CA Business Law 4 — Questions and Answers
Question 1: A corporation issues stock at $10 par value but sells it for $15. How is the $5 excess recorded?
- As retained earnings
- As additional paid-in capital (Correct answer)
- As a liability
- As goodwill
Correct answer: As additional paid-in capital
The amount received above par value is recorded as additional paid-in capital (or capital surplus) on the balance sheet.
Question 2: Under contract law, which of the following is an example of an illusory promise?
- 'I will pay you $500 to paint my house.'
- 'I will buy your car if I feel like it.' (Correct answer)
- 'I promise to deliver goods within 30 days.'
- 'I will hire you for one year starting Monday.'
Correct answer: 'I will buy your car if I feel like it.'
An illusory promise is one that appears to bind a party but leaves them complete discretion to perform or not, making it unenforceable as consideration.
Question 3: Which remedy for breach of contract aims to place the non-breaching party in the position they would have been in had the contract been fully performed?
- Restitution damages
- Nominal damages
- Expectation (benefit-of-the-bargain) damages (Correct answer)
- Liquidated damages
Correct answer: Expectation (benefit-of-the-bargain) damages
Expectation damages compensate the non-breaching party for the benefit they expected to receive, putting them in the position they would have occupied had the contract been performed.
Question 4: A director of a corporation personally benefits from a transaction with the corporation without board approval. This is most likely a violation of:
- The duty of care
- The duty of loyalty (Correct answer)
- The business judgment rule
- The ultra vires doctrine
Correct answer: The duty of loyalty
The duty of loyalty requires directors to put the corporation's interests above their own and prohibits self-dealing without proper disclosure and approval.
Question 5: Which type of negotiable instrument is an unconditional written order by one party directing another to pay a fixed sum to a third party?
- Promissory note
- Certificate of deposit
- Draft (bill of exchange) (Correct answer)
- Debenture
Correct answer: Draft (bill of exchange)
A draft is a written order (three-party instrument) where the drawer directs the drawee to pay the payee, making it the classic bill of exchange.
Question 6: Under the Sherman Antitrust Act, which type of agreement between competitors is considered illegal per se without any analysis of market effects?
- Exclusive dealing arrangements
- Price-fixing among horizontal competitors (Correct answer)
- Vertical territorial restrictions
- Tying arrangements between non-competing goods
Correct answer: Price-fixing among horizontal competitors
Horizontal price-fixing—agreements among competing sellers to set prices—is per se illegal under the Sherman Act without requiring proof of actual harm.
Question 7: Which of the following best defines 'piercing the corporate veil'?
- Dissolving a corporation through bankruptcy
- Holding shareholders personally liable for corporate debts (Correct answer)
- Converting a corporation to an LLC
- Transferring corporate assets to a parent company
Correct answer: Holding shareholders personally liable for corporate debts
Piercing the corporate veil is the judicial remedy that disregards the corporate form and holds shareholders personally liable, typically when the corporation is used as an alter ego or to commit fraud.
CA Business Law 4
A corporation issues stock at $10 par value but sells it for $15.
How is the $5 excess recorded?