Authorization of Loan to Corporation

d. All of the Above



II. Short Answer. Please answer the following in the space provided.


1. What are two distinct and separate remedies of a buyer when a seller fails to deliver product?

i. Sue for Specific Performance

ii. Replevy the goods (Legal Seizure)

iii. Recover goods from Insolvent seller

iiii. Sue for Conversion (Tort


2. What are two distinct advantages and disadvantages of a corporation over a partnership?

  Advantages:  Limitation of liability of owners

             Ability to add ownership by non active participants

           Separation of management from Ownership

          Access to additional capital

Disadvantages:  Complex and Expensive in formation 

             Corporate Formalities requirement

            Double Tax/ Tax restrictions



3. Please distinguish between open end credit and closed end credit.


Open End Credit has set amount of credit allocated by lender  that borrower draws down as needed and pays back amount monthly determined by borrower, subject to minimum amount set by lender. Examples would include credit card debt and home equity loans

Closed End Credit is a term loan with a set amount disbursed at the same time. The borrower pays back this credit in equal monthly installments of principal and interest. Examples would include car loan, home mortgage



III. Fact Situations. Please analyze the following fact situations using the legal principles that you have learned. 


1. Security First manufactures and sells a line of outdoor floodlights that are water activated and light sensitive.  They are marketed  as a safe security feature, noting that the spotlights  only activate when needed during rain or at night. The company tested the spotlights using indoor sprinkler systems but never tested them in actual weather conditions, such as heavy rain or wind.  The Smith family purchases the floodlights for their house and install them according to the directions. 3 days later a large storm develops with heavy rain and 40 mile per hour winds.  The lens on the lights separates from the light fixture, exposing  the electrical element to the water.  The elements shorts and catches on fire, burning the Smith house to the ground. The wind in the storm causes the fire to spread to three neighboring houses, which also burn completely. 

The Smith family sues Security First for $125,000 in property damage and $200,000 for mental anguish related to the loss of their home.  The 3 neighbors also sue for property damage in the amount of $500,000 and $1 million for mental anguish.

Please evaluate the liability of Security First.


Security First owed a duty to use reasonable care in producing a light that was free of defects. ___ out of 3 points

Did Security First Breach that duty of Care?  The lights had either a product or design defect that caused the lens to separate. Did SF breach duty of care by not testing the lights in actual weather conditions?  ____ out of 4 points

Was the Defect the proximate cause of damage? To the Smith property? To the neighbors property? What about the wind intervening to cause the damage to neighbors houses? ____ out of 3 points


2. .    Sue the Seller offers to sell her motorhome to Burt the Buyer for $20,000. Burt agrees to the offer, gives Sue a deposit of $2000 and tells Sue that he will pay the balance and pick up the motorhome  when he returns from his business trip.(The motorhome is parked in Sue’s driveway) While Burt is away, the motorhome is destroyed by a tornado that strikes Sue’s neighborhood. Who is responsible for the loss? Why?


Issue: When did title pass to Burt: at the date of paying the deposit or when he was to pick up the Motorhome? ( ___ out of 5 points)

Analysis:  What was the intent of the parties? Since nothing specifically said, must infer intent from their actions. Facts indicating conditional sale include leaving the motorhome with the seller and paying only a deposit, not the entire sales price. Facts that might point to regular sale is the lack of any specific conditions put on buyer that boat was his only when price paid. (___ out of 5 points)








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