BL Compilation

BUSINESS LAW & TAXATION

CPA Review School of the Philippines

OBLIGATIONS General Provisions Meaning of Obligation; Meaning of Juridical Necessity; Nature of Obligations; Essential Requisites; Form of Obligations; Kinds of Obligation According to Subject Matter (1156) 10. 1st Statement: In alternative obligations, it is the communication of which prestation to perform made by the debtor shall convert the alternative obligation into a pure or simple one. 2nd Statement: In case of a joint obligation, the co-debtors may be held liable for the share of an insolvent co-debtor A. B. C. D. 1st Statement True False True False 2nd Statement True False False True Sources of Obligations (1157) Legal Obligations (1158) Contractual Obligations, Compliance in Good Faith (1159) Quasi-Contracts (1160) Quasi-Contractual Obligations; Kinds of Quasi-Contracts Civil Liability Arising from Crimes or Delicts; Scope of Civil Liability (1161) Quasi-Delicts (1162) Obligations Arising from Quasi-Delicts; Requisites of Quasi-delict; Crime Distinguished from Quasidelict 4. A mango tree in the land of O is reclining towards the road. All of a sudden, without a storm or an earthquake or even strong wind, the tree falls hitting a car belonging to X causing a P200,000 damage. The liability of O to X arises from A. Contract C. Delict B. Quasi-contract D. Quasi-delict Nature and Effect of Obligations Specific & Generic Thing (1163) Meaning of Specific or Determinate Thing; Meaning of Generic or Indeterminate Thing; Specific Thing and Generic Thing Distinguished; Duties of Debtor in Obligation to Give a Determinate Thing; Duties of Debtor in Obligation to Deliver a Generic Thing February 19, 2005

First Pre-board Examination

Fruits (1164) Different Kinds of Fruits; Right of Creditor to the Fruits; When Obligation to Deliver Fruits Arises 1. S agreed to sell B his land and B agreed to pay P10,000 if X will pass CPA Exams of 2002. X passed. Meantime, interest earned is P1,200, while the fruits harvested is P2,000. A. S will deliver the land to B B. B will pay S the price of the sale C. Combination of A and B D. Combination of A and B, together with the fruits and interest 1. The buyer has the right to the fruits of the thing from: A. Time of delivery C. Time contract of sale is perfected B. Time of obligation to deliver it arises D. Time fruits are delivered Meaning of Personal Right and Real Right; Personal Right and Real Right Distinguished; Ownership Acquired by Delivery Remedies of Creditor in Real Obligation; Responsibility of Debtor who Delays or Has Promised Delivery to Separate Creditors (1165) Accessions and Accessories (1166) Meaning of Accessions and Accessories; Right of Creditor to Accessions and Accessories Situations Contemplated in Art. 1167; Remedies of Creditor in Positive Personal Obligation; Performance by Third Person (1167) Remedies of Creditor in Negative Personal Obligation (1168) Delay (1169) Meaning of Delay; Kinds of Delay or Default 2. The delay of the part of the creditor to accept the performance of an obligation A. Dolo incidente C. Dolo causante B. Mora accipiendi D. Mora solvendi No Delay in Negative Personal Obligation; Requisites of Delay or Default by the Debtor; Effects of Delay; When Demand is Not Necessary to Put Debtor in Delay 2. Rose obliges herself to give Jack 1 dozen of eggs on January 15, 2003. When the date arrived, Rose failed to deliver despite repeated demands from Jack. Jack’s remedy is: Page 1 of 48

BUSINESS LAW & TAXATION A. B. C. D.

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Compel Rose to deliver the eggs plus damages. Compel Rose to pay the amount of the eggs. Rescind the contract. Ask a 3rd person to deliver the eggs to him but chargeable to Rose.

2. Debtor obliged himself to deliver to creditor 100 cavans of rice on June 1, 2001. On said date, D failed to make delivery despite repeated demands by C. In this case: A. C has no remedy under the law B. C can compel D to deliver 100 cavans of rice plus damages C. C may ask a third person to deliver 100 cavans of rice to him, the value recoverable from D plus damages D. None of the above. 4. D obliges himself to pay C P100,000 in 30 days plus a penalty of P20,000 if A fails to pay the obligation in due time. D failed to pay his obligation in 30 days. C can demand from D A. The principal amount of P100,000 plus the penalty of P20,000 plus interest. B. The principal amount of P100,000 plus legal interest. C. The principal amount of P100,000 plus the penalty of P20,000, plus interest, plus damages. D. The principal amount of P100,000 plus the penalty of P20,000. 7. Paula obliged herself to give to Cathy her BMW car on October 10, 2004 but she failed to deliver on that date. On the following day, a lighting completely destroyed the car. A. Paula is still liable for she is in default already. B. Paula is no longer liable there being no demand, there is no delay and the thing is lost due to fortuitous event C. Cathy can demand for a substitute. D. Paula is not liable even if she is in default. 4. R bought her diamond ring to a jewelry shop for cleaning. The jewelry shop undertook to return the ring by February 1, 2001. When the said date arrived, the jewelry shop informed R that the job was not yet finished. They asked her to return five days after. On February 6, 2001, R went to the shop to claim the ring, but she was informed that the same was stolen by a thief who entered the shop the night before. Later, the ring was found in the possession of “T”, the thief. 1st Statement: The jewelry shop is not liable because the lost of the ring is due to force majeure. The right of R is to proceed against T, the theft. 2nd Statement: The right of R is to proceed against the jewelry shop owner and ask for the February 19, 2005

First Pre-board Examination

value of the ring plus damages because there was a breach of contract. The shop cannot escape liability because there was delay. A. B. C. D. 1st Statement True False True False 2nd Statement True False False True Grounds for Liability; Fraud and Negligence Distinguished (1170) 2. A, B and C are obliged to give X, Y and Z a specific car valued at P600,000. On due date, X, Y, and Z demanded delivery from A but A did not deliver. The following day, the car is lost due to fortuitous event. A. The obligation is extinguished because the loss is due to fortuitous event B. The obligation is extinguished because the debtor are guilty of default, but instead converted into money consideration C. the creditor can require the debtor to deliver another car but more valuable D. Answer not given 3. Christine obliged herself to give to Conrad her BMW car on October 10, 2003 but she failed to deliver on that date. On the following day, a lightning completely destroyed the car. A. Christene is still liable for she is in default already. B. Christene is no longer liable there being no demand, there is no delay and the thing is lost due to fortuitous event. C. Conrad can demand for a substitute. D. Christene is not liable even if she is in default. Responsibility Arising from Fraud Demandable; Waiver of Action for Future Fraud Void; Waiver of Action for Past Fraud Valid (1171) 1. In the execution of obligations, liability for malice or bad faith A. Extends not only to results intended but also to their foreseen consequences. B. Is demandable in all obligations but may be renounced in advance. C. Extends only to results intended but excluding exemplary damage D. Extends to natural consequences even if they exceed the debtor's expectations. 1. 1st Statement: Negligence in the performance of a pre existing contract or culpa contractual is one of the sources of obligations. 2nd Statement: Waiver for a future fraud is void but a waiver for a fraud done (past fraud) is valid. A. B. C. D. Page 2 of 48

BUSINESS LAW & TAXATION 1st Statement 2nd Statement

True True

CPA Review School of the Philippines False False

False True

True False

Negligence (1172-1173) Responsibility Arising from Negligence Demandable; Validity of Waiver of Action Arising from Negligence; Kinds of Negligence According of to Source of Obligation; Effect of Negligence on the Part of the Injured Party Meaning of Fault or Negligence; Factors to be Considered; Measure of Liability for Damages; Kinds of Diligence Required 5. Which of the following is not a ground for damages? A. Promising to deliver the same thing to two different persons not having the same interest therein. B. Performance of an act which impairs the strict and faithful fulfillment of the obligation. C. Non-performance of an obligation with respect to time. D. None of the above. 1. The standard of care that a person obliged to give something must observe in the preservation of the specific thing subject matter of an obligation. A. That diligence of a good father of a family B. That diligence which the parties have stipulated on C. That diligence which the law provides D. All of the above 1. The initial standard of care that a person is obliged to give something must observe in the preservation of the specific thing subject matter of an obligation. A. That diligence of a good father of a family. B. That diligence which the parties have stipulated on. C. That diligence which the law provides. D. None of the above. 4. X a passenger of a bus plying the Manila-Baguio route, sustained serious physical injuries brought about by the reckless driving of Y, the designated bus driver, when the bus rammed into a concrete wall at around 11:00 pm that day. In a criminal case against the driver, the latter was acquitted. Thereafter, X filed a case against the bus company for culpa contractual. Will the suit prosper? A. No, this would constitute double jeopardy February 19, 2005

First Pre-board Examination

B. Yes, provided he can prove the negligence of Y, the driver C. No, the dismissal of the criminal case against Y carries with it the dismissal of the civil aspect which was not reserved D. Yes, so long as he can prove the existence of a contract of common carriage between him and the bus company at the time he sustained the injuries. 2. A person is entitled to adequate compensation only for such pecuniary loss suffered by him as he has duly proved, except as provided by law or by stipulation. Such payment is referred to as A. Nominal damages C. Liquidated damages B. Compensatory damages D. Monetary damages Fortuitous Event (1174) Meaning of Fortuitous Event; Fortuitous Event Distinguished from Force Majeure; Kinds of Fortuitous Events; Requisites of a Fortuitous Event; Rules as to Liability in Case of Fortuitous Event Loan, Usury, Interest (1175) Meaning of Simple Loan or Mutuum; Meaning of Usury; Requisites for Recovery of Interest Presumption (1176) Meaning of Presumption; Two Kinds of Presumption; When Presumptions Do Not Apply Remedies Available to Creditors for the Satisfaction of their Claims (1177) Transmissibility of Rights (1178) Comprehensive 5. 1st Statement: Mr. X waived in advance his right to sue Mr. A, if A will cause him injury due to A’s negligence. The waiver is void. 2nd Statement: Dolo incidente or fraud in the celebration of contacts is a ground to annul the obligation. A. B. C. D. st 1 Statement True False True False 2nd Statement True False False True Different Kinds of Obligations Pure and Conditional Obligations (1179) Page 3 of 48

BUSINESS LAW & TAXATION

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Meaning of Pure Obligation; Meaning of Conditional Obligation; Meaning of Condition; Characteristics of a Condition; Two Principal Kinds of Condition; Distinctions beween Suspensive and Resolutory Conditions; When Obligations is Demandable at Once; Past Event Unknown to the Parties 8. A promissory note signed by D and dated March 15, 2002 is worded as follows, “I promise to pay C the sum of Fifty Thousand Pesos (P50,000) provided that if she should fail in the October, 2002 CPA Examination, she shall return to me said amount.” The above note gives rise to an obligation with A. Suspensive condition C. Resolutory condition B. Casual condition D. None of the above Where Duration of Period Depends Upon the Will of Debtor (1180) Effect of Happening of Condition (1181) Classification of Conditions (1182) Potestative Condition; Where Suspensive Condition Depends upon Will of Debtor; Where Suspensive Condition Depends upon Will of Creditor; Where Resolutory Condition Depends upon the Will of Debtor; Casual Condition; Mixed Condition; Where Suspensive Condition Depends Partly upon Will of Debtor. 3. DR promised to give DE, his grandson, a car if the latter will pass the bar examinations. When his grandson passed the said examinations, which of the following statements is true? A. DR may refuse to deliver because the condition is purely a potestative one. B. The obligation is valid because the condition depends upon the sole will of the donor. C. Both the obligation and the condition are ineffective because they depend upon the sole will of the donor. D. The obligation is valid although potestative because they depend upon the sole will of the donee. Impossible Conditons (1183) Two Kinds of Impossible Conditions; Effect of Impossible Conditions 4. 1st Statement: “I will give you a specific car if you will not marry X this year (1999). If by the end of 1999, both parties are alive and no marriage has taken place, my obligation is extinguished. 2nd Statement: “I will give you P10,000 if you cannot make a dead man alive. This is impossible condition, obligation not demandable. A. B. C. D. 1st Statement True False True False February 19, 2005

2nd Statement

First Pre-board Examination True

False

False

True

Positive Condition (1184) Negative Condition (1185) Constructive Fulfillment of Condition (1186) Constructive Fulfillment of Suspensive Condition; Constructive Fulfillment of Resolutory Condition; Retroactive Effect of Fulfillment of Condition (1187) Retroactive Effects of Fulfillment of Suspensive Condition; Retroactive Effects as to Fruits and Interests in Obligations to Give Rights Pending Fulfillment of Suspensive Condition (1188) Loss (1189) Requisites for Application of Article 1189; Kinds of Loss; Rules in Case of Loss, Deterioration, or Improvement of Thing During Pendency of Suspensive Condition Fulfillment of Resolutory Condition (1190) Effects of Fulfillment of Resolutory Condition; Applicability of Article 1189 to Party with Obligation to Return) Art. 1191 Kinds of Obligation According to the Person Obliged; Remedies in Reciprocal Obligations; Court may Grant Guilty Party Term for Performance; Remedies are Alternative; Limitations on Right to Demand Rescission; Rescission Without Previous Judicial Decree Breach (1192) Where Both Party are Guilty of Breach Comprehensive Obligations with a Period (1193) Meaning of Obligation with a Period; Meaning of Period or Term; Period and Condition Distinguished; Kinds of Period or Term 9. “Conrado will continue giving Pedro the latter’s meal allowance until the end of this year”, is an obligation subject to: A. a resolutory period C. a resolutory condition Page 4 of 48

BUSINESS LAW & TAXATION B. a suspensive condition

CPA Review School of the Philippines D. a suspensive period

2. Which of the following is not an obligation with a period? A. Obligation payable within 2 years B. Obligation payable within a reasonable time C. Obligation payable on or before a given date in the future D. None of the above 5. 1st Statement: “To Maria, my true love, I obliged myself to give you my one and only horse when I feel like it. 2nd Statement: “To Perla my true sweetheart, I obliged myself to pay you the P500.00 I owe you when I feel like it. A. B. C. D. st 1 Statement Void Valid Void Valid 2nd Statement Void Valid Valid Void 6. 1st Statement: “To Maria, my true love, I obliged myself to give you my one and only horse when I feel like it. 2nd Statement: “To Perla my true sweetheart, I obliged myself to pay you the P500.00 I owe you when I feel like it. A. B. C. D. st 1 Statement Enforceable Not Enforceable Enforceable Not Enforceable 2nd Statement Enforceable Not Enforceable Not Enforceable Enforceable Effect of Loss, Deterioration, or Improvement before Arrival of Period (1194) Payment before Arrival of Period (1195-1198) Debtor Presumed Aware of Period; No Recovery in Personal Obligations; Presumption as to Benefit of Period 16. On July 1, 1997, A signs a promissory note and binds himself to pay X P100,000 plus 15% per annum interest on June 30, 1999 A. Before June 30, 1999. X can demand payment B. If on June 30, 1998 A is paying X, X cannot refuse the payment C. Because the period is for the benefit of the debtor A can compel creditor X to accept payment any date before June 30, 1999 D. Because the period is for the benefit of the debtor and creditor, X can refuse any tendered payment before June 30, 1999. February 19, 2005

First Pre-board Examination

2. A sold to B the former’s horse for P5,000. No date is fixed by the parties for the performance of their respective obligation. The obligation of A is A. To deliver the horse immediately as there is a perfected contract B. To deliver the horse within a reasonable time of two months from the contract date C. To deliver the horse upon payment by B of P5,000 D. To rescind the contract as there is no time fixed for the delivery and payment Exceptions to the General Rule; Computation of Term or Period Court Generally Without Power to Fix a Period; Exceptions to the General Rule; Legal Effect Where Suspensive Period/Condition Depends upon the Will of Debtor; Period Fixed Cannot be Changed by the Courts 3. 1st Statement: If the obligation does not fix a period, but from its nature and the circumstances, it can be inferred that a period was intended, the court may fix the duration thereof. Once it is fixed by the court, the parties cannot change the fixed date for performance. 2nd Statement: “I will give you P10,000, as soon as possible.” This is an obligation with a period for the benefit of both the debtor and creditor. A. B. C. D. 1st Statement True False True False 2nd Statement True False False True When Obligation Can be Demanded Before Lapse of Period 3. When the period is "on or before a date", the debtor has the benefit of the period. This benefit is lost and the obligation becomes demandable when: A. the debtors attempts to abscond. B. after contracting the obligation, the creditor suspects the debtor to becoming insolvent. C. the guarantee given by the debtor is not acceptable to the creditor. D. demand by the debtor could be useless. Alternative Obligations (1199-1206) Kinds of Obligation According to Object; Meaning of Alternative Obligation Right of Choice, as a Rule, Given to Debtor; Right of Choice of Debtor Not Absolute Communication of Notice that Choice has been Made Page 5 of 48

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Effect when only one Prestation is Practicable When Debtor may Rescind Contract Effect of Loss of Objects of Obligation; Basis of Indemnity 6. D obliged to give C, either object No.1 valued P15,000 or object No. 2 valued P10,000; or object No. 3 valued P5,000. All the objects were lost due to D’s fault in the following order stated. A. D’s obligation is extinguished B. D’s obligation is to pay the value of object No.1 plus damages C. C’s right id to demand the value of any of the object plus damages D. None of the above When Right of Choice belongs to Creditor; Rules in Case Loss before Creditor has Made Choice; Rules Applicable to Personal Obligations 4. A obliged himself to deliver to B his dog, his cow, his carabao, his elephant or his crocodile and gave B the right of choice. The first two were lost due to fortuitous event and the last three were lost due to A’s fault. A. Creditor, B may convert to cash any of them plus damages. B. Debtor A may convert to cash the value of the last one lost plus damages. C. A may rescind the contract plus damages. D. Creditor, B may convert to cash any of the last three plus damages. Meaning of Facultative Obligation; Effect of Loss; Alternative and Facultative Obligations Distinguished 7. Effect of the loss of the thing in a facultative obligation. Which is incorrect? A. Before substitution: if the principal thing is lost due to fortuitous event, there is no more obligation. B. Before substitution: if the substitute thing is lost due to debtor's fault, there is no more obligation. C. After substitution, if the principal thing is lost, the debtor is no longer liable even if it was lost due to his fault. D. None of the above Joint and Solidary Obligations (1207-1222) Meaning of Joint and Solidary Obligations; When Obligation Solidary; Words Used to Indicate Solidary Liability; Kinds of Solidarity February 19, 2005

First Pre-board Examination

3. A, B, and C secured a loan from X. The promissory note which evidences the obligation states that: “I promise to pay” and signed by A, B, and C. Here, the obligation is A. Divisible. C. Indivisible. B. Joint. D. Solidary. Kinds of Obligations According to the Number of Parties; Collective Obligation Presumed to be Jointl Presumption Subject to Rules on Multiplicity of Suits; Words Used to Indicate Joint Liability; Solidarity not Presumed Joint Indivisible Obligation Indivisibility and Solidarity Distinguished Kinds of Solidary Obligation According to the Legal Tie; Solidarity not Affected by Diverse Stipulations Act of Solidary Creditor Prejudicial to Others Assignment by Solidary Creditor of His Rights Payment to Any of the Solidary Creditors Liability of Solidary Creditor in Case of Novation, Compensation; Confusion; or Remission; Effect of Novation, etc. where Obligation Joint Right of Creditor to Proceed Against Any Solidary Debtor 2. X, Y and Z executed a promissory note for P18,000.00 payable to the orders of A, B and C. At maturity, can the creditors proceed to collect from X alone for the payment of the entire debt? A. Yes, since the note is silent as to the nature of the liability of the debtors, the obligation is presumed to be solidary. B. No, each creditor is entitled to collect only P2,000 from X. C. Yes, any of A, B or C can collect P18,000 from X D. No, each creditor can collect only P6,000 from X 3. X and Y bound themselves solidarily to deliver to A a specific motorboat worth P120,000. The motorboat was not delivered to A as it was destroyed by fire through the fault of Y. Thereupon A sued X in court and the court awarded P150,000 in favor of A representing the value of the boat plus damages. Given this scenario, which of the following statements is correct? Page 6 of 48

BUSINESS LAW & TAXATION

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A. X can be compelled to pay A only P60,000 as his share in the obligation, and refuse to pay the penalty because it should be charged against Z, the guilty party B. If X pays A P150,000, he can collect from Y the entire amount of P150,000 C. If A successfully collects from X P150,000, X in turn, can collect P90,000 from Y D. A has to collect P60,000 from X and P90,000 from Y 7. Debtor’s A, B, C and D are liable to creditors E, F, G and H in the amount of P200,000. Assuming passive solidarity exists among A, B, C and D, how much can E and F collect from A? A. P 50,000 C. P150,000 B. P100,000 D. P200,000 2. Debtor’s A, B, C and D are liable to creditors E, F, G and H in the amount of P400,000. Assuming passive solidarity exists among A, B, C and D, how much can E and F collect from A? A. P100,000 C. P350,000 B. P200,000 D. P400,000 8. Debtor’s A, B, C and D are liable to creditors E, F, G and H in the amount of P200,000. If the obligation is joint, how much can E and F collect from A? A. P12,500 C. P 50,000 B. P25,000 D. P200,000 3. Debtor’s A, B, C and D are liable to creditors E, F, G and H in the amount of P400,000. Suppose the obligation is joint, how much can E and F collect from A? A. P25,000 C. P100,000 B. P50, 000 D. P400, 000

First Pre-board Examination

3. This is the promissory note; "We promise to pay A, B and C the sum of ONE HUNDRED EIGHTY THOUSAND (P180,000) PESOS within 60 days. Signed: X,Y and Z. A. X is obliged to pay A P20,000 B. X is obliged to pay A P60,000 C. X Is obliged to pay A P180,000 D. X is obliged to pay A, B and C, P180,000 Effects of Payment by a Solidary Debtor 6. A, B and C are solidary debtors of X for 9,000. Later, C paid X the whole obligation. Which of the following is considered a false statement as to the effects of C paying X the whole obligation A. C becomes a creditor for reimbursement B. After C paid X the whole obligation, the same is converted into a joint obligation of reimbursement C. If the debtor A becomes insolvent C can collect from B P6,000 D. None of the above 2. Guillermo, Hilario and Apolinario owed in solidum (solidarily) P75,000 to Conrado as evidenced by a promissory note due on September 29, 1990. The note prescribed on September 30, 2000. On October 1, 2000, however, Apolinario paid the entire obligation to Conrado. In this case, Apolinario is: A. not entitled to reimbursement from his co-debtors for the shares of the latter as there is no more obligation to pay B. entitled to collect P25,000 each from Hilario and Guillermo C. entitled to recover from Conrado as it was already a natural obligation D. entitled to recover from Conrado based on quasi-contract on solution indebiti Effect of Payment after Obligation has Prescribed or Become Illegal; Prescriptive Periods of Action

2. Debtors A, B, C, D and E are liable to creditors F, G, H, I & J in the amount of P50,000. How much can F, G & H collect from A & B (total amount)? A. P12,000 C. P15,000 B. P18,000 D. P 6,000 3. Debtors A, B, C, D and E are liable to creditors F, G, H, I & J in the amount of P50,000. If active solidarity exists how much can F, G and H collect from A & B? A. P20,000 C. P15,000 B. P 6,000 D. P12,000

Effect of Remission of Share after Payment No Right to Reimbursement in Case of Remission Rules in Case Thing has been Lost or Prestation has become Impossible Defenses Available to Solidary Debtor Comprehensive

February 19, 2005

Page 7 of 48

BUSINESS LAW & TAXATION

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5. A & B are joint debtors of C, D, & E solidary creditors in the amount of P100,000. How much can E collect from A? A. 100,000 C. 25,000 B. 50,000 D. none of the above 8. W, X, Y, Z solidarily liable to A, B, C, joint creditors for P30,000. How much can A and B collect from X? A. P10,000 C. P20,000 B. P2,500 only D. P15,000 7. X and Y are solidary debtors of A, B and C, joint creditors to the amounts of P30,000. How much can B collect from X? A. B can collect P30,000 from X. B in turn has to give A and C P10,000 each B. B can collect P10,000 from X. C. B can collect P15,000 from X. D. B can collect P30,000 from X. X in turn can recover from Y the amount of P15,000 Divisible & Indivisible Obligations (1223-1225) Meaning of Divisible and Indivisible Obligations; Test for the Distinction; Applicability of Article; Kinds of Division; Kinds of Indivisibility; Where There is Only One Creditor and One Debtor; Effect of Noncompliance by a Debtor in a Joint Indivisible Obligation Obligations Deemed Indivisible; Obligations Deemed Divisible; Divisibility or Indivisibility in Obligations Not to Do Obligations with a Penal Clause (1226-1230) Meaning of Principal and Accessory Obligations; Meaning of Obligation with a Penal Clause; Meaning of Penal Clause; Purposes of Penal Clause; Penal Clause and Condition Distinguished; Kinds of Penal Clause; Penalty Substitutes for Damages and Interests; When Creditor may Recover Damages when Penalty may be Enforced Penalty not Substitute for Performance; Penal Clause Presumed Subsidiary; When Penal Clause Joint Penalty Demandable Without Proof of Actual Damages; Damages Recoverable in Addition to Penalty must be Proved February 19, 2005

First Pre-board Examination

When Penalty May be Reduced by the Courts Effect of Nullity of the Penal Clause; Effect of Nullity of the Principal Obligation Comprehensive 4. Which of the following obligation is void? A. Obligation payable within a reasonable time B. Obligation payable if the debtor cannot make a circle at the same time a square C. Obligation payable of the debtor cannot make a dead man alive D. None of the above 1. “ I will give you this book provided that if I like to have it back, you will return the same to me” A. The obligation is void, because the fulfillment depends upon the will of the debtor B. The obligation is void, because the fulfillment depends upon the will of the creditor C. The obligation is valid because the condition merely causes the loss of rights already acquired D. Combination of A and B 18. Statement 1: In alternative obligations, it is the communication of which pre-station to perform made by the debtor shall convert the alternative obligation into a pure or simple one. Statement 2: In case of a joint obligation, the co-debtors may be held liable for the share of an insolvent co-debtor. A. B. C. D. Statement 1 True False True False Statement 2 True False False True Extinguishment of Obligation Causes of Extinguishment of Obligation (1231) 12. Which of the following is not a ground for the extinguishment of an obligation? A. Remission D. Death of either debtor or creditor B. Merger E. None of the above C. Compensation 10. Which of the following is not a ground for the extinguishment of an obligation? A. Remission D. Death of either debtor or creditor B. Merger E. None of the above C. Compensation Page 8 of 48

BUSINESS LAW & TAXATION

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Payment or Performance (1232-1259) Meaning of Payment When Debt is Considered Paid 2. This is a classification of obligations where there are several prestations due and the complete performance of all shall extinguish the obligation. Identify this. A. Facultative obligation. C. Alternative obligation. B. Conjoint/conjunctive obligation. D. Obligation with a penal clause. Recovery Allowed in Case of Substantial Performance in Good Faith; Requisites for the Application of Art. 1234

First Pre-board Examination

Person to Whom Payment Shall be Made; Meaning of “Any Person Authorized to Receive it.” Effect of Payment to an Incapacitated Person; Effect of Payment to a Third Person; When Benefit to Creditor Need not be Proved by Debtor Payment to Third Person in Possession of Credit When Payment to Creditor not Valid Every Prestation Due Must be Complied with; When Prestation may be Substituted Special Forms of Payment; Meaning of Dation in Payment; Governing Law

Recovery Allowed when Incomplete or Irregular Performance is Waived; Requisites for the Application of Art. 1235 Persons from whom the Creditor must Accept Payment; Creditor may Refuse Payment by a Third Person; Effect of Payment by a Third Person 14. A owes B P5,000. C is the guarantor of A. A was able to pay B P3,000, thus leaving P2,000 unpaid. X, against the will of A and without the knowledge of the partial payment made by A, paid B the sum of P5,000. How does this payment affect the obligation? A. The obligation is extinguished. X, however, cannot recover any amount from A since the payment was made against will of A. Instead, A can demand payment from C, the guarantor to the amount of P5,000. B. The obligation is extinguished. X however, can demand only P2,000 from A as this is the amount which benefited A. Instead, A can demand payment from C, the guarantor, to the amount of P5,000. C. The obligation is extinguished. X can demand P2,000 from A, but if A cannot pay, X cannot ordinarily proceed against guarantor C because having paid against the will of A, X is not entitled to subrogation D. X’s payment, having been made against the will of A does not extinguish the obligation. Right of a Third Person to Subrogation; Subrogation and Reimbursement Distinguished Payment by a Third Person Who Does Not Intend to be Reimbursed Meaning of “Free Disposal of Thing Due” and “Capacity to Alienate”; Free Disposal of Thing Due and Capacity to Alienate Required February 19, 2005

Rule of the Medium Quality Debtor Pays for Extrajudicial Expenses; Losing Party Generally Pays Judicial Costs Performance of Obligation Should be Complete; When Partial Performance Allowed Meaning of Legal Tender; Legal Tender in the Philippines; Payment by Means of Instruments of Credits 5. After many of years of shopping in the Metro Manila area, housewife HW has developed the sound habit of making cash purchases only, none on credit. In one shopping trip to Mega Mall, she got the shock of her shopping life for the first time, a store’s smart salesgirl refused to accept her coins in payment for a purchase worth not more than one hundred pesos. HW was paying seventy pesos in 25-centavo coins and twenty fives pesos in 10-centavo coins. Strange as it may seem, the salesgirl told HW that her coins were not “legal tender”. Do you agree with the salesgirl in respect for the 10-centavo coins and 25-centavo coins the legal tender is up to P50.00 only. 1st Statement: No, because for the 10-centavo coins and 25-centavo coins the legal tender is up to P50.00 only 2nd Statement: All coins issued by the Central Bank in any amount are considered legal tender. A. B. C. D. 1ST Statement True False True False 2nd Statement True False False True Meaning of Inflation and Deflation; Basis of Payment in Case of Extraordinary Inflation or Deflation. Page 9 of 48

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Place where Obligation Shall be Paid

First Pre-board Examination

Prior Notice to Persons Interested Required; Consignation Must Comply with Provisions on Payment

Meaning of Application of Payments Requisites of Application of Payments; Application as to Debts not yet Due; Rules of Application of Payments

Consignation must be with Proper Judicial Authority; Notice to be Given to Interested Parties of the Consignation Made

Interest Earned Paid Ahead of Principal Creditor Bears Expenses of Consignation; When Consignatoin Deemed Properly made Legal Application of Payments; When a Debt More Onerous than Another; Where Debts Subject to Different Burdens Meaning of Payment by Cession; Requisites of Payment of Cession; Effect of Payment by Cession; Dation in Payment and Cession Distinguished 18. Requisites of application of payment, except A. Debts are all due C. Two or more debts B. Debts are of different kinds D. One debtor and one creditor 9. When the debtor abandons and assigns all his properties in favor of his creditors for the latter to sell and satisfy their credits, this is: A. Application of payment C. Dacion en pago B. Assignment in favor of creditors D. Expromission 10. When the debtor abandons and assigns all his properties in favor of his creditors for the latter to sell and satisfy their credits, this is: A. Payment by cession C. Dacio en pago B. Application of payment D. Expromission 9. When the debtor’s property are not enough at the moment to pay all his debt in full. This conditions is called: A. Antichresis C. insolvency B. Pactu commissorio D. suspension of payment

Withdrawal by Debtor of Thing or Sum Deposited Effect of Withdrawal with Authority of Creditor Loss of the Thing Due (1260 -1269) When a Thing is Considered Lost; When Loss of Thing will Extinguish an Obligation to Give; When Loss of Thing will not Extinguish Liability 6. A obliged himself to deliver to B his 7650 Nokia cellphone or as a substitute he may deliver his cute kitten. After substitution was made, the former was lost due to A’s fault. A. A is liable and must pay damages. B. A will simply deliver his cute kitten plus damages for the loss of the cellphone. C. The loss has no effect to the obligation. D. Obligation was extinguished. Effect of Loss of a Generic Thing Effect of Partial Loss of a Specific Thing Presumption of Fault in Case of Loss of Thing in Possession of Debtor When Presumption not Applicable Effect of Impossibility of Performance; Kinds of Impossibility

13. Insolvency of the debtor is required in: A. Dation in payment B. Payment by cession

C. Tender of payment and consignation D. Application of payment

Effect of Difficulty of Performance Effect of Fortuitous Event Where Obligation Proceeds from a Criminal Offense

Meaning of “Tender of Payment”; Meaning of “Consignation”; Requisites of a Valid Consignation; When Tender of Payment not Required; Requirements for Valid Tender of Payment February 19, 2005

Right of Creditor to Proceed Against Third Persons Page 10 of 48

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Condonation or Remission of Debt (1270-1274) Meaning of Condonation or Remission; Requisites of Condonation or Remission; Kinds of Remission; Effect of Inofficious Remission Presumption in Case of Voluntary Delivery of Document of Indebtedness by Creditor; Payment, not Remission of Debt

First Pre-board Examination

30. In here, C can set up compensation (or cum pondere) on December 25, and this is called: A. Legal C. Judicial or "set-off" B. Partial D. Facultative 8. Type of compensation which arises from a proven counterclaim is called A. Facultative compensation. C. Voluntary or conventional compensation. B. Judicial compensation. D. Legal compensation .

Effect of Renunciation of the Principal Debt of the Accessory Obligation

20. In three of the following cases, facultative compensation shall prosper. exception? A. gratuitous support C. mutuum B. civil liability arising from crime D. depositum

Presumption in Case Thing Pledged Found in Possession of Debtor

Requisites of Legal Compensation

Confusion or Merger of Rights (1275-1277) Confusion or Merger – Meaning, Reason or Basis, Requisites

Compensation Benefits Guarantor

Presumption in Case Document Found in Possession of Debtor

Which is the

Total and Partial Compensation Effect of Merger in the Person of (1) Principal Debtor or Creditor; (2) Guarantor Voluntary Compensation Confusion in a Joint Obligation, Confusion in a Solidary Obligation Judicial Compensation Compensation (1278-1290) Meaning of Compensation; Compensation and Confusion Distinguished; Kinds of Compensation 19. D owes C P10,000 payable on December 25, while C owes D P10,000 payable on December 30. In here, C can set up compensation (or cum pondere) on December 25, and this is called: A. Legal C. Judicial or “set-off” B. Partial D. Facultative

Compensation of Rescissible or Voidable Debts Where Compensation has Taken Place before Assignment; Where Compensation has Taken Place after Assignment Compensation where Debts Payable at Different Places (1286)

9. D deposited his car to C as he would go to the U.S. to visit his father. In the meantime, D owed C a specific car. In case of a facultative compensation, which statement is correct? A. Only C may raise facultative compensation in this case. B. Only D may raise facultative compensation to set off his obligation to D with the latter’s obligation. C. Either or both C and D may raise compensation to set off the two obligations D. There cannot be a case of facultative compensation in this case. 15. D owes C P10,000 payable on December 25, while C owes D P10,000 payable on December February 19, 2005

Instances when Legal Compensation is not Allowed by Law (1287-1288) Rules on Application of Payments Apply to Order of Compensation (1289) Consent of Parties not Required in Legal Compensation (1290) Comprehensive 6. 1st Statement: D owes C P10,000 due on December 25, C owes D P6,000 on December 25. D’s obligation is guaranteed by G. On the due date if D is insolvent G is liable to C for Page 11 of 48

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P10,000, the latter (G) cannot set up compensation because he is not a principal debtor. 2nd Statement: D owes C P10,000 payable on December 25. Later, D through intimidation, was able to make C sign a promissory note stating that C is indebted to D for the same amount. In here, D cannot be required to pay C P10,000 because he (D) can set up compensation against C. A. B. C. D. 1st Statement True False True False 2nd Statement True False False True Novation (1291-1299) Meaning of Novation; Dual Function of Novation; Kinds of Novation Requisites of Novation; Novation is not Presumed; Test of Incomparability between Two Obligations or Contracts Kinds of Personal Novation; Kinds of Substitution; Right of New Debtor who Pays 10. When the third person assumes the payment of the obligation without the knowledge or against the will of the debtor but with the consent of the creditor, there is A. Delegacion C. Subrogation B. Expromission D. Novation Effect of New Debtor’s Insolvency or Nonfullment of the Obligation in Expromision 11. A owes B – P10,000. Without the consent of A, B agreed with C’s proposal (C is suitor of A) to answer for A’s obligation for which A vehemently objected to but could not do anything. The following week all of C’s properties were destroyed by fire, hence he could no longer pay the P10,000 obligation. A. A’s obligation is revived. C. A must answer for ½ of the obligation. B. A’s obligation is not revived. D. B cannot collect at all. Effect of New Debtor’s Insolvency or Non-fulfillment of the Obligation in Delegacion 15. On October 4, 1997, A is indebted to B for P50,000 for a 20-day period. A proposed to B that X will pay A’s debt, and that A will be free from all liabilities. B and X agreed to the proposal. On October 25, 1997, when B tries to collect from X, he finds that X is insolvent. At the time of delegation, X was already insolvent but this was not known to A. The insolvency is not of public knowledge. So B sues A on the ground that it was A who made the proposal and that A really guaranteed X’s solvency. Decide. A. A is liable because he is pressured to have guaranteed X’s solvency February 19, 2005

First Pre-board Examination

B. A is not liable, because A does not know the insolvency of X at the time of delegation and neither was the insolvency of public knowledge. C. A is liable because he did not exercise due diligence in determining the insolvency of X. D. A is liable because X agreed to the proposal to make himself solidary liable for the obligation Effect of Novation on Accessory Obligations Effect where the New Obligation Void; Effect where the New Obligation Voidable Effect where the Old Obligation Void or Voidable Presumption where Original Obligation subject to a Condition Comprehensive 16. In novation, which of the following is incorrect? A. If the new obligation is void, original obligation shall subsist. B. In expromission, the insolvency of the new debtor shall not revive the action of the creditor against the original debtor. C. If the original obligation is subject to a suspensive condition, the new obligation is not subject to the same condition unless stated D. While if the condition is resolutory the new is also resolutory condition, unless otherwise stated. Subrogation (1300-1304) Kinds of Subrogation Consent of all Parties Required in Conventional Subrogation Cases of Legal Subrogation Effect of Total Subrogation Effect of Partial Subrogation Comprehensive 5. Which of the following is not a special mode of payment? A. Tender of payment C. Dacion en pago Page 12 of 48

BUSINESS LAW & TAXATION B. Cession

CPA Review School of the Philippines D. None of the above

7. Which does not result in the extinguishment of obligations? A. Rescission. C. Arrival of resolutory period. B. Happening of suspensive condition. D. Compromise. 9. Which statement is correct about extinguishment of obligation? A. Condonation is generally gratuitous. B. Prescription is a primary mode of extinguishing an obligation. C. Agency wherein novation is effected must be in writing and thru a Special Power of Attorney. D. Confusion or merger rights may occur in the person of a guarantor. 5. On January 15, 2002, D purchased on credit construction materials worth P50,000.00 from the lumber and hardware store owned by C. At maturity date on March 5, 2002, D could not pay despite repeated demand coming from C. X, D’s brother and a good friend of C’s, voluntarily offered to assume his brother’s obligation to the latter as soon as his (X’s) application for a loan is approved by a bank and asked that he be given until April 5, 2002. C accepted the offer of X and agreed to the period. At maturity date, X did not pay C as his application loan was disapproved. Given this scenario, which statement is correct? A. D’s obligation to C was extinguished by novation thru expromission, and thus, there can be no revival when X did not pay. B. D’s obligation subsists because the creation of the new obligation of X to C by expromission is subject to a suspensive condition that did not happen. C. X is liable to C as the new debtor because the former’s assumption of D’s laiability was accepted and consented to by C. D. D’s obligation was extinguished by a valid delegacion to X. D’’s obligation cannot be revived because there was no showing that X was insolvent and it was of public knowledge. 17. Statement 1: "I promise to pay within 2 years" is an obligation with a period, the creditor having a right to demand payment within 2 years from the date of the instrument. Statement 2: Ten sacks of corn cannot be compensated (legal compensation) by ten sacks of rice. A. B. C. D. Statement 1 True False True False Statement 2 True False False True February 19, 2005

First Pre-board Examination

13. Statement 1: Payment by cession does not totally extinguish the whole obligation. Statement 2: In obligation with penal clauses, it is necessary for the creditor to show proof of actual damages suffered by him on account of the non-performance of the obligation by the debtor. A. B. C. D. Statement 1 True False True False Statement 2 True False False True 26. 1st Statement: The creditor may be compelled to accept payment in checks as long as the check is negotiable 2nd Statement: An obligation payable “should the client die of diabetes” is an obligation subject to a period A. B. C. D. 1st Statement True False True False 2nd Statement True False False True 24. 1st Statement: In case of extra-ordinary inflation, the basis of payment is the value of the obligation at the time it was constituted 2nd Statement: After substitution, the loss of the principal object through the fault or negligence of the debtor shall render him liable for damages. A. B. C. D. 1st Statement True False True False 2nd Statement True False False True 17. 1st Statement: Payment made by a third person who does not intend to be reimbursed by the debtor is desired to be a donation, which requires the debtor’s consent. If the debtor’s consent is not given the obligation is not extinguished 2nd Statement: If the debtor’s consent or permission is not given, but the third person paid the creditor his right is to proceed against the creditor for reimbursement and not against the debtor A. B. C. D. 1st Statement True False True False 2nd Statement True False False True 4. 1st Example – D promised to give C a specific car valued P100,000 after C has killed X. Later after the killing the contract was novated instead of giving C a specific car he will just give a specific land to be delivered on February 28, 1998. Meantime, both parties died. In here, the Page 13 of 48

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heirs of C may compel the execution of the second contract, that is, the delivery of the specific land. 2nd Example – S sold to B a specific residential house situated in Bulacan for P1M, unknown to both parties one (1) hour before the sale, the property was totally gutted by fire caused by electrical defect. In here, B can be required to pay the price of the sale, because the subject is determinate S’s obligation to deliver is extinguished, while B’s obligation remain to subsist. A. B. C. D. 1st Example True False True False 2nd Example True False False True 9. Statement 1: Just before the obligation became due and demandable, the debtor proposed to the creditor that he would give him a specific car instead of paying P150, 000.00, and which proposal was accepted by the creditor. Here, there is extinguishment of an obligation by way of dacion en pago. Statement 2: After substitution in facultative obligations, the loss of the principal through the fault or negligence of the debtor shall render him liable for damages in favor of the creditor. A. B. C. D. Statement 1 True False True False Statement 2 True False False True Comprehensive 1. S and M agreed in print that S, debtor for P3,000, will work as a servant of M without pay until she could find money with which to pay her debt. Meantime, S absconded her obligation and failed to comply with her promise. Under this promise, which of the following statements is correct? A. The agreement to work as a servant is void because it is immoral B. To act as a servant without pay is unconstitutional because this is equivalent to involuntary servitude. C. The obligation to pay is enforceable because this is in accordance with law D. All of the above 71. Which is not correct? A. A check, even if good when offered, maybe refused by a creditor in satisfaction of his demand because it does not meet the requirements of legal tender B. The Phil. Peso bills when attempted to be exported, as when carried in excess of that allowed by the Central Bank maybe deemed to have been taken out of domestic circulation as legal tender and thus maybe treated as commodity February 19, 2005

First Pre-board Examination

C. If the obligation of a debtor is to pay in dollars it shall be discharged in Phil. Currency measured at the prevailing rate of exchange at the time the obligation is incurred D. Payment of the debtor’s obligation maybe made by a third person even without the knowledge and consent of the debtor 10. D owes C P10,000. X wrote C a letter stating that he would be the one to take care of D’s debt as soon as X had made a shipment of logs to Indonesia. X did not pay C. In this example, which statement is incorrect? A. Yes, X is liable because there is personal novation of obligation by way of expromission. B. X is not liable because there was no novation as C never consented to the offer of X. C. The offer made by X is subject to a suspensive condition which was not fulfilled, the liability never became effective. D. None of the above. 1. 1st Statement: The loss or deterioration of the intended substitute, prior to substitution, through the negligence of the obligor, shall render him liable for damages. 2nd Statement: In alternative obligations, all objects are due. A. B. C. D. Statement No. 1 True False True False Statement No. 2 True False False True 20. Statement 1: The creditor may be compelled to accept payment in checks as long as the check is negotiable. Statement 2: An obligation payable "should the client die of diabetes" is an obligation subject to a period. A. B. C. D. Statement 1 True False True False Statement 2 True False False True 23. 1st Statement: “I promise to pay within 2 years” is not obligation with a period, the creditor having a right to demand payment within 2 years from the date of the instrument 2nd Statement: Ten sacks of corn cannot be compensated (legal compensation) by ten shacks of rice. A. B. C. D. 1st Statement True False True False 2nd Statement True False False True Page 14 of 48

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12. 1st Statement: An obligation subject to potestative resolutory condition based on the debtor’ will is void. 2nd Statement: Political agreement wherein FPJ promised not to prosecute CHAVIT’s liability for graft and corruption if FPJ becomes a president, one day is an unenforceable contract. A. B. C. D. 1st Statement True False True False 2nd Statement True False False True 1. 1st Statement: An obligation subject to potestative suspensive condition based on the debtor’s will is void. 2nd Statement: Political agreement wherein Dolphy promised not to prosecute FVR’s liability for graft and corruption if Dolphy becomes a president, one day is an unenforceable contract. A. B. C. D. 1st Statement True True False False 2nd Statement True False True False 11. 1st Statement: The defense that a contract is unenforceable is subject to 4 year prescriptive period. 2nd Statement: In a joint divisible obligation, a joint debtor can be compelled to answer for the obligation of the other debtor. A. B. C. D. st 1 Statement True True False False 2nd Statement True False True False zzz CONTRACT General Provisions Contract Defined (1305) Meaning of Contract; Contract and Obligation Distinguished; Contract and Agreement Distinguished Criteria (1306) Freedom of Contract Guaranteed; Limitations on Contractual Stipulations: Contract must not be Contrary to Law, Contract must not be Contrary to Morals; Contrary must not be Contrary to Good Customs; Contract must not be Contrary to Public Order; Contract must not be Contrary to Public Policy February 19, 2005

First Pre-board Examination

8. Which of the following is not a valid stipulation? A. A stipulation that the mortgagor cannot enter into a second mortgage without the consent of the first mortgagee and such violation will make the obligation due and demandable B. A stipulation in chattel mortgage on installment sale where the object sold is mortgaged back to the seller to answer for the unpaid installments or upon failure to pay any installment due, all installment shall become due and payable, the mortgagee is given the right to foreclose and sell the property at public auction to recover the unpaid balance. C. A stipulation in a mortgage or real property authorizing the mortgagee to have the mortgaged property sold without the necessity of an action in court. D. None of the above. Classification (1307) Classification of Contracts According to its Name or Designation; Kinds of Innominate Contract; Reasons for Innominate Contracts; Rules Governing Innominate Contracts Contract Binds Both Contracting Parties (1308) Determination of Performance by a Third Person (1309) Effect where Determination is Inequitable (1310) Persons Affected by a Contract (1311) Cases when Strangers or Third Persons Affected by a Contract; Meaning of Stipulation Pour Autrui; Classes of Stipulations Pour Autrui; Requisites of Stipulation Pour Autrui Third Persons are Bound by Contracts; Creating Real Rights (1312) Right of Creditor to Impugn Contracts Intended to Defraud Them (1313) Liability of Third Person for Breach of Contract (1314) Perfection of Contract (1315-1316) Classification of Contracts According to Perfection; Stages in the Life of a Contract; How Contracts are Perfected; Effect of Perfection of the Contract; Unauthorized Contract Unauthorized Contracts are Unenforceable; Unauthorized Contracts Can be Cured Only by Ratification; When a Person is Bound by the Contract of Another (1317) Page 15 of 48

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Essential Requisites of Contracts Classes of Elements of a Contract (1318) 13. Neither an essential nor accidental element of a contract A. Cause or consideration C. Warranty against eviction B. Consent D. Penal cause in a contract 12. Neither an essential nor natural element of a contract A. Cause or consideration C. Warranty against eviction B. Consent D. Penal cause in a contract Consent (1319) Meaning of Consent; Meaning of Offer; Offer Must be Certain; Meaning of Acceptance; Acceptance of Offer Must be Absolute 4. “Contracts must bind both parties and their efficacy or validity cannot be left to the sole will of any one of them.” A. Freedom or liberty of contracts C. Relativity of Contracts B. Consensual nature of contracts D. Mutuality of Contracts Form of Acceptance of Offer (1320)

First Pre-board Examination

Effect of Drunkenness and Hypnotic Spell (1328) Incapacity Declared in Art. 1327 Subject to Modifications; Other Special Disqualifications May be Provided by Law (1329) Characteristics of Consent; Vices of Consent; Causes Vitiating Consent and Causes of Incapacity Distinguished (1330) Meaning of Mistake or Error; nature of Mistake; Mistake of Fact to which Law Refers; Mistake of Fact Which Does Not Vitiate Consent; Effect of Simple Mistake of Account (1331) Burden of Proof in Case of Mistake or Fraud (1332) Effect of Knowledge of Risk (1333) Meaning of Mistake of Law; Effect of Mistake of Law; When Mistake of Law Vitiates Consent; Requisites for the Application of Art. 1334

Matters that May be Fixed by the Offerer (1321)

Nature of Violence or Force (1335) Nature of Intimidation or Threat; Factors to Determine Degree of Intimidation; Threat to Enforce Just or Legal Claim

Communication of Acceptance to Agent (1322)

Violence or Intimidation by a Third Person (1336)

When Offer Becomes Ineffective; Other Ground Which Render Offer Ineffective (1323)

Meaning of Undue Influence; Circumstances to be Considered (1337)

Meaning of Contract of Option; Option Period; Option Money; Withdrawal of Offer Where Period Stipulated for Acceptance; Articles 1324 & 1479 Compared (1324)

Meaning of Causal Fraud; How Causal Fraud Committed; Requisites of Causal Fraud (1338) Fraud by Concealment (1339)

Business Advertisements Generally Not Definite Offers (1325) Usual Exaggerations in Trade (1340) Advertisements for Bidders Generally Not Definite Offers (1326) Capacity to Given Consent Presumed; Persons Who Cannot Given Consent; Reason for Disqualification (1327)

Expression of Opinion (1342) Fraud by a Third Person (1342) Effect of Misrepresentation Made in Good Faith (1343)

Contracts Entered into During a Lucid Interval (1328) February 19, 2005

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First Pre-board Examination

Two Kinds of Fraud in the Making of Contract; Causal Fraud Must be Serious and Unilateral. (1344) Meaning of Lesion; Effect of Lesion or Inadequacy of Cause (1355) Meaning of Simulation of a Contract; Kinds of Simulation (1345 – 1346) Comprehensive 27. 1st Statement: A threat to enforce one’s claim through competent authority, if the claim is just or legal, does not vitiate consent 2nd Statement: Contracts entered into during a lucid interval are valid. Contracts agree to in a state of drunkenness or during a hypnotic spell are binding A. B. C. D. 1st Statement True False True False 2nd Statement True False False True

Objects of Contracts (1347 – 1348) Concept of Object of a Contract; Kinds of Object of Contract; Requisites of Things as Object of Contract; Requisites of Services as Object of Contract; Rights as Object of Contract(1347 – 1348) Definition of Future Inheritance; Validity of Contracts upon Future Inheritance; Kinds of Impossibility

Form of Contracts Form of Contracts Defined (1356) Meaning of Form of Contracts; When Contract Considered in Written Form; Classification of Contracts According to Form; Rules Regarding Form of Contracts; Form for Validity of Contract; Form for Enforceability of Contract 11. Which of the following contracts is enforceable even if not reduced in writing. A. Representation as to the credit of a third person B. Agreement for the sale of immovable property C. Contract executed by one of the parties in a contract D. Lease of immovable for a period longer than one year Form for the Convenience of the Parties (1357) Contracts Which Must Appear in a Public Document (1358)

Quantity of Object of Contract Need not be Determinate

Reformation of Instruments Meaning of Reformation; Reason for Reformation; Requisites of Reformation; Reformation Distinguished from Annulment (1359)

Cause of Contracts Meaning of Cause; Cause Distinguished from Object; Classification of Contracts Accounting to Cause (1350)

Principles of the General Law on Reformation (1360)

Meaning of Motive; Cause Distinguished from Motive (1351) Requisites of Cause; Effect of Absence of Cause; Effect of Failure of Cause; Effect of Illegality of Cause; Effect of Falsity of Cause (1352 – 1353) Cause Presumed to Exist and Lawful (1354) 28. In a contract, as written, D promises to pay C P10,000 on September 15, 1997. The consideration received by D is not stated in the contract. A. The contract is valid because the cause is always presumed to exist B. The contract is valid so long as it is in writing C. The contract is valid because cause is not essential to a contract D. The contract is void because cause is not stated February 19, 2005

Mutual Mistake as Basis for Reformation (1361) Mistake on One Side, Fraud or Inequitable Conduct on the Other (1362) Concealment of Mistake by the Other Party (1363) Ignorance, etc. on the Part of Third Person (1364) Mortgage or Pledge Stated as a Sale (1365) Cases when Reformation Not Allowed (1366 – 1367) Party Entitled to Reformation (1368) Page 17 of 48

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Procedure for Reformation (1369) Interpretation of Contracts Interpretation of Contracts (1370) Meaning of Interpretation of Contracts; Literal Meaning Controls when Language Clear; Evident Intention of Parties Prevails over Terms of Contract

First Pre-board Examination

12. In which case is the right of rescission not available? A. The ability to restore what he has received by virtue of the contract. B. The property must have passed to the hands of a third person who bought the same in good faith and for value. C. Bought within the proper prescriptive period. D. None of the above. Payments Made in a State of Insolvency (1382)

Contemporaneous and Subsequent Acts Relevant in the Determination of Intention (1371) Nature of Action for Rescission (1383) Special Intent Prevails over a General Intent (1372) Extent of Rescission (1384) Interpretation of Stipulation with Several Meanings (1373) Interpretation of Various Stipulations of a Contract (1374)

Rescission Creates Obligation of Mutual Restitution; Obligation of Third Person to Restore; When Rescission Not Allowed (1385)

Interpretation of Words with Different Significations (1375)

Contracts Approved by the Courts (1386)

Resort to usage or Custom as Aid in Interpretation (1376)

When Alienation Presumed in Fraud of Creditors; Circumstances Denominated as Badges of Fraud (1387)

Interpretation of Obscure Words (1377) Liability of Purchases in Bad Faith (1388) Rules in Case Doubts Impossible to Settle (1378) Period for Filing Action for Rescission; Persons Entitled to Bring Action (1389) Principles of Interpretation in the Rules of Court Applicable (1379) Comprehensive (1370 – 1379) Rescissible Contracts Rescissible Contracts Defined (1380) Meaning of Rescissible Contracts; Binding Force of Rescissible Contracts; Meaning of Rescission; Requisites of Rescission Cases of Rescissible Contracts (1381) 12. D is indebted to C in the sum of P10,000. For the purpose of avoiding the claims of C, D donated all his properties worth the same amount to X. A. The contract is absolutely simulated C. The contract is merely voidable B. The contract is rescissible D. The contract is void February 19, 2005

Voidable Contracts Voidable Contracts Defined (1390) Meaning of Voidable Contracts; Binding Force of Voidable Contracts; Meaning of Annulment Period for Filing Action for Annulment (1391) Meaning and Effect of Ratification (1392) 8. In three of the following defective contracts, ratification cleanses the defects. Which is not susceptible of ratification? A. Both parties are incapable of giving consent B. Sale of land thru an agent where the authority is orally given C. Sale of immovable or any interest therein orally entered into D. Contracts entered into by a person who has been given no authority Page 18 of 48

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Kinds of Ratification; Requisites of Ratification (1393) Who May Ratify? (1394) Conformity of Guilty Party to Ratification Not Required (1395) Effect of Ratification Retroactive (1396) Partly Entitled to Bring an Action to Annul; Right of Strangers to Bring Action; Guilty Party Without Right to Bring Action (1397) Duty of Mutual Restitution Upon Annulment (1398)

First Pre-board Examination

Void or Inexistent Contracts Defined (1409) Meaning of Void Contracts; Meaning of Inexistent Contracts; Characteristics of a Void or Inexistent Contract; Instances of Void or Inexistent Contracts 13. One is a void and inexistent contract. A. Those which are absolutely simulated or fictitious. B. Those which are outside the commerce of man. C. Those contrary to law. D. Those which contemplate an impossible service. 14. The following, except one, are void or inexistent contracts. A. Those which are absolutely simulated for fictitious. B. Those which are outside the commerce of man. C. Those whose cause or object did not exist at the time of transaction. D. Those which contemplate a very difficult service.

Restitution by an Incapacitated Person (1399) Effect of Loss of Thing to be Returned (1400) Extinguishment of Action for Annulment (1401)

13. The following, except one, are void or inexistent contracts. Which is it? A. Those which are absolutely simulated or fictitious. B. Those which are outside the commerce of man. C. Those whose cause or object did not exist at the time of transaction. D. Those which contemplate a possible service.

Effect Where a Party Cannot Restore What He is Bound to Return (1402) Unenforceable Contracts Unenforceable Contracts Defined (1403) Meaning of Unenforceable Contracts; Binding Force of Unenforceable Contracts; Kinds of Unenforceable Contracts; Meaning of Unauthorized Contracts; Statute of Frauds; Agreements Within the Scope of the Statute of Frauds) Modes of Ratification Under the Statute (1404 – 1405) Right of a Party Where Contract Enforceable (1406) When Unenforceable Contract Becomes a Voidable Contract; When Unenforceable Contract Becomes a Valid Contract (1407) Right of Third Persons to Assail an Unenforceable Contract (1408) Void or Inexistent Contracts February 19, 2005

11. A, a person of legal age and an agent of X, sold 10 grams of shabu to B who is a minor of 16 years. The shabu was sold for P600 which is actually less than its actual market value of P1,000 thereby incurring a loss of P400 on the part of X. Worse, the contract of sale was not reduced into writing. What is the status of the contract? A. The contract of sale is voidable because one party is a minor. B. The contract is rescissible because of lesion. C. The contract is unenforceable considering it was orally done. D. The contract is void. 9. The following are void contracts. Which is the exception? A. an agreement that will compel x to work for Y without compensation until the latter’s debt is fully paid; B. an agreement where married man X would have carnal knowledge with the single and beautiful Y for a consideration of P5,000; C. a provision in the lease agreement that will enable the lessor to sue for ejectment against the lessee in case of nonpayment of rentals; D. an amicable settlement whereby the heirs of A will not prosecute B for having killed A in Page 19 of 48

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consideration of P1 Million

First Pre-board Examination

Restitution by Minor After Annulment of Contract (1426)

Action or Defense is Imprescriptible (1410)

Delivery by Minor of Money or Fungible Thing in Fulfillment of Obligation (1427)

Rules Where Contract is Illegal and the Act Constitutes a Criminal Offense (1411)

Performance After Action to Enforce Civil Obligation has Failed (1428)

Rules Where Contract is Illegal But the Act Does Not Constitute a Criminal Offense (1412)

Payment by Heir of Debt Exceeding Value of Property Inherited (1429)

Recovery of Usurious Interest (1413)

Payment of Legacy After Will Has Been Declared Void (1430)

Recovery Where Contract Entered into for Illegal Purpose (1414)

Comprehensive 9. “Mutual promise to marry” between would-be husband and wife, orally entered into is A. A validable contract C. Unenforceable contract B. A void contract D. None of the above

Recovery by an Incapacitated Person (1415) Recovery Where Contract Not Illegal per se (1416) Recovery of Amount Paid in Excess of Ceiling Price (1417) Recovery of Additional Compensation for Service Rendered Beyond Time Limit (1418) Recovery of Amount of Wage Less Than Minimum Fixed (1419) Effect of Illegality Where Contract Indivisible/Divisible; Divisible Contract Distinguished from Divisible Obligation (1420) Persons Entitled to Raise Defense of Illegality or Nullity (1421) Void Contract Cannot be Novated (1422) Natural Obligations Natural Obligations (1423) Concept of Natural Obligations; Civil and Natural Obligations Distinguished; Enumeration Not Exclusive Performance After Civil Obligation Has Prescribed (1424) Reimbursement of Third Person for Debt that has Prescribed (1425) February 19, 2005

5. Which of the following is the most defective contract among the following? A. A and B both minor entered into a contract of sale involving chocolate worth P400. B. Contract of sale wherein a car worth P1M is contributed but not reduced in a public instrument. C. A contract of sale wherein one party sold to the other his hereditary rights under the pain of being raped. D. A compromised agreement between two government officials to settle an ANTI-GRAFT CASE 5. Which is the most defective contract among the following? a. A & B, both minors entered into a contract of sale involving chocolate worth P400. b. Contract of partnership wherein a car worth P1M is contributed but not reduced in a public instrument. c. A contract of sale wherein one party sold to the other his hereditary rights under the pain of being raped. d. A compromise between Senator Lacson and Pre. GMA to hide the evidence against Jose Pidal, to achieve peace and reconciliation for the country. 7. S agreed to sell B 100 cases of napkins with the name of B’s restaurant on the napkins. In the enforceable contract, it was specified that delivery will take place on April 15, 2000 which is one (1) month after S and B signed the contract. B wanted the napkins by April 15 because the grand opening of the restaurant was scheduled for April 17. On April 11, S tells B that the has too many orders and will not be able to deliver the napkins. What options does B have? Page 20 of 48

BUSINESS LAW & TAXATION I. II. III. A. B.

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Treat it as a present breach of contract and cancel the contract Wait for a reasonable time to see if S will deliver Ask a third person to perform the obligation at the expense of S but no damages I only C. Either I or II II only D. Either I or II or III

6. Which of the following contracts is enforceable even if not executed in writing? A. Sale of immovables B. Lease of real property for a period of more than one year C. Lease of personal property for a period of two years D. Donations made in consideration of marriage 7. Which of the following statements is legally correct? A. An action for rescission of the contract shall prescribe in four years from the discovery of lesion B. An action to declare a contract void or inexistent does not prescribe C. An action to enforce a natural obligation judicially prescribes in four years from maturity of the obligation D. An action to annul a contract does not prescribe 30. 1st Example: The husband by intimidation, was able to obtain the consent of his wife, with regards to the sale of a piece of land belonging to the wife for P1M. The contract is voidable because there was intimidation 2nd Example: In the above example, the right of the wife is to go to court and file a motion for annulment within four (4) years from the time intimidation ceased A. B. C. D. 1st Example True False True False 2nd Example True False False True 15. 1st Statement: The defense that a contract is unenforceable is subject to prescription. 2nd Statement: In solution indebiti the contract violated is the premature payment of the obligation. A. B. C. D. 1st Statement True False True False 2nd Statement True False False True 14. 1st Statement: The guardian sold to a minor his car for P200,000 although its FMV is February 19, 2005

First Pre-board Examination

P400,000 or ½ lesion. 2nd Statement: A lawyer purchased the property of his friend’s client pending litigation in the court where both lawyers are practicing for P700,000 but with a FMV of P1,000,000. The contracts are: A. B. C. D. 1st Statement Valid Rescissible Void Voidable 2nd Statement Valid Void Void Valid 4. 1st Statement: A contract whose cause or object did not exist at the time of the transaction is a detective contract which cannot be remedied by providing a cause or object as the case may be in the contract. 2nd Statement: The nullity of the accessory obligation of the penal clause does not carry with it the nullity of the principal obligation which remains in force and demandable. Determine whether A. B. C. D. st 1 Statement True True False False 2nd Statement True False True False

PARTNERSHIP Introduction to partnership Particular partnership 14. Which of the following is not a particular partnership A. A partnership formed by two lawyer for the practice of law profession B. A partnership formed for the purpose of constructing a building C. A partnership formed for the acquisition of immovable property and reselling it for profit D. None of the above. Choosing the form of business organization Brief history of partnership Meaning of partnership – delectus personas Characteristics of partnerships as a business organization and as a contract Partnerships distinguished from co-ownership Partnership distinguished from corporation Form of partnership contract Juridical personality Page 21 of 48

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Articles of partnership Universal partnership 7. Alma, Booba and Carla formed a Universal Partnership of profits. The partners are the owners of the following: a) Alma, a passenger jeepney; b) Booba, a Tamaraw FX Taxi; and c) Carla, A Corolla Taxi. The parties agreed that the use and fruits of the objects contributed shall pertain to the partnership. Which of the following statements is False? A. The partnership, upon delivery, shall become the owner of the objects contributed; B. Upon dissolution, the objects shall be converted into cash and the proceeds shall be divided equally among the partners including the fruits; C. During the term of the partnership, the contributing partner remains to be the naked owner of the object contributed by him, but upon dissolution all objects contributed are to be converted into cash and the proceed shall be divided equally among the three partners D. All of the above Comprehensive 6. The following are effects of unlawful partnership, except: A. The profits shall be confiscated in favor of the government B. The instruments or tools and proceeds of the crime shall be forfeited in favor of the government C. The contribution of the partners shall be confiscated in favor of the government D. The contract is void ab initio and the partnership never existed in the eyes of the law. Elements & Kinds Essential Elements General Partnership Limited Partnership Silent Partner Secret Partner Dormant Partner 13. A partner who does not participate in the management of the affairs of the partnership and whose connection with it is not made known to the public is called: A. Silent-secret partner C. Dormant partner B. Nominal partner D. Silent-ostensible partner Partners Contributing Usufructuary Rights Liquidating Partner Comprehensive 8. A, B, and C wish to go into the business together to bottle mineral water. Each contributed February 19, 2005

First Pre-board Examination

P50,000, but C wanted to limit his liability to the extent of his contribution, and his name to appear in the partnership name. Which form of partnership as business organization should they choose? A. General partnership B. Limited partnership C. No partnership organization is available D. Limited partnership, but C must be a general and limited partners at the same time 6. Statement No. 1: The sharing in the net returns is a prima facie evidence of the existence of a partnership. Statement No. 2: In a universal partnership of all present properties, the partnership is dissolved when a specific thing contributed by a partner is lost after delivery to the partnership. A. B. C. D. Statement No. 1 True False True False Statement No. 2 True False False True Formalities required 15. Every contract of partnership having a capital of P3,000 or more in money or property shall appear in a public instrument which must be recorded in the Securities and Exchange Commission. Failure to comply with said requirements A. Will not affect the liability of a partnership and the members thereof to third persons B. Will render the partnership void C. Will not give the partnership a legal personality D. Will give the partnership a de facto existence 24. A, B, and C formed a Limited Partnership, each contributing P10,000. However, the articles of partnership was not recorded or registered with the SEC. Which of the following is an incorrect statement. A. Not valid as a limited partnership B. It is considered as a general partnership C. The partnership still possessed of juridical personality distinct and separate from the partner D. None of the above 31. Statement 1: For failure to register the Certificate of Limited Partnership with the Securities and Exchange Commission (SEC), any and all contracts entered into by such partnership with third persons shall be considered void. There was, absolutely, no partnership at all to speak of. Statement 2: When an unlawful partnership is dissolved by a judicial decree, all the Page 22 of 48

BUSINESS LAW & TAXATION contribution as well as the profits shall be confiscated by the State A. B. C. Statement 1 True False True Statement 2 True False False

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D. False True

Management of a partnership Relations established in a partnership 11. The duty to deliver the fruits of the promised contribution of things or money to the partnership common fund: A. Arises from the perfection of the contract of partnership without need of demand; B. Arises when the duty to deliver the promised contribution arises upon demand; C. Arises from the perfection of the contract of partnership upon demand D. Arises when the duty to deliver the promised contribution arises without need of demand; Obligations of partners to the partnership 34. A, B and C are partners where C as a capitalist partner is engaged in the same business in which the partnership is engaged in. In this situation, A. the partnership may oust C from the partnership and at the same time avail of C’s profit in her separate business B. the partnership may oust C from the partnership C. the partnership may avail of C’s profits in her separate business D. the partnership has nothing to do with C since it is her right to engage in any business Profit and loss sharing 31. K is an industrial partner. Besides his services, he also contributed capital to the partnership. There is no agreement or stipulation as to the profits or losses. The share of K in the profit is A. the remaining partners will determine his share in profits B. combination of C and D below C. such share as may be just and equitable under circumstances D. Pro-rata to his contributions 14. A, B and C formed a partnership, with A and B as general partners and C as limited partner. The firm’s name is A & B Partnership. After one (1) year of operation, the partnership incurred a loss of P12,000. X is the creditor. X can collect: A. P6,000 from A C. Nothing from C B. P12,000 from A or B D. P12,000 from A, B, and C 19. A, B and C partners. Their contributions are as follows: A, P60,000; B, P40,000; C, services. February 19, 2005

First Pre-board Examination

The partners did not agree on how to divide profits and losses. If there is a loss of P10,000, how should the said loss of P10,000, how should the said loss of P10,000 be shared by the partners? A. A, P6,000; B, P4,000 C, nothing C. A, 3,500; B, 3,500 C, 3,000 B. A, 3,000; B, 2,000 C, P5,000 D. A, 3,500; B, 2,500 C, 4,000 23. K is an industrial partner. Besides his services, he also contributed capital to the partnership. There is no agreement or stipulation as to the profits or losses. The share of K in the profit is A. The remaining partners will determine his share in profits B. Combination of C and D below. C. Such share as may be just and equitable under circumstances D. Pro-rata to his contributions. 14. The partnership suffered heavy losses in the first year of its operation and is on the brink of bankruptcy. X, a capitalist partner, cannot contribute further because he became insolvent, while Y and Z are willing, able and ready to give additional contribution to save the business of the partnership. Can he be obliged to sell his interest to the other partners by reason of such refusal to give additional contribution? A. Yes, provided he is paid the value of his interest B. Yes, because his refusal to give additional contribution speaks of his lack of interest in the continuance of the partnership. C. No, because his refusal is justified. D. Answer not given. Appointment of a managing partner Stipulations on exercises of management power Rights and liabilities of partners Right of partner to associate with another 10. A, B, and C formed a general partnership. Later, C shared his interest with X in the partnership. In here, X is considered: A. An associate of a partner C. Sub-partner B. Stranger to the partnership D. all of the above Other rights – property, rights 7. One or more but less than all the partners have no authority to perform the following, EXCEPT: A. Renounce a partnership claim B. Submit a partnership claim or liability to arbitration Page 23 of 48

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C. Convey partnership property in the ordinary course of partnership business D. Do any act, which would make it impossible to carry on the ordinary business of the partnership Effects of assignments or attachment of partner’s interests 11. C, a partner in “C” partnership, assigns his interest in “Y” partnership to X, who is not made a partner. After assignment, X asserts the right to 1. Participate in the management of “Y” partnership 2. C’s share in the surplus profit 3. May compel the other partners that he (X) becomes a partner A. 1 and 3 C. 2 only B. 3 only D. 2 and 3 Admission or representation of partners Notice to partners Solidary liability of partners 16. Which of the following statements is (are) usually correct regarding general partner’s liability I. All general partners are jointly and severally liable for partnership torts. II. All general partners are liable only for those partnership obligations they actually authorized. A. I only C. Both I and II B. II only D. Neither I or II 9. Which of the following statements is correct concerning liability when a partner in a general partnership commits a tort while engaged in partnership business? A. The partner committing the tort is the only party liable. B. The partnership is the only party liable. C. The partnership and each partner are jointly and severally liable. D. Each partner is liable to pay an equal of any judgment. Partnership by estoppel 25. A, B and C are partners in ABC Company. D introduced himself as a partner in ABC Company to X, who in the belief of such introduction extended a P60,000 credit to ABC Company. These facts are known by A who did not oppose. Who shall be held liable to X? A. Since X extended the credit to ABC Company, a partnership liability exists, thus, partner A, B and C and D are liable B. Only A, who knows the transaction and D are partners by estoppel are liable pro-rata to X. February 19, 2005

First Pre-board Examination

C. D who represented himself as partner in ABC Company is liable D. A, and C who benefited in the P60,000 credit shall be liable to X 13. A and B formed a general partnership and contributed P500,000 each. C, a brother-in-law of A, allowed his name to be included in the partnership firm name. The partnership became insolvent and there remains unpaid partnership obligation to X to the tune of P60,000. X can compel: A. Either A or B to pay the P60,000 liability B. Any of A, B and C to pay the P60,000 liability C. A and B to pay P30,000 each D. A, B and C to pay P20,000 each 5. Carlos and Conrado established a partnership each contributing P100,000. Pepito, a third party, allowed his name to be included in the firm name of the partnership. The partnership was insolvent and, after exhausting all the remaining assets, there remained a P30,000 liability in favor of Hermeneglido, a partnership creditor. Hermeneglido can compel: A. Pepito to pay the remaining P30,000 liability; B. Carlos, Conrado and Pepito to pay P10,000 each; C. Carlos and Conrado to pay P15,000 each; D. Carlos and Conrado to pay the remaining liability, jointly and severally Liability of incoming partner 12. A and B are the general partners and C the limited partner of X & Co. partnership. After one year, D was admitted as a new limited partner. If the partnership suffered a loss of P12,000, who are liable? A. A and B C. A, B and D B. A, B and C D. All of them Preference as creditors 18. A, B, and C, capitalist partners, contributing P30,000, P20,000 and P10,000 respectively, and D, the industrial partner contributed his services. Suppose X, a customer, is the creditor of the firm to the amount of P180,000. How can X recover the P180,000? A. X must sue the firm and get P60,000. X can still recover the balance of P120,000 from the four partners jointly, that is, P40,000 each. B. X can recover from the firm P60,000. X can still recover the balance of P120,000 from the capitalist partners only C. X can recover from the firm P60,000. X can still recover the balance of P120,000 from any of the partners solidarily Page 24 of 48

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D. X can recover from the firm P60,000 and can no longer recover the balance of P120,000. 38. A, B and C capitalist partners, contributed P10,000 each and D, the industrial partner contributed his services. Suppose X, is the creditor of the firm to the amount of P90,000 after getting the P30,000 assets of the partnership A. X can recover P20,000 each from A, B and C only B. X can recover P60,000 from either A, B and C only C. X can recover P15,000 each from A, B, C and D D. X can recover P15,000 each from A, B and C but D is exempt because he is an industrial partner 39. A, B and C formed a limited partnership with A, as general partner, B as limited partner and C as industrial partner. A and B contributed P50,000 each. The partnership failed and after disposing all its assets to pay partnership debts there still remains a note payable in the sum of P30,000. Against whom can the creditor demand payment of the note of P30,000? A. Only A is liable to pay the P30,000 indebtedness B. A and C are liable to pay P15,000 each C. A and B are liable to pay P15,000 each D. A, B and C are liable to pay P10,000 each 30. A, B and C are partners of A and Company. They agreed that in case of loss, the share of A is 50%, B 30% and C 20%. After three years total assets of A and Company is P100,000 as against total liability of P112,000. If D is the only creditor, D can collect from A A. P6,000 D. P4,000 B. P12,000 E. P8,000 C. None of the above

First Pre-board Examination

receipt. b. Equal sharing, 50% shall go to Bova and 50% to the partnership. c. P5,000 should go to Bova and P15,000 should be for the partnership. d. P6,666,666 should go to Bova and the balance to the partnership. Comprehensive 32. 1st Statement: A person admitted as a partner into an existing partnership is liable for all the obligations of the partnership before his admission as though he had been a partner when incurred and that such liability will extend to his own individual property. 2nd Statement: In the absence of stipulation, the share of each partner in the profits and losses shall be equal to each other. A. B. C. D. 1st Statement True False True False 2nd Statement True False False True 17. 1st Statement: A person admitted as a partner into an existing partnership is not liable for obligations of the partnership contracted before his admission. 2nd Statement: On dissolution the partnership is not terminated, but continues until winding up of partnership affairs is completed. A. B. C. D. st 1 Statement True False True False 2nd Statement True False False True

40. A, B and C are partners of A and Company. They agreed that in case of loss, the share of A is 50%, B 30% and C is 20%. After three years, total assets of A and Company is P100,000 as against total liability of P112,000. If D is the only creditor, D can collect from A A. P6,000 D. P4,000 B. P12,000 E. P8,000 C. None of the above

Dissolution of partnership Meaning of dissolution Causes – judicial and extra-judicial 15. Which of the following is a ground for the court to dissolve a general partnership? A. Death of a partner B. Termination of the term C. Business cannot be carried except at a loss D. Civil interdiction of a partner E. All of the above

7. Emong, Jack and Bova are partners with Bova as managing partner. Carla is indebted to Bova in the amount of P50,000 and P150,000 to the partnership. Both debts are due and demandable. Carla paid Bova P20,000 and he issued his own receipt. a. The whole P20,000 should be applied to indebtedness of Carla to Bova as he issue his

8. One is a mode of dissolving partnership that requires decree of court: A. Death of partner B. When a specific thing promised by a partner is lost before delivery C. Business can only be carried on at a loss

February 19, 2005

Page 25 of 48

BUSINESS LAW & TAXATION

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D. Accomplishment of the purpose of partnership

B. P 15,000

12. Unless otherwise provided in a general partnership, which of the following is correct when a partner dies? Deceased partner’s administrator His estate would be free The partnership is would automatically become partner from any liabilities automatically dissolved A. Yes Yes Yes B. Yes No No C. No Yes No D. No No Yes 9. Unless otherwise provided in a general partnership, which of the following is correct when a partner dies? His Administrator Automatically Extinguishment of all Dissolution of the becomes a partner his Liabilities Partnership A. B. C. D.

Yes Yes No No

Yes No Yes No

Yes No No Yes

Effects of dissolution 13. A, B, C and D partners with A and B as the capitalist partners and C and D as the industrial partners. In due course of business, the firm incurs a contractual debt in favor of X. After X has exhausted the assets of the firm a balance of P10,000 remains unpaid. X files an action against C and D because A and B are already out of the country A. C and D are not liable because they are the industrial partners B. C and D may be held liable for P10,000 because they are solidary debtors C. C and D are liable for P5,000 each because A and B are out of the country D. C and D are liable for P2,500 each because they are joint debtors 28. A, B, and C formed a general partnership with a gross capital of P90.000. They agree that the profit and loss sharing is: A – 50%; B – 25%; C – 25%. Upon dissolution and after exhausting the partnership capital, X has still a collectible amount of P30.000 from the firm. Suppose there is no profit and loss sharing and A contributed P24.000; B – P21,000; C – P15,000. How much is the obligation of C to X? A. P30,000 C. P 7,500 February 19, 2005

First Pre-board Examination D. P10,000

27. A, B, and C formed a general partnership with a gross capital of P90.000. They agree that the profit and loss sharing is: A – 50%; B – 25%; C – 25%. Upon dissolution and after exhausting the partnership capital, X has still a collectible amount of P30.000 from the firm. How much can X collect from C alone. A. P 7,500 C. P30.000 B. P15,000 D. P10,000 10. X, Y and Z formed a general partnership decided to contribute P200,000 each. The partnership and has started its operations although X was able to contribute only P140,000. They also agreed the X & Y be exempted from losses. Upon dissolution there was an outstanding obligation to Mr. A in the amount of P720,000. A exhausted the capital of P540,000, leaving a P180,000 balance. Which statement based on the foregoing is true? A. The share of X is nothing based on the agreement. B. The share of X is 1/3 of P180,000 or P60,000 being a general partner. C. Z will have to absorb the whole P180,000 per agreement minus X’s share of P60,000. D. X is liable for P60,000 to the partnership and P40,000 to Mr. A. 9. X, Y and Z formed a general partnership decided to contribute P200,000 each. The partnership and has started its operations although X was able to contribute only P140,000. They also agreed the X & Y be exempted from losses. Upon dissolution there was an outstanding obligation to Mr. A in the amount of P720,000. A exhausted the capital of P540,000, leaving a P180,000 balance, if X is a limited partner in their partnership named Z and Co. which is correct? a. X has no share in the balance being a limited partner b. X will only have to pay his unpaid contribution of P60,000 c. Z will have to absorb the whole P180 per agreement minus X’s share of P60,000 d. X is liable for P60,000 to the partnership and P40,000 to Mr. A 10. A, B, C and D are partners. Their contributions are as follows: A – P50,000; B – P30,0000; C – P20,000; D services. The partnership incurred obligations to third persons which the firm was unable to pay. After exhausting all the assets of the partnership, there still is an unpaid balance of P10,000? How much should each partner be liable for? A. A - P5,000; B - P3,000; C - P2,000; D - none B. A - P2,500; B - P2,500; C - P2,500; D - P2,500 C. A - P4,000; B - P3,000; C - P2,000; D - P1,000 D. A - P4,000; B - P4,000; C - P4,000; D - none Page 26 of 48

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9. Jay, Jane, James and Joy formed the “Four Js Partnership” with Jay, Jane and James as capitalist partners, and Joy as an industrial partner. The partnership suffered heavy losses and its remaining assets amounted to only P100,000 and the partnership is still indebted to one of its suppliers, Mr. Red, P130,000. After getting P100,000 from the partnership, how would Mr. Red recover the balance of P30,000? A. Mr. Red suffers as his loss the balance of P30,000; B. Mr. Red can recover from all the three (3) capitalist partners, jointly C. Mr. Red can recover the balance of P30,000 from all the four (4) partners, jointly, including the industrial partner; D. Mr. Red can recover the balance of P30,000 from all the four (4) partners, jointly and severally, including the industrial partner Rights of partners among themselves Relation of partner to third persons for contract after dissolution Liability of partners Liquidating partners Rights of partner Comprehensive 35. A, B and C formed partnership engaged in appliance business. A and B were general partners while C was a limited partner. Later, B and C got married, and afterwards A sold his interest to B. Based on the facts presented, is the partnership dissolved? A. No, the marriage of B and C will not dissolve the partnership unless there is judicial approval B. The selling of A’s interest to B will not dissolve the partnership because the spouses can enter into a particular partnership C. No, the marriage of B and C and the selling of A’s interest to B converts the partnership into a universal partnership D. Yes, when B acquired the interest of A it became a sole proprietorship therefore the partnership is dissolve 20. 1st statement: The arrival of the term of a partnership with a fixed term or period shall not dissolve the partnership but such partnership may be terminated anytime dependent in the will of the continuing partners. 2nd statement: The general rule is that the loss of the specific thing contributed to the partnership dissolves the partnership when only the use of the thing is contributed by the partner and such thing after its transfer to the partnership which used the same form sometime was subsequently lost, the partnership is not dissolve. Which is correct? February 19, 2005

st

1 Statement 2nd Statement

First Pre-board Examination A. False False

B. True True

C. True False

D. False True

21. A, B and C are partners in X Partnership. The partnership is dissolved by A’s death. B, thereafter transacts business with D, a third person. 1st Statement: If the transaction is designed to complete transactions began but unfinished at the time of dissolution, the partnership is bound. 2nd Statement: If D had extended credit prior to the dissolution and had no knowledge or notice of dissolution, the partnership is bound. A. B. C. D. 1st Statement True False True False 2nd Statement True False False True Liquidation of partnership Methods of liquidation Rights of creditors after dissolution Rights of accounting Requisites of limited partnership Distinctions between limited and general partners Powers of general partners Limited partnership Rights of limited parties to share for profits, return of contribution 25. A substituted limited partner is A. A buyer of right of the deceased partner B. A person admitted as a limited partners by the other partners C. An assignee admitted to all the rights of the assignor D. A legal representative of a limited partner 26. Which of the following is not correct? In a limited partnership composed of A, B and C, the contribution may be as follows: A. A property (limited partner); B – services (general partner); C cash (general partner) B. A cash (limited partner); B – property (general partner); C services (general partner) C. A services (limited partner); B - cash (general partner); C services (general partner) D. A cash (limited partner); B – cash (general partner); C services (general partner) Page 27 of 48

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15. As regards a limited partner, which statement is correct? A. He cannot be allowed to transact business directly with the partnership of which he is a member as this would result into conflict of interest; B. He is automatically the agent of the partnership with general authority to bind the partnership to contracts with third persons; C. He can only contribute money and property but not services; D. He has no liability to partnership creditors even if he takes part in the management of the partnership. Liability Death of limited partner Settlement of accounts after dissolution Amendment and cancellation of certificate Comprehensive 8. Conrado, Pedro and Carlos formed a limited partnership with Conrado as managing partner; Pedro as industrial partner; and Carlos as limited partner. Conrado contributed P100.000 while Carlos contributed P150,000. The partnership became a failure. After all its assets have been disposed to pay partnership debts, there still remains a note, executed by Conrado in his capacity and authority as managing partner, payable to the order of Guillermo, a partnership creditor, in the sum of P60,000. Against whom can Guillermo enforce his claim of P60,000? A. Against Conrado and Carlos, the capitalist partners, jointly B. Against Carlos only or any of his legal representative C. Against Conrado and Pedro only, jointly D. Against Conrado only Comprehensive 27. Which of the following statements is correct? A. A partnership contract is not covered by statute of fraud B. A limited partnership is one having at least one general partner or one limited partner and the limited partner shall not be liable for the obligations of the partnership C. A limited partner who contribute industry to the firm becomes liable as a general partner D. The contract of partnership is void is it contains a stipulation which exclude a partner from sharing in the profits of the firm 12. All are correct except: a. Limited partner cannot be an industrial partner too. b. A managing partner is always a general partner. February 19, 2005

First Pre-board Examination

c. Persons not allowed to donate to each other cannot form Universal Partnership. d. As to liability to creditors of the partnership an industrial partner is considered a general partner. 9. In partnership which of the following is incorrect? A. Stipulation exempting any kind of partner in a partnership from profit and loss sharing is void as to third person B. Unlawful partnership is dissolved by court decree, the capital contribution of the partners shall be confiscated in favor of the state. C. In case of tie in a joint management in a partnership, the matter will be decided by the controlling interest. D. All of the above 7. One of the following statements is false: A. Limited partner cannot be an industrial partner B. A managing partner is always a general partner C. Persons not allowed to donate to each other cannot form Universal Partnerships D. As to liability to creditors of the partnership an industrial partner is considered a general partner. 12. 1st Statement: A newly admitted partner shall be liable for all obligations which the partnership incurred prior to the time of his admission, but the same shall only be satisfied out of his personal and separate property. 2nd Statement: Article of Universal Partnership entered into without specification as to its nature is presumed to constitute only universal partnership of profits. A. B. C. D. Statement No. 1 True False True False Statement No. 2 True False False True 10. Statement No. 1: A partner’s right to use specific partnership properties may be assigned to third person-creditor. Statement No. 2: The death, retirement, insolvency or civil interdiction of a limited partner dissolves the limited partnership. A. B. C. D. Statement No. 1 True False True False Statement No. 2 True False False True Page 28 of 48

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CORPORATION Introduction to the Corporation Law Private corporation – definition 42. Which of the following is a disadvantage of forming a corporation? A. The existence of the entity is not affected by the personal vicissitudes or of the individual stockholder B. Free and ready transferability or ownership of shares C. Subservience of minority stockholders to the wishes of the majority subject only to equitable restraints D. The shareholders are not liable for the debts of the business 12. Which of the following is the disadvantage of forming a corporation? A. The free and ready transferability of ownership B. The shareholders are not liable for the debts of the business. C. Because of the power of succession, the existence of the entity is not affected by the personal vicissitudes of the individual stockholders. D. The subservience of minority stockholders to the wishes of the majority subject only to equitable restraints. Theory of corporate entity; piercing the veil of corporate fiction 23. Plaintiffs filed a collection action against “X” Corporation. Upon execution of the court’s decision, “X” Corporation was found to be without assets. Thereafter plaintiffs filed an action against its present and past stockholder including “Y” Corporation which owned substantially all of the stock of “X” Corporation. The two corporation have the same board of directors and “Y” Corporation financed the operations of “X” Corporation. May “Y” Corporation be held liable because there was delay. A. Yes, under the principle of “Corporate Opportunity” of Interlocking Director B. Yes, under the principle of “Trust Fund Doctrine” C. No, under the doctrine of “Separate Entity” D. Yes, under the principle of “Piercing the veil of corporate entity” Rights of a Corporation Distinction from partnership Classes of corporations Corporations created by special laws Corporators; incorporators; members; stockholders 31. This group of persons may not form a corporation and be incorporators in a corporation in the February 19, 2005

First Pre-board Examination

Philippines A. Fifteen Spanish citizens who are residents of Manila B. Ten resident aliens and four aliens in Singapore C. Eleven Filipinos who are residents of San Francisco, California D. Seven American residing in the Philippines and two Filipinos residents of Hawaii 32. A corporation cannot be an incorporator, because only natural persons may become incorporators, except A. Cooperative as incorporator of Rural Bank B. Eleemosynary corporations C. Charitable organizations incorporated under the Philippines Laws D. Corporation sole 19. A, B and C are Filipinos who are residents of the Philippines. D, E and F are Filipinos who are on-residents, G and H are Japanese nationals residing in the Philippines. I and J are Japanese who are nonresidents. A. A, B, D, E and F may form a corporation in the Philippines B. D, J, I, A and H may form a corporation in the Philippines C. A, G, H, E and J may form a corporation in the Philippines D. none of the above 18. The Articles of incorporation requires that the names, nationalities and residences of incorporators be stated to enable the State, through the Securities and Exchange Commission (SEC) to determine whether: A. Majority of the incorporators are citizens of the Philippines B. 2/3 of the incorporators are citizens of the Philippines C. 2/3 of the incorporators are residents of the Philippines D. Majority of the incorporators are residents of the Philippines, even if all of them are foreigners Classification of shares – brief definition 34. Shares deposited by the seller or his agent with a bank or third party to be delivered to the buyer or subscriber only upon the fulfillment of the stipulated suspensive condition A. Promotion shares C. Redeemable shares B. Founders shares D. Escrow shares Cases when non-voting shares can vote Definition of terms – capital stock, share of stock and certificate of stock Page 29 of 48

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Treasury shares; founders’ shares; redeemable shares Incorporation of a business Number and qualification of incorporators 14. Who among the following comply with the minimum requirement of law and, in the process, form a stock corporation in the Philippines? Name Nationality Residence Ramon Recto Filipino Philippines Poncito Enrile Filipino Canada Lee, Chin Chih Taiwanese Philippines Luis Cordero Spanish Philippines Renato Mabuhay Filipino USA John Pratts American Philippines Honorato Reyes Filipino Hongkong A. Recto, Enrile, Cordero, Reyes, Mabuhay B. Recto, Enrile, Mabuhay, Pratts, Reyes C. Recto, Lee, Cordero, Pratts, Reyes D. Recto, Enrile, Mabuhay, Lee, Reyes Steps for incorporation 12. What need not be submitted outrightly to the SEC during incorporation stage. A. Articles of incorporation C. Treasurer’s Affidavit B. By-laws D. Bank Certification Corporate term Minimum capital stock 15. The required minimum authorized capital stock for stock corporation is a. Not less than P5,000 b. 25% must be subscribed and 25% must be paid c. At least 25% must be subscribed and at least 25% must be paid but not less than P5,000 d. None as a rule provided the paid up capital is not below P5,000. 13. The required minimum authorized capital stock for stock corporation is: A. Not less than P5,000 B. 25% must be subscribed and 25% must be paid C. At least 25% must be subscribed and at least 25% must be paid but not less than P5,000 D. Correct answer not given February 19, 2005

First Pre-board Examination

Pre-incorporation subscription and paid-up capital 14. Suppose SPAGHETTI Corporation has an authorized capital stock of P100,000 divided into 1000 shares of stock with par value of P100 each. Subscibers A – 100 shares and paid P8,000 D – 50 shares and paid P5,000 B – 160 shares and paid P 100 E – 200 shares and paid P 600 C – 250 shares and paid P4,000 Which will qualify the pre-incorporation subscription requirement? A. Combination of A and E C. Combination A and B B. Combination of C and D D. All of the above 16. Suppose SPAGHETTI Corporation has an authorized capital stock of P100, 000 divided into 1,000 shares of stocks with a par value of P100 each. A – 100 shares and paid P8,000 D – 50 shares and paid P5,000 B – 160 shares and paid P 100 E – 200 shares and paid P600 C – 250 shares and paid P4,000 Which will not qualify as pre-incorporation subscription requirement? a. Combination of A and E c. Combination of A and B b. Combination of C and D d. Combination of B and D 45. Which of the following conditions will allow corporate formation and allow Securities and Exchange Registration? Authorized capital Subscribed capital Paid-in capital A. P200,000 P50,000 P12,500 B. 50,000 12,500 3125 C. 100,000 25,000 6,250 D. 60,000 15,000 6,250

21. Which of the following situations complies with the requirement of the law for corporate formation and registration? Authorized Capital A. P 50,000.00 B. P 60,000.00 C. P100,000.00 D. All of the above

Subscribed Capital P12,000.00 P15,000.00 P25,000.00

Paid-up Capital P 5,000.00 P 10,000.00 P 7,000.00

19. Choose the minimum requirement of the corporation to corporate formation: Page 30 of 48

BUSINESS LAW & TAXATION Authorized Capital A. P160,000.00 B. P400,000.00 C. P100,000.00 D. All of the above

CPA Review School of the Philippines Subscribed Capital P 50,000.00 P150,000.00 P 25,000.00

Paid-up Capital P 12,500.00 P 38,000.00 P 6,250.00

15. Which of these conditions comply with the minimum requirement of law to form a stock corporation? A. B. C. D. Authorized Capital P400,000 P200,000 P100,000 P 64,000 Subscribed Capital 20,000 50,000 25,000 16,000 Paid-up Capital 20,000 10,000 12,500 4,000 By-laws 20. They provide and regulate the internal governance and internal matter of the corporation, such as the calling of the Board of Directors’ and Stockholders’ meeting: A. The Articles of Incorporation B. The Board of Directors in the exercise of its corporate powers C. The By-laws D. The majority of the Outstanding Capital Stockholders 15. Is a by-law provision of “X” Corporation “rendering ineligible or if elected, subject of removal, a director if he is also a director in a corporation whose business is in competition with or is antagonist to said corporation” valid and legal A. Yes, under the principle of “corporate opportunity” B. No, under the principle of “separate entity” C. Yes, provided it is approved by 2/3 of the outstanding capital stock D. Yes, under the principle, “of vested interest” Articles of incorporation – form, contents, disapproval 18. Which of the following must be obtained in a Corporation’s Articles of Incorporation? A. Names of stockholders B. Name of the temporary treasurer C. Provisions for issuance of par and no par value shares D. Quorum voting requirement 16. One of the following is a ground for the suspension or revocation of the Article of Incorporation February 19, 2005

First Pre-board Examination

by the SEC. A. Failure to organize and commence business operation with in 2 years from incorporation. B. Continuous inoperation or inactivity for 5 years after it has organized and commenced business transactions for one year. C. Corporation has commenced its operation and subsequently become continuously inoperative for 2 years. D. Corporation has failed to commence and start to operate due to causes beyond its control. Revocation of certificate 14. One of the following is a ground for the suspension or revocation of the certificate of Incorporation by the SEC. a. Failure to organize and commence business operation with in 2 years from incorporation. b. Continuous in-operation or inactivity for 5 years after it has organized and commenced business transactions for one year. c. Corporation has commenced its operation and subsequently become continuously inoperative for 2 years. d. Corporation has failed to commence and start to operate due to causes beyond its control. Corporate name Commencement of corporate existence Operations of a corporation De facto corporation; de jure corporation; corporation by estoppel 32. A, B, C, D and E organized a corporation. An article of incorporation was prepared, signed and acknowledge before a notary public and filet with the SEC. The corresponding certificate of incorporation was issued. It turned out, however, that A, B, and C are not residing in the Philippines. What is the status of the corporation? A. De jure corporation D. Corporation by prescription B. De facto corporation E. None of the above C. Corporation by estoppel 13. A, B , C , D and E prepared and drafted their Article of Incorporation as well as the set of Bylaws for the creation of Five Kings Corporation but were not able to file the same with the Securities and Exchange Commission. A was temporarily appointed as Treasurer. They deposited P1 Million to the bank for which a bank certificate was issued to them. They began transacting business and held themselves out as directors and stockholders of Five Kings Page 31 of 48

BUSINESS LAW & TAXATION Corporation. In this case, there is: A. a corporation by prescription B. a de jure corporation

CPA Review School of the Philippines C. a de facto corporation D. a corporation by estoppel

Effect of non-use and disqualification Board of Directors & Officers 17. Which is correct about a B.O.D. member? a. He is entitled to compensation as a matter of right. b. He must be a citizen of the Philippines c. He is disqualified to be one if convicted of the crime of murder before d. He can be removed by votes representing 2/3 of the outstanding capital stocks in all cases 49. “ A” was one of the directors of “X” Corporation. “B” obtained a judgment against “A” and had all of “A’s “ shares of stock in “X” Corporation. A meeting was held and both “A” and “B” appeared in said meeting, each claiming the right to participate in the deliberation of the board. “A” contended that he had the right to continue as director until the stockholders could elect his successor. “B” on the other hand, contended that having purchased all of “A’s” share he had the right to take the latter’s place in the board. Under the rule of directorship, which of the following is false? A. Both A and B are disqualified to sit as directors in the Board of Directors B. A cannot qualify as he disposed all his shares. The requirement is that a director must continuously have at least one share in the corporation C. B can qualify because a corporation as well as the heirs of stockholders of same corporation has got a right of succession D. B cannot also qualify if he claims succession to A. He must have to be elected by the stockholders. The position is personal and does not allow substitution.

First Pre-board Examination

C. Stockholders always have the right to elect a corporation officers D. An officer of a corporation is required to own at least one share of the corporation’s stock Board of Trustees 33. Qualification of trustee of non-stock corporation: A. Trustees must be member of the corporation B. Majority of the trustees must be resident of the Philippines C. Trustees of non-stock corporation may be more than 15 members D. All of the above. Method of voting Quorum Removal – vacancy Liability and disloyalty of directors 30. A corporation officer or director cannot take advantage for their personal benefit a business opportunity which the corporation is financially able to undertake A. Doctrine of corporate fiction C. Doctrine of corporate opportunity B. Trust fund doctrine D. Doctrine of limited capacity 17. Where a director, by virtue of his office, acquired for himself a business opportunity which belongs to the corporation, thereby obtaining profits to the prejudice of such corporation, he must account to the latter for all such profits by refunding the same to the corporation. This pertains to what duty of a director or a corporation? A. Duty of diligence C. Duty of loyalty B. Duty of obedience D. Duty of honest

50. In no case shall the total yearly compensation of directors, exceed A. 5% of the net income before income tax during the preceding year B. 10% of the net income before income tax during the preceding year C. 10% of the net income after income during the preceding year D. 10% of the net income before income tax during the current year

35. Directors or trustees who willfully and knowingly vote for or assent to patently unlawfully act of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty shall be liable A. As a trustee for the corporation B. Criminally for violation of the corporation code C. Jointly and severally liable for the damages suffered by the corporation D. None of the above.

22. Which of the following statement is correct regarding corporate officers of a stock corporation? A. An officer may not simultaneously may or not be a stockholder of the same corporation B. Corporate Secretary may or not be a stockholder of the same corporation

Contracts with interlocking directors Powers of a corporation (expressed; implied; incidental) Extension of corporate term

February 19, 2005

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Increase or decrease capital stock Deny pre-emptive right Sale or disposition of assets 29. The assets of the corporation as represented by its capital stock are to be maintained unimpaired that there can be no distribution of such assets among the stockholders without provision being first made for the payment of corporate debts A. Doctrine of corporate fiction C. Trust fund doctrine B. Doctrine of corporate opportunity D. Doctrine of limited capacity Acquisition of own shares Investment in another business 16. Cool Lang Corporation, acting through its Board of Directors, wanted to invest corporate funds in Sobra-Sobra Corp., and her corporation the primary purpose of which is similar or related to the primary purpose of the former. What should be the voting requirement? A. Majority vote of the Board and assented to by 2/3 vote of the OCS B. Majority vote of the Board and assented to by majority vote of the OCS C. Majority vote of the Board of Directors only D. None of the above Declaration of dividends 18. Cash dividends as distinguished form stock dividend A. Corporate capital is increased B. Concurrence of the stockholders is required C. Involves disbursement to the stockholders of accumulated earnings D. Being part of corporate property, maybe reached by corporate creditors. 40. The following are the requisites, except one, for valid declaration and/or issuance of stock dividend A. Existence of original and unissued shares B. Dividend declaration is made by the Board of Directors and approved by 2/3 of the outstanding capital stock C. It is issued to increase the authorized capital D. Existence of unrestricted retained earnings 23. A distribution by a corporation, to its existing shareholders, of shares of stock held by it in another corporation is considered as: A. Stock dividend C. Sale of treasury shares B. Property dividend D. Sale of capital assets February 19, 2005

First Pre-board Examination

22. For past four years of its commercial operation, MY TRUST CO. an insurance company has been earning tremendously in excess of 100% of the corporation’s paid in capital. All of the stockholders want that they share in the profits of the corporation by way of dividends but the Board of Directors remained unmoved. 1st Question – Can the stockholders compel the Board of Directors to declare dividends. 2nd Question – If there is a plan for a definite corporate expansion is it true that

the BOD cannot be compelled to declare dividends even if the profit exceed 100% of the paid up capital. 1st Statement 2nd Statement

A. Yes Yes

B. No No

C. No Yes

D. Yes No

Management contracts – ultra vires 48. To enter into management contracts, as a rule A. Majority X of the board and majority of the outstanding capital stock or of the members of both the managing and managed corporations B. Majority of the quorum of the board and 2/3 of the outstanding capital stock or of the members C. Majority vote of the board and majority of the outstanding capital stock or of the members D. 2/3 of the outstanding capital stock or of the members. Adoption of by laws procedures Contents Validity Amendment Meetings and Stocks Kinds, place and time 35. Place of meetings of stockholders and members. Which one is incorrect? A. Stockholders: City or municipality where the principal office of the corporation is located B. Members: Any place even outside the principal office of the corporation if stated in the bylaws by must be within the Philippines and stated in the notice of meeting. C. Members: Any place even outside the principal office of business if stated in the by-laws but must be within the Philippines even if not stated in the notice of meeting. D. Stockholders: Meeting held outside the principal place of business is valid except if all stockholders are present or represented. Page 33 of 48

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37. Which statement is correct? A. The Board of Directors may hold its meeting outside the municipality or city where its principal place of business is located and the directors may attend by proxy, while the stockholders' meeting must by held in the city or municipality where the principal place of business of the corporation is located and the stockholders may attend personally or by proxy. B. The Board of Directors may hold its meeting outside the municipality or city where its principal place of business is located and the directors must attend personally and not by proxy; while the stockholders meeting must by held in the city or municipality where the principal place of business of the corporation is located and the stockholders may attend personally or by proxy. C. The Board of Directors must hold its meeting only within the municipality or city where its principal place of business is located and the directors must attend personally and not by proxy; while the stockholders' meeting may be held within or even outside the city or municipality where the principal place of business of the corporation is located and the stockholders may attend personally or by proxy. D. The Board of Directors may hold its meeting outside the municipality or city where its principal place of business is located and the directors may attend by proxy; while the stockholders' meeting must held in the city or municipality where the principal place of business of the corporation is located and the stockholders must be in attendance personally. Quorum Right to vote – proxies, voting trust agreement Subscription contract Pre-incorporation subscription Consideration for stock 53. Which of the following is (are) valid consideration for the purchase of stocks of a corporation? I. Real estate II. A negotiable promissory note in money III. Monetary consideration for services to be performed A. I only C. Both I and III B. II only D. Both II and III Transfer of stock Issuance of certificate Stock rights – property, management February 19, 2005

First Pre-board Examination

Watered stock; ancilliary rights Liability – unpaid subscription 57. The “Manila Cigar Company” was organized with a capital stock of P50,000 divided into 500 shares of P100 a share. “X” subscribed for 20 shares and paid P500 upon his subscription leaving unpaid account thereof the sum of P1,500. Five years later, the company was declared insolvent and “A” was duly appointed assignee who upon assuming his position, found that “X” has an unpaid subscription in the amount of P1,500. Prior to the company’s declaration of insolvency, its board of directors, by resolution, released “W” (another subscriber) from the payment of his “W” remaining unpaid subscription. The assignee brought action to recover from “X” the amount representing his unpaid subscription and against W, the recall of the release order. Which of the following statements is incorrect? A. Insolvency of the corporation makes all unpaid subscription immediately demandable B. The release of W of his unpaid subscription is void under the Trust Fund Doctrine C. X is considered released by invoking that W, another subscriber has been released by the board. D. The payment of unpaid subscription is immediately demandable whether or not a “call order” has been made by the board of directors Procedures of sale Highest bidder Lost or destroyed certificate Stockholders’ Rights, Powers & Obligations Stockholders’ rights 15. The right given to a stockholder to dissent and demand payment of the fair value of his shares in all of the following except: A. In case of merger or dissolution B. Sale of all corporate assets C. Shorten corporate term only. D. Divert corporate funds to another purpose Pre-emptive Right 41. A shareholders’ option to subscribe to allotment of shares in proportion to his holdings of outstanding shares, before new shares are offered to others A. Voting right C. Ultra vires act B. Pre-emptive right D. Appraisal right Appraisal right Page 34 of 48

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46. Any stockholder of a corporation shall have the right to dissent and demand payment of the fair value of his share/s in three of the following corporate acts. Which is the exception? A. In case of any amendment to the articles of incorporation which has the effect of changing or restricting the rights of any stockholder or class of shares B. In case of merger or consolidation C. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the corporate assets and property of the corporation D. In case of incurring, creating, or increasing bonded indebtedness 47. In which of the following can a dissenting stockholder exercise the right of appraisal? A. Amendment of the articles to increase authorized capital stock B. Amendment of the articles to change corporate name C. Amendment of the articles to transfer location of the principal office D. In case of merger 22. In one of the following cases, appraisal right is not available. A. In case of merger or consolidation. B. In case of increase or decrease of corporate term. C. In case of increase or decrease of capital stock. D. Diversion of Corporate funds for another purpose other than its primary or secondary purposes. 23. In one of the following cases, appraisal right is not available. a. In case of merger or consolidation. b. In case of increase or decrease of capital stock. c. In case of increase or decrease of corporate term. d. Diversion of Corporate funds for another purpose other its primary or secondary purposes. Remedies Voting Requirements Majority of the Board 25. In 1999, Corporation “A” passed a board resolution removing “X” from his position as manager of said corporation. The by-laws of “A” corporation provides that the officers are the president, general-manager, treasurer and secretary. Upon complaint filed with the SEC, it held that the general manager could be removed by mere resolution of the board of directors. On motion for reconsideration, “X” alleged that he could only be removed by the affirmative vote of the stockholders representing 2/3 of the outstanding capital stock. Is “X’s” contention legally February 19, 2005

First Pre-board Examination

tenable? A. No, the vote required is majority of the board and 2/3 OCS consenting B. Yes, the voting requirements is only 2/3 of the outstanding capital stock C. No, the required vote is MBD consented by MOCS D. No, the voting requirement is only majority of the Board of Directors 21. What is the voting proportion required enabling the corporation to invest, its funds in another corporation or business for a purpose similar to its primary purpose? A. majority vote of its Board of Directors B. majority of its Board of Directors and ratified by a majority of its outstanding capital stock C. majority vote of its Board of Directors and ratified by 2/3 vote of its outstanding capital stock D. majority of its Board of Directors and ratified by 2/3 of its stockholders Majority of the Stockholders 20. Any director of a corporation may be removed from office by a vote of A. Majority of the members of the board B. Majority of the stockholders present C. 2/3 of the stockholder present D. 2/3 of the outstanding capital stock 54. To adopt by-laws A. Majority of the outstanding capital stock or of the members B. Majority vote of the board and of the outstanding capital stock or of the members C. 2/3 of the outstanding capital stock or of the members D. Majority vote of the board and 2/3 of the outstanding capital stock or of the members 44. To revoke the power granted to the board to make by-laws. A. Majority vote of the board and of the outstanding capital stock of the members B. 2/3 of the outstanding capital stock or of the members C. Majority of the quorum of the board and 2/3 of the outstanding capital stock or of the members D. Majority of the outstanding capital stock or of the members Two-thirds of the Stockholders 56. To delegate to the board of directors or trustees the power to amend or repeal the by-laws or adopt new by-laws A. Majority of the outstanding capital stock or of the members Page 35 of 48

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B. Majority vote of the board and of the outstanding capital stock or of the members C. 2/3 of the outstanding capital stock or of the members D. Majority vote of the quorum of the board and 2/3 of the outstanding capital stock or of the members Majority of the Board & Two-thirds of the Stockholders 18. One of the following corporate acts requires a majority vote of the Board plus 2/3 of Outstanding Capital Stocks. a. Declaration of Property Dividends. c. Election of Corporate Officers. b. Declaration of Stock Dividends d. Filling up of Board Vacancy. 18. One of the following corporate acts require a majority of the Board and the vote or written assent of the stockholders representing at least 2/3 of the Outstanding Capital Stock. A. Declaration of the stock dividend B. Amendment of the Articles of Incorporation C. The power to extend corporate life D. The power to sell corporate property 42. “By the Board of Directors” and approval of not less than 2/3 of all stocks, outstanding and entitled to vote are the prescribed vote in three of the following, which is the exemption? A. adoption of new by-laws B. declaration of stock dividends C. to incur, create or increase bonded indebtedness D. to amend the articles of incorporation 20. Under the Corporation Code, a majority vote of the Board of Directors and assented to by 2/3 vote of the outstanding capital stockholders, as a rule, is necessary before an act can be considered a corporate act. Which among the following does not belong to this category? A. If the corporation would like to merge or consolidate itself with another corporation; B. If the corporation would invest corporate funds in another corporation the primary purpose of which is similar or related to the primary purpose of the investing corporation; C. If the corporation would enter into a management contract with another corporation where there exists interlocking directorates between the two corporation; D. If there is a need to declare cash and stock dividends to existing stockholders of the corporation Majority of the Board & Majority of the Stockholders 55. To amend or repeal the by-laws or adopt new by-laws February 19, 2005

A. B. C. D.

First Pre-board Examination

Majority vote of the outstanding capital stock or of the members Majority vote of the board and majority of the outstanding capital stock of the members 2/3 of the outstanding capital stock or of the members Majority vote of the board and 2/3 of the outstanding capital stock or of the members

19. What is the voting proportion required to enable the corporation to enter into a management contract with another corporation if there is no “interlocking directorate” between the two corporation? A. majority vote of its Board of Directors B. majority vote of its Board of Directors and ratified by a majority of its outstanding capital stock C. majority vote of its Board of Directors and ratified by 2/3 vote of its outstanding capital stock D. majority vote of its Board of Directors and ratified by 2/3 of its stockholders 21. In the matter of managing the business of the corporation, the exercise of corporate power and handling of corporate properties, this is supreme: A. 2/3 approval of the stockholders of the corporation B. majority vote of the outstanding capital stockholders of the corporation C. majority vote of the Board of Directors D. the President of the corporation 24. In which of the following corporate acts/powers, as exercised by the Board of Directors, is the consent of, ratification or approval by the outstanding capital stockholders (OCS) of the corporation necessary? A. The power to invest corporate funds in another corporation where the primary purpose of the two (both) corporations are similar or related to each other. B. The power to declare cash dividends only C. The power to change the par value of shares of the corporation D. The power to re-acquire the corporation’s own shares Other Topics Corporate Mergers and Consolidations How exercised Cost of appraisal Non-stock corporation 28. Any profit which it may earn shall be used for the furtherance of the purpose for which the Page 36 of 48

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corporation was organized as such profit is not distributable to its members A. Close corporation C. Private educational corporation B. Stock corporation D. Non-stock corporation Close corporations and religious corporations 45. A corporation where vacancies in the Board of Directors are filled only by the remaining members of the board is: A. Open corporation C. eleemosynary corporation B. Corporation sole D. close corporation 11. Three of the following may not incorporate as close corporations. Which is the exception? A. Insurance companies C. Telecommunication companies B. Homeowner’s association D. Schools or universities 17. Three of the following of institutions, using strict compliance with the provisions of the Corporation Code, cannot incorporate as close corporations. Which is an exception? A. A corporation to engage in the business of providing electricity to the public; B. A corporation to engage in the business of producing, bottling, selling and distributing beers and softdrinks; C. A corporation to engage in the business of gold mining; D. A corporation to engage in the business of secondary and tertiary level education 46. Features of transfer restriction of shares in close corporation A. For the restriction on the right to transfer, the same shall be stated in the Articles of Incorporation, By-Laws and Certificate of Stock B. The restriction shall not be more onerous than granting the existing stockholders of the corporation the option to purchase the shares of the transferring stock with such reasonable terms, conditions or period stated therein C. The transfer therefore, shall only be made to the close corporation or to the stockholders of the close corporation or to the stockholders of the close corporation D. All of the above Dissolution 18. There of the following, except one, are involuntary grounds for dissolution of corporations. Which is the exception? A. Failure to organize and commence business transaction within two years from the grant of certificate of incorporation; B. Expiration of the terms for which it was lawfully organized; February 19, 2005

First Pre-board Examination

C. The shortening o the corporate terms as approved by the Board, assented to by the CCS and approved by the SEC. D. By the repeal of the law which created the corporation Causes; methods Foreign corporations 43. Foreign corporation A. Are organized under laws of countries other than the Philippines B. Are not permitted to transact business in the Philippines until after they have obtained a license for the purpose from SEC C. If found to be engaged in business without any license, they are not permitted to sue in any court or administrative agency of the Philippines but may be used D. Are bound by all laws, rules and regulation applicable to domestic corporation of the same class but governed by laws of the country of incorporation as to creation, formation, organization, dissolution or such as fix the relations, liabilities, or duties of stockholders, members or officers of corporation to each other or to the corporation E. All of the above Promotion 17. Not a legal but business term, usefully summing up in a single word a number of business operation familiar to the commercial world by which a company is generally brought into existence A. Incorporation C. Commencement of business transaction B. Organization D. Promotion Comprehensive 19. Only one of the following statements is correct. A. Stockholder can inspect corporate books anytime he wants. B. The rule that no dividends can be declared w/o unrestricted retained earnings is not absolute. C. Pre-emptive right may not denied by the corporation D. A stockholder declared delinquent losses absolutely all his rights. 38. Which of the following statements is false? A. Stock dividend cannot be issued to a person who is not a stockholder in payment of the services rendered B. A stipulation that no stockholder shall transfer any share to any other person without Page 37 of 48

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notifying the corporate secretary in writing is void C. An ultra vires act of a corporation can be ratified with the consent of the majority of all stockholders when the rights of the state or of the creditors are not involved D. A stipulation that the corporation shall have the right to acquire for itself, under the same condition, the shares intended to be transferred is valid under the "doctrine of first refusal" 24. 1st Statement: The corporate secretary may be a director of the same corporation. 2nd Statement: Corporate director can vote by proxy in stockholders meeting. A. B. C. D. 1st Statement True False True False 2nd Statement True False False True 38. 1st Statement: Stocks issued by a corporation in excess of the amount prescribed or limited by its Articles of Incorporation are void except in the hands of a bona fide purchaser for value. 2nd Statement: Treasury shares are part of the outstanding capital stock of a corporation. A. B. C. D. st 1 Statement True False True False 2nd Statement True False False True 23. Corporation Law: 1st Statement: Stockholders in a corporation by estoppel are liable even to the extent of their separate property, as if they were partners in a general partnership 2nd Statement: Subscribers for stock shall be liable to the corporation for interest from the date of subscription even if not stated in the by-law. A. B. C. D. 1st Statement True False True False 2nd Statement True False False True 22. 1st Statement: A stock corporation cannot be converted into a non-stock corporation without dissolving the former. 2nd Statement: A limited partnership can be converted to a general partnership by amending its Certificate or Articles of Partnership A. B. C. D. 1st Statement True True False False 2nd Statement True False True False February 19, 2005

First Pre-board Examination

48. 1st Statement: All the issued stocks, exclusive of treasury stocks, of a close corporation shall be held of record by not more than 20 stockholders. 2nd Statement: Foreign corporations transacting business in the Philippines without license may not sue but may be sued in our courts. A. B. C. D. 1st Statement True False True False 2nd Statement True False False True 22. Statement No. 1: A corporation can be held liable for personal indebtedness of its stockholders, especially if he is the Chairman of the Board. Statement No. 2: Under all circumstances, directors serve at the pleasure of the stockholders of the corporation, and thus, may be removed with or without just cause. A. B. C. D. Statement No. 1 True False True False Statement No. 2 True False False True 21. Statement No. 1: Delinquent stockholders are entitled to dividend distribution minus the unpaid subscription. Statement No. 2: Treasury shares are not part of the outstanding capital stock of the corporation. A. B. C. D. Statement No. 1 True False True False Statement No. 2 True False False True 39. 1st statement: No cash dividends can be declared out of principal surplus as this could amount to declaration of dividend out of capital. 2nd statement: If the surplus profits of the stock corporation exceeded the level equal to its paid-up capital, the SEC may compel the corporation to declare dividends otherwise it will be liable for a surtax on improperly accumulated profits. Which of the following is correct? A. B. C. D. st 1 Statement False True False True 2nd Statement True True False False 24. 1st Statement: Under the Corporation Code, an executive committee if composed by at least 3 BOD members has the power to fill up vacancy in the Board of Directors. 2nd Statement:: If an instrument payable to order 30 days after sight, but undated, was delivered without endorsement, the transferee may require endorsement from the transferor, Page 38 of 48

BUSINESS LAW & TAXATION and if endorsed, only then is the holder considered as a holder in due course. A. B. C. st 1 Statement True False True 2nd Statement True False False

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D. False True

17. Statement No.1: The preemptive right of stockholders in close corporations shall extend to all shares to be issued, including re-issuance of treasury shares, unless the Articles of Incorporation so provide. Statement No.2: Non-voting shares like preferred shares have no right to vote in the amendment of by laws if provided in the Articles of Incorporation. A. Both statements are true B. Both statements are false C. Statement No. 1 is true while statement No. 2 is false D. Statement No. 1 is false while statement No. 2 is true 36. 1st Statement: Membership in a non-stock corporation, and all rights arising therefrom cannot be transferred even if provided in the articles of incorporation or by laws, because membership and the rights arising therefrom are personal and non-transferable. 2nd statement: Treasury stock sold for less than their par or issued value are considered “watered stock” and as such as prohibited by law. Which is correct? A. B. C. D. 1st Statement True False True False 2nd Statement True False False True 47. 1st Statement: Management of a corporation may be delegated to an executive committee, composed of not less than 3 members of the board to be appointed by the board provided the creation of such executive committee is provided in the by-laws. 2nd Statement: Stockholders’ or members meetings shall be held in the city or municipality where the principal office of the corporation is located and if practicable, in the principal office of the corporation. A. B. C. D. st 1 Statement True False True False 2nd Statement True False False True

zzz February 19, 2005

First Pre-board Examination

NEGOTIABLE INSTRUMENTS Introduction Applicability of the Negotiable Instruments Law Function and importance of negotiable instruments Characteristics or Features of negotiable instruments Common forms of negotiable instruments Instruments with limited negotiability Form and Interpretation Formal requirements of negotiability in general Negotiable instrument defined Formal requirements explained Non-negotiable instrument defined Promissory note defined Original parties to a promissory note Bill of exchange defined Original parties to a bill of exchange Theory of a bill of exchange Certainty of sum payable Sum to be paid with interest 50. B received an instrument from A on March 31, 2000. How much can B collect on April 30, 2000. “Pay to order amount only five thousand pesos (P5,000) with 12% interest.” A. P5,000 plus 30 – day interest B. B cannot collect because the instrument is defective C. P5,000 only D. P5,000 plus interest Sum to be paid by stated installments Sum to be paid by stated installments with acceleration clause Sum to be paid with exchange Exchange applicable only to foreign bills Sum to be paid with costs of collection or an attorney’s fee When promissory note contains a promise to pay When bill of exchange contains an order to pay Indication of a particular fund out of which reimbursements is to be made 49. 1st Statement: An order or promise to pay is unconditional though coupled with an indication of particular fund out of which reimbursement is to be made, or particular account to be debited with the amount. Page 39 of 48

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2nd Statement: An order or promise to pay out a particular fund is not unconditional. A. B. C. D. st 1 Statement True False True False 2nd Statement True False False True Indication of a particular account to be debited with the amount Statement of transaction which gives rise to instrument Certainty of time of payment Acts in addition to payment of money Effect of omission of date Effect of omission of value Effect of omission of place Effect of presence of seal Effect of particular kind of current money payable When instrument payable on demand When instrument payable to order Effect where payee not named or described When instrument payable to bearer Substance criterion of negotiability Presumption as to date Date on instruments payable at a fixed future date Date in instruments payable on demand Meaning of ante-dating and post-dating Effect of ante-dating and post-dating When date may be inserted Effect of insertion of wrong date Steps in issuance of negotiable instrument Application of Section 14, 15 and 16 Rules where instrument incomplete but delivered Rules where instrument incomplete and undelivered Rules where instrument mechanically compute by undelivered Rules of construction in case of ambiguity or omission Persons liable on an instrument; Signing in a trade or assumed name Signature by an authorized agent 27. A promissory note is signed in behalf of the principal by an agent as follows: Juan dela Cruz Per Procuration: Manuel S. Canet This operates as notice that the agent has: February 19, 2005

First Pre-board Examination

A. Unlimited authority to sign for and in behalf of the principal B. A limited authority to sign, and the principal is bound only in case the agent in so signing noted within the actual limits of his authority C. A limited authority to sign, but the principal is bound even in case the agent in so signing acted outside the actual limits of his authority D. Answer not given When agent may escape personal liability Use of descriptive words without disclosure of principal Meaning of procuration; Effect of signature by procuration Effect of endorsement by a minor; Effect of endorsement by a corporation Forgery explained Application of Section 23; Cases of forgery in general; Extent of the effect of forgery; Exceptions to the general rule; Persons precluded from setting up the defense of forgery; Rights of parties in cases of forged endorsements Non-negotiable Instruments Examples of Negotiable Instruments 26. B bought a used cellphone from S. S preferred cash but B is a friend so S accepted B’s promissory note for P10,000.00. S thought of converting the note into cash by indorsing it to his brother X. The promissory note is a piece of paper with the following hand-printed notation: “B WILL PAY S OR HOLDER TEN THOUSAND PESOS IN PAYMENT FOR HIS CELLPHONE 1 WEEK FROM TODAY”. Below this notation is B’s signature with “8/1/00” next to it, indicating the date of the promissory note. When S presented B’s note to X, the latter said it was not a negotiable instrument under the law and so could not be a valid substitute for cash. Which of the following statements is correct? A. The instrument is non-negotiable because it is not sign by the maker. B. The instrument is non-negotiable because the cause or consideration paid is not stated in the instrument. C. The instrument is negotiable because the requisites of negotiability are present. D. The instrument is non-negotiable because it is not payable to order or bearer Examples of Non-negotiable Instruments 45. Item No1: "To X: Pay to P on demand the amount of P5.000.00 and reimburse yourself from the proceeds of the sale of my car which is still in your possession. "Sgd.: Drawer" Item No. 2: "I promise to pay X the amount of P5.000.00 on demand." Sgd.: M. A. B. C. D. Item No. 1 Negotiable Non-negotiable Non-negotiable Negotiable Item No. 2 Negotiable Non-negotiable Negotiable Non-negotiable Page 40 of 48

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46. Which of the following examples is not negotiable? A. “To X: PLEASE pay to the order of Y P5,000.00 on demand. “Sgd.: D B. “To X: Pay to the order of yourself the amount of P50,000 in two EQUAL MONTHLY INSTALLMENTS beginning May 31, 2002. “ Sgd.: D C. Pay to P or bearer the amount of P50,000 on June 25, 2002 or deliver to him ten (10) pigs AT HIS ELECTION.” Sgd.: D D. “I promise to pay X or order P5,000 AS SOON AS I HAVE MONEY.” Sgd.: M 51. “I promise to pay to the order of Pedro San Pedro only the sum of $10,000.” (Sgd.) M. The words “Pedro San Pedro only” are written in the handwriting of M. The instrument is A. Negotiable, convert dollars into legal tender B. Non-negotiable, because the instrument is payable in dollars C. Non-negotiable, indorsement is restrictive D. Non-negotiable, payable only to a specified person. 52. 1st Statement: “I promise to pay B the sum of P20,000, three (3) days from date,” Sgd. A (The instrument is not dated) 2nd Statement: “I promise to pay to the order of B or C the sum of P50,000. Sgd. A. A. Both are negotiable B. Both are not-negotiable C. First is not negotiable while second is negotiable D. First is negotiable while second is not Consideration Meaning of consideration in general; Presumption of consideration Adequacy of consideration; Antecedent or pre-existing debt What constitutes holder of value Where a holder has lien on instrument Meaning of absence or want of consideration; Meaning of failure of consideration Liability of accommodation party Meaning of “without receiving value therefore” Kinds of accommodation party Accommodation party and regular party distinguished Negotiation Meaning of negotiation Methods of negotiation February 19, 2005

First Pre-board Examination

Payment of instrument by drawee not negotiation; Meaning of assignment Negotiation and assignment distinguished Can there be a negotiation to a payee? Endorsements Meaning and nature of endorsement; Form of endorsement; Place of endorsement Endorsement must be of entire instrument Endorsement to two or more indorsees severally When partial endorsement is allowed Special endorsement and Blank endorsement Conversion of blank endorsement to special endorsement Restrictive endorsement, Effect of absence of words of negotiability Rights of indorsee in restrictive endorsement Qualified endorsement and its effect Conditional and absolute endorsements; Different combinations of endorsements 30. M, maker, P payee. Instrument is indorsed to “pay A, if he passes the CPA exams”. Which of the following is incorrect? A. The conditional indorsement will not affect the negotiability of the instrument B. Before the release of the result of the exams M may pay the holder C. Before the result of the exams, M may refuse to pay the holder because the condition is not yet fulfilled D. None of the above 53. Identify the following indorsement “Pay to A, without recourse” Sgd. P A. Qualified B. Blank

C. Special Qualified indorsement D. Qualified restrictive

54. Identify the following indorsement. “Pay to A if he completes work today, without recourse,” Signed P. A. Qualified indorsement B. Special and qualified indorsement C. Restrictive and qualified D. Special, conditional and qualified endorsement 55. 1st Statement: Where a negotiable instrument is indorsed conditionally, the person liable on the instrument may disregard the condition and legally pay the same. Page 41 of 48

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2nd Statement: An instrument which is negotiable in origin continues to be negotiable unless restrictively indorsed or discharged by payment. A. B. C. D. 1st Statement True False True False 2nd Statement True False False True 28. This instrument was written on the negotiable instrument itself: “Pay to Juan San Juan, or order, provided he passes the CPA examination 2003. Sgd. Pedro San Pedro.” This kind of indorsement is called A. Conditional indorsement C. Special indorsement B. Restrictively indorsement D. Combination of A and C Effect of special endorsement where instrument originally payable to bearer; Application of Sec. 40 Endorsement where instrument payable to two or more payees or indorsees; When joint endorsement by all payees or indorsees not required 63. One of the following indorsement is a valid negotiation A. Pay to A P6,000 (amount of the instrument is P10,000) B. Pay to A P7,000 and to B, the balance (amount of the note is P10,000) C. Pay to A P8,000 out of the amount of P10,000 of this note D. Pay to A and B P10,000 Endorsement where instrument drawn or indorsed to a person as cashier Endorsement where name misspelled, etc. Endorsement in representation capacity Presumption as to time of endorsement Presumption as to place of endorsement Continuation of negotiable character of originally negotiable instrument When holder may strike out endorsement Effect of transfer without endorsement; Effect of endorsement after transfer 51. C issues a bill payable to the order of R. Later R without endorsing the bill transfer for a consideration said bill to M. The following, except one, are the valid effects of the transfer A. M becomes a holder B. M acquires the right to have the endorsement of R C. The transfer vests in M such title as R had thereon D. The bill is merely assigned and not negotiated. Right of prior party to negotiate; Limitations on negotiation Comprehensive February 19, 2005

First Pre-board Examination

29. Negotiable instruments; effects of indorsement 1. Pay to A P6,000 and B P4,000 2. Pay to A and B P10,000 A. Both indorsement are valid C. Both are invalid B. No. 1 is valid; No. 2 is invalid D. No. 1 is invalid; No. 2 is valid 58. M makes a negotiable note in favor of P payable on December 25, 1997, with the following successive indorsements. P to A, A to B, B to C, C to D. On the due date M is paying D, but D extends the payment up to December 25, 1998. Which of the following is incorrect. A. If M become insolvent on December 25, 1998, P, A, B, C are discharged of their obligation B. “If the indorsers consented to the extension of time, and M become insolvent the indorsers are still liable C. If before the extension date, D cancels the signature of P as indorser, P, A, B, C and the instrument are discharged D. None of the above 64. C issues a bill payable to the order of R. Later R without endorsing the bill transferred for a consideration said bill to M. The following except one is the valid effects of the transfer A. M becomes a holder B. M acquires the right to have the endorsement of R C. The transfer vest in M such title as R had thereon D. The bill is merely assigned and not negotiated 47. One of the following indorsements is a valid negotiation A. Pay to A P6.000 (amount of the instrument is P10,000) B. Pay to A P7.000 and to B, the balance (amount of the note is P10,000) C. Pay to A P8.000 out of the amount of P10,000 of this note D. Pay to A and B P10,000 48. Under the Negotiable Instrument Law, which of the following statements best describes the effect of a person endorsing a check "without recourse"? A. The person has no liability to prior endorsers B. The person makes no promise or guarantee of payment on dishonor C. The person gives no warranty protection to later transferees D. The person converts the check into order paper. 31. Three of the following are requisites before a person is considered irregular or anomalous indorser. Which of the following is the exception? Page 42 of 48

BUSINESS LAW & TAXATION A. Not a party to the instrument B. Person principally liable

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71. A issued a negotiable promissory note to the order of B for P10,000 payable after 30days after date. Later B indorsed it to C. Then X stole the note from C, forged the signature of C and negotiated it to D, and D to E, E to F, the holder. On maturity of the note, which of the following statements is not correct and invalid? A. F cannot collect from C because it was C’s signature which was forged B. F cannot collect from A because A cannot put up forgery as his defense C. F can collect from either D or E, because their signatures are genuine and the note is operative against them D. F cannot collect from B because B is a party prior to the forgery 35. “A” issued a promissory note payable to “B” or bearer. “A” delivered the note to “B”. “B” indorsed the note to “C”. “C” placed the note in his drawer, which was stolen by the janitor “X”. “X” indorsed the note to “D” by forging “C’s” signature. “D” indorse the note to “E” who in turn delivered the note to “F”, a holder in due course, without indorsement. Which of the following statements is false. A. A is liable to F despite the forgery committed because F is a holder in due course B. B is liable to F because as an indorser he warrants that the instrument is genuine C. C cannot set up forgery because the instrument is payable to bearer negotiable only by delivery, the forged signature of “X” is not necessary. D. C can set up the defense of forgery because his signature is forged by X. Rights of the Holder Rights of holder in general; Right of transferee of unindorsed instrument What constitutes a holder in due course; Payee as holder in due course; Drawee as holder in due course; Instrument complete and regular upon its face; Holder without notice of dishonor; Holder in good faith; Holder for value; Holder without notice of infirmity of instrument or defect of title 65. When is a person holder in due course? (Which is false) A. Complete and regular upon its face B. He became holder of it after it is overdue C. He acquired it in good faith and for value D. If no notice of defect and infirmity 66. Under the Negotiable Instrument Law, which of the following requirements must be met for a transferee of order paper to become a holder? February 19, 2005

I. II. A. B.

First Pre-board Examination

Transferee in possession of the note Indorsement of transferor and delivery to the transferee I only C. Both I and II II only D. Neither I and II

67. The value requirement in determining whether a person is a holder in due course with respect to a check will not be satisfied by the taking of the check A. As security for an obligation to the extent of the obligation B. As payment for an antecedent debt C. In exchange for another negotiable instrument D. In exchange for a promise to perform services in the future 61. Under the Negotiable Instrument Law which of the following requirements must be met for a person to be a holder in due course of a promissory note? A. The note must be payable to bearer B. All prior holders must have been holders in due course C. The holder must be the payee of the note D. None of the above 53. M issued and delivered to P or order a blank promissory note with a specific instruction that the latter must fill it up for a maximum of P10,000. Upon receipt thereof, P completed the instrument by putting P100,000 as the sum payable and properly indorsed it to A who qualifies as a holder in due course. At maturity, which statement is correct? A. A can get from M P10,000 only as this was the instruction or authority given by M to P. B. A can get the entire P100,000.00 as this was the amount originally appearing on the face of the instrument C. The instrument is invalidated in the hands of A as the same was not completed in accordance with the strict authority of M D. A gets nothing Holder in due course in instrument payable on demand Effect of notice before full payment When title of a person defective What constitutes notice of infirmity or defect Rights of a holder in due course; Real defenses available against a holder in due course Comprehensive 59. Holder H altered the amount of a negotiable note from P10,000 to P110,000 then negotiated to note to P. Page 43 of 48

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A. If P is a holder in due course, he can require the maker to pay P110,000 B. If P is not a holder in due course, he can require the maker to pay only the original sum of P10,000 C. P cannot require the maker to pay because of forgery whether or not he is a holder in due course D. P can require the maker to pay P10,000 if P is a holder in due course 70. M issued and delivered to P or order a promissory note which was complete in all its details and the amount was for P10,000.00 which the payee P altered to P100,000.00. What will be the correct statement? A. A, at maturity, can get from M P10,000 only as this was the original tenor of the instrument B. A can get the entire P100,000 as this was the amount originally appearing on the face of the instrument C. The instrument is validated in the hands of A as the same was not completed in accordance with the strict authority of M D. A gets nothing 62. 1st Statement: A holder for value is an endorsee who has both the legal title and the beneficial interest to the instrument and is subject to both real and personal defenses available against him. 2nd Statement: A holder in due course is one who possesses both the legal and beneficial interest to the instrument but is subject to personal defenses. A. B. C. D. 1st Statement False False True True 2nd Statement False True True False Defense in general Fraud in factum and fraud in inducement distinguished Rights of holder not in due course Rights of purchaser from a holder in due course When holder presumed a holder in due course Liabilities of Parties Classification of parties according to liability Primary party and secondary party distinguished Liability of maker Liability of drawer; Drawer distinguished from maker February 19, 2005

First Pre-board Examination

Liability of acceptor; Liability depends on tenor of acceptance; Warranties of the acceptor 64. Which is not correct? The acceptor by accepting the instrument. A. Admits the existence of the drawer, the genuineness of signature and his capacity and authority to draw the instrument B. Admits the existence of the payee and his capacity to indorse C. Engages that he will pay it according to the tenor of his acceptance D. Admits the existence of the indorser, the genuineness of his signature and his capacity and authority to draw the instrument When person deemed an indorser; When a person liable as guarantor or surety When a person an irregular or anomalous indorser; Rules as to liability of irregular or anomalous indorser; Warranties of irregular indorser Negotiation by delivery/qualified endorsement; Liability of one negotiating by delivery and of qualified indorser; Sale of public or corporate securities 57. In case of qualified indorsement, which is not correct? A. Constitutes the indorser a mere assignor of the title to the instrument B. It does not impair the negotiable character of the instrument C. The qualified indorser is not liable if the marker is insolvent D. At the time of his indorsement, the instrument is valid and subsisting 56. Every person negotiating an instrument by delivery or by qualified indorsement warrants the following. Which does not belong to the warranties? A. That at the time of his indorsement the instrument is valid and subsisting B. That the instrument is genuine and in all respect what it purports to be C. That he has good title to it and that all prior parties and capacity to contract D. That he has no knowledge of any fact which would impair the validity or the instrument or render it valueless. Liability of general or unqualified indorser; Conditions precedent to make indorser liable; Indorser and drawer distinguished; General indorser and irregular indorser distinguished Liability of indorser or bearer instrument Order of liability among indorsers; Liability of joint payees or joint indorsees who indorse Liability of an agent or broker Comprehensive 66. A person whose signature does not appear on an instrument is not liable thereon, except. A. Where a duly authorized agent signed for him B. Where he forges the signature of another person Page 44 of 48

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C. Where he signs in an assumed or trade name D. All of the above 69. A executed a bill of exchange in favor of B for P10,000. B, altered the amount to P100,000 and presented the bill to C, the drawee who accepted the bill. Thereafter the bill was negotiated by B to C. Which is correct? A. The acceptor is liable up to P10,000 only B. The acceptor is not liable because of alteration C. The acceptor is liable only up to P10,000 except if D is a holder in due course in which case A is liable up to P100,000 D. The acceptor by accepting the bill is liable according to the tenor of his acceptance, that is P100,000. Presentment for Payment Meaning of presentment for payment; Presentment for payment to person primarily liable not necessary; Presentment for payment to persons secondarily liable necessary Date of presentment of instrument Requisites for a sufficient presentment for payment Place of presentment Manner of presentment Presentment where instrument payable at a bank Presentment where principal debtor is dead Presentment to persons liable as partners Presentment to joint debtors When presentment not required to charge drawer When presentment not required to charge indorser When delay in making presentment excused When presentment may be dispensed When instrument dishonored by non-payment Effect of dishonor by non-payment Time of maturity of instrument; Instrument falling due or becoming payable on Saturday Computation of time of maturity Rule where instrument payable at a bank Requisites of payment in due course Notice of Dishonor Meaning of notice of dishonor; Object of notice of dishonor; Effect of failure to give notice of February 19, 2005

First Pre-board Examination

dishonor; When notice of dishonor not necessary By whom notice of dishonor given Authority to give notice not necessary Effect of notice given by holder Effect of notice give by party entitled thereto When and to whom agent may give notice Form of notice; When notice sufficient Person to be given notice Notice where party is dead Notice to partners Notice to joint parties Notice of bankruptcy Time within which notice must be given Notice where parties reside in same place Notice where parties reside in different places When sender deemed to have given due notice When notice deemed to have been deposited Time of notice to subsequent party Place where notice must be given Waiver of notice of dishonor Persons affected by waiver Effect of waiver of protest When notice dispensed with When delay in giving notice excused When notice to drawer not required When notice to indorser not required Effect where notice of non-acceptance already given Effect of omission to give notice of non-acceptance When protest required and not required; summary of rules s to notice of dishonor Discharge of Negotiable Instrument Meaning and effect of discharge of instrument Methods for discharge of instrument 33. A makes a negotiable promissory note in favor of B payable on November 1, 2002. B negotiates the note to C. The note is discharged if A. B pays C on November 1, 2002 C. A pays C on November 10, 2002 B. A pays C on October 25, 2002 D. Letter B or C Page 45 of 48

BUSINESS LAW & TAXATION

CPA Review School of the Philippines

Methods of discharge of secondary parties 34. M makes a negotiable note in favor of P payable on December 25, 2002, with the following successive indorsements. P to A, A to B, B to C, C to D. On the due date M is paying D, but D extends the payment up to December 25, 2003. Which of the following is incorrect? A. If M becomes insolvent on December 25, 2003, P, A, B, C are discharged of their obligation B. If the indorsers consented to the extension of time, and M becoming insolvent the indorsers are still liable C. If before the extension date, D cancels the signature of P as indorser P, A, B, C and the instrument are discharged. D. none of the above Effect of reacquisition by prior party Effect of renunciation 63. In the renunciation by the holder of his rights against any party to the instrument, which of the following statements is false? A. If the instrument, is delivered to the person primarily liable without collecting, it constitutes oral renunciation B. If renunciation is made in favor of any party secondarily liable, all parties subsequent to him are discharged from liability C. Renunciation will not affect the rights of a holder in due course D. If the renunciation is made in favor of the party primarily liable it must be made before, at or after maturity date. When cancellation inoperative Meaning of material alteration; Effect of alteration of instrument When alteration is material Comprehensive 54. Discharge of promissory notes. Which is the exception? A. If the holder intentionally shredded and burned the instrument B. If the instrument is paid to the holder by the party accommodated C. If the instrument is paid to the holder by the accommodation maker D. If the maker of the instrument became the holder thereof 32. Which of the following instances does not discharge a negotiable instrument? A. Payment by the maker of a promissory note before maturity B. Intentional cancellation of the instrument by the holder C. Payment by party primarily liable to the holder or his authorized representative February 19, 2005

First Pre-board Examination

D. Voluntary surrender of the instrument by the holder to the maker without collecting Comprehensive 44. Not a method of transferring commercial papers A. Assignment C. Indorsement and delivery B. Negotiation D. None of the above BILLS OF EXCHANGE Form and Interpretation Bill of exchange and promissory note distinguished When a promissory note like a bill of exchange; When a bill of exchange like a promissory note Other classes of bills of exchange 57. A bill of exchange to which no document is attached when presentment for payment or acceptance is made A. Trade acceptance C. Clean bill of exchange B. Bank acceptance D. Documentary bill of exchange Status of drawee prior to acceptance of payment Bill addressed to several drawees Inland and foreign bills of exchange explained; When foreign bill may be treated as inland bill When bill may be treated as a note 68. Where in a bill the drawer and the drawee are the same person or where the drawee is a fictitious person, or a person not having capacity to contract, the holder, at his option, may treat the instrument as A. Dishonored B. Bill of exchange C. Promissory note D. Either a bill of exchange or a promissory note Referee in case of need 65. 1st Statement: The referee in case of need is liable on the instrument and if he refuses to pay he maybe sued in court. 2nd Statement: The avalista is liable on his written obligation and if he refuses to pay he maybe sued in court. A. B. C. D. Page 46 of 48

BUSINESS LAW & TAXATION 1st Statement 2nd Statement

True True

CPA Review School of the Philippines True False

False True

Comprehensive 67. Which of the following is not a characteristics of a Bill of Exchange A. Original parties are the drawer, drawee, and payee B. Acceptance is generally required C. Drawer is primarily liable D. Contains an unconditional order

False False

First Pre-board Examination

Protest Meaning of protest; Reasons for requiring protest in case of foreign bills Form and contents of certificate of protest; Purpose of certificate of protest By whom protest made When protest to be made Where protest to be made Protest both for non-acceptance and non-payment Protest for better security before maturity When protest dispensed with Protest where bill is lost, etc.; Protest and notice of dishonor distinguished

Acceptance Meaning of acceptance Object and effect of acceptance Formal requisites of acceptance How acceptance made Right of holder to acceptance on face of bill Acceptance by separate instrument when promise to accept equivalent to acceptance Time allowed drawee to accept Constructive acceptance When acceptance may be made Kinds of acceptance Right of holder to general acceptance

Acceptance for Honor Meaning of acceptance for honor; Purpose of acceptance for honor; Requisite of acceptance for honor Formal requisites of acceptance for honor When an acceptance for honor deemed for honor of drawer Rights and liability of acceptor for honor Agreement of acceptor for honor Maturity of bill payable after sight, accepted for honor Protest for non-payment of bill accepted for honor when presentment for payment to acceptor for honor made when delay in making presentment excused Protest for non-payment by acceptor for honor; Acceptance for honor and ordinary acceptance distinguished

Presentment for Acceptance Meaning of presentment for acceptance When presentment for acceptance necessary When presentment for acceptance not necessary Necessity for presentment for acceptance or negotiation within a reasonable time How presentment for acceptance made Days when presentment for acceptance may be made When time for presentment for acceptance insufficient When presentment for acceptance excused When bill dishonored by non-acceptance Duty of holder in case of non-acceptance Rights of holder where bill not accepted

Payment for Honor Meaning of payment for honor; who may make payment for honor; Purpose and function of payment for honor Requisites of valid payment for honor Preference of parties offering to pay for honor Effects where bill is paid for honor Effect of holder’s refusal to receive payment Rights of payer for honor; Payment for honor and acceptance for honor distinguished

February 19, 2005

Bills in Set Bill in a set defined; Purpose of bills in set Rights of holders where different parts of a set are negotiated Liability of indorser of different parts of a set Page 47 of 48

BUSINESS LAW & TAXATION

CPA Review School of the Philippines

Liability of acceptor of different parts of a set Liability of acceptor who pays part of a set Effect of discharging a part of a set

First Pre-board Examination

PLEDGE & MORTGAGE

Promissory Notes and Checks Note payable to maker’s order; Special types of promissory notes Check defined; Check and ordinary bill of exchange distinguished; Special types of checks When drawer of check discharged form liability; Discharge of drawer and indorser in case presentment delayed Effects of certification of checks; Purpose of certifying checks Effect where holder procures certification of check; Effect where certification obtained not by holder Right before acceptance or certification of check; When check operates as assignment of drawer’s funds; Cases when bank may refuse payment; Relation between depositor and bank Comprehensive 72. 1st Statement: A check must be presented for payment within a reasonable time after its last negotiation. 2nd Statement: A Bill of Exchange must be presented for payment within a reasonable time after its last negotiation. A. B. C. D. st 1 Statement True True False False 2nd Statement True False True False 26. Which of the following is true? A. If a check is not dates it is not negotiable B. If a bill of exchange states that it is payable after its date and the date is left off, it is not negotiable. C. One receiving negotiable promissory note payable to order by delivery is called an assignee. D. Instrument is payable to John Doe or order is an instrument payable to bearer. xxx CONTRACT OF SALE CREDIT TRANSACTIONS AGENCY February 19, 2005

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