CPA REG Business law: practice questions with answers

Question 1

Westbrook Hardware Co. hired Anjali Nandakumar to manage its new store. Her written employment agreement authorizes her to "purchase inventory and operate the store" and says nothing about staff. In her first week she hired two cashiers at the local going wage. Westbrook's owner learned of the hiring only later. Which type of authority did Nandakumar use when she hired the cashiers?

1. A Express actual authority, because her agreement is in writing
2. B Apparent authority, because the cashiers reasonably believed she could hire them
3. C Authority by ratification, because the owner did not object afterwards
4. D Implied actual authority, because hiring staff is needed to run the store

Show the answer

Answer: D. Actual authority is either express (stated by the principal in words) or implied (the authority to do what is reasonably necessary, usual or customary to carry out the express authority).

Nandakumar was expressly authorized to "operate the store". A store cannot be operated without ordinary staff, so hiring cashiers at the going wage falls within her implied actual authority. Westbrook is bound by the employment contracts even though the agreement did not mention hiring.

Apparent authority and ratification are needed only where the agent lacked actual authority. (Common-law agency; Restatement (Third) of Agency §2.02.)

Question 2

Corriemoor Properties LLC offered in writing to sell an office building to Vance Holdings Inc. for $750,000. Vance replied in writing: "We accept, provided you replace the roof before closing." Corriemoor did not respond. Two days later Vance wrote: "We withdraw our condition and accept your offer of $750,000." Corriemoor has since received a higher bid. Is Corriemoor bound to sell to Vance?

1. A Yes, because Vance's first reply accepted the offer and merely asked about the roof
2. B Yes, because Vance's second letter accepted the offer before Corriemoor revoked it
3. C Yes, because Corriemoor's silence after the first reply amounted to agreement
4. D No, because Vance's first reply was a counteroffer that ended Corriemoor's offer

Show the answer

Answer: D. A sale of real estate is governed by common law, which applies the mirror image rule: an acceptance must match the offer exactly.

1. Vance's first reply made acceptance conditional on a new term (a new roof). That is a counteroffer, which operates as a rejection and terminates Corriemoor's offer.
2. Corriemoor did not accept the counteroffer; silence is not acceptance.
3. Vance's second letter cannot accept an offer that no longer exists. It is a new offer at $750,000, which Corriemoor is free to reject.

Corriemoor is not bound. (Restatement (Second) of Contracts §§39, 59.)

Question 3

Rocha Bakery Inc. owes Kline Supply Co. $25,000. Rocha sells its bakery business to Pembroke Foods LLC, which agrees in the signed sale contract to pay the Kline debt. Kline is told of the sale. In which situation is Rocha discharged from its liability to Kline?

1. A Pembroke assumes the debt in the signed contract for the sale of the business
2. B Rocha gives Kline written notice that Pembroke has assumed the debt
3. C All three agree that Pembroke replaces Rocha and Rocha is released
4. D Pembroke makes the first monthly payment and Kline accepts it

Show the answer

Answer: C. When a debtor transfers its obligation:

- Assumption / delegation (Rocha and Pembroke agree): Pembroke becomes liable, and Kline can enforce the promise as a third-party beneficiary, but Rocha stays liable as a surety-like party.
- Novation (all three agree): a new contract substitutes Pembroke for Rocha and discharges Rocha. The creditor's consent to release the original debtor is essential.

Neither notice to Kline nor Kline's acceptance of Pembroke's payments amounts to that consent. Only the three-party agreement releases Rocha. (Restatement (Second) of Contracts §§279–280, 318.)

Question 4

In 2026, Ardent Valve Co. paid Lucinda Ferro, its operations director, wages of $230,000. She had no other employer. For 2026, the Social Security tax rate is 6.2% each for employer and employee on wages up to $184,500, the Medicare tax rate is 1.45% each with no wage limit, and the Additional Medicare Tax is 0.9% on wages over $200,000. What is Ardent's employer share of FICA tax on Lucinda's 2026 wages?

1. A $14,114
2. B $14,774
3. C $15,044
4. D $17,595

Show the answer

Answer: B. The employer pays Social Security tax only on wages up to the wage base, but Medicare tax on all wages; the Additional Medicare Tax is imposed on the employee only (IRC §§3111(a)-(b), 3101(b)(2), 3121(a)(1)).

Social Security: 6.2% x $184,500 = $11,439

Medicare: 1.45% x $230,000 = $3,335

Employer share = $11,439 + $3,335 = $14,774

(Lucinda's own withholding is $14,774 plus 0.9% x ($230,000 - $200,000) = $270, a total of $15,044; the employer does not match the $270.)

Question 5

Fenwick Outfitters Inc., a retailer, has 15 creditors and is generally not paying its debts as they become due. Some of its creditors want to file an involuntary Chapter 7 petition against it. For petitions filed in 2026, the qualifying unsecured claims must total at least $21,050. Which group of creditors can file the petition?

1. A Two unsecured creditors whose undisputed claims are $30,000 and $15,000
2. B Three unsecured creditors whose undisputed claims are $9,000, $7,000 and $4,900
3. C Three unsecured creditors whose claims are $12,000, $8,000 and $6,000, with the $8,000 claim in bona fide dispute
4. D Three unsecured creditors whose undisputed claims are $9,200, $7,400 and $4,600

Show the answer

Answer: D. Under 11 USC §303(b), if the debtor has 12 or more creditors, an involuntary petition needs at least three creditors holding claims that are not contingent and not subject to a bona fide dispute, and that total at least $21,050 more than any liens securing them. (With fewer than 12 creditors, one such creditor is enough.)

- Two creditors: too few petitioners.
- $9,000 + $7,000 + $4,900 = $20,900: below $21,050.
- Disputed $8,000 claim: that creditor does not qualify; two remain, with $18,000.
- $9,200 + $7,400 + $4,600 = $21,200: three qualifying creditors and at least $21,050, so this group can file.

Question 6

Hana Kimura is a limited partner in Westvale Storage LP, formed in a state that has adopted the 2001 uniform limited partnership act. She contributed $75,000. She regularly advises the general partner on marketing and votes on major decisions as the partnership agreement allows. Westvale is now insolvent, and its creditors seek to recover from Hana's personal assets. Which statement is correct?

1. A Hana is personally liable for Westvale's debts jointly with the general partner, up to twice her contribution.
2. B Hana is not personally liable for Westvale's debts beyond her contribution, even though she took part in management.
3. C Hana is personally liable only for the debts Westvale incurred while she voted on major decisions.
4. D Hana is personally liable for all of Westvale's debts, because she took part in control of the business.

Show the answer

Answer: B. In a limited partnership, the general partner has unlimited personal liability for partnership obligations, while a limited partner risks only her contribution. Under the 2001 revision of the uniform limited partnership act (§303), an obligation of the limited partnership is not an obligation of a limited partner, and a limited partner is not personally liable for it even if the limited partner participates in the management and control of the partnership.

Older versions (the 1976/1985 RULPA control rule) could make a limited partner who took part in control liable to persons who reasonably believed she was a general partner. That rule does not apply here, so Hana's loss is limited to her $75,000 contribution.