CPA Quiz: Identify Negotiable Instruments
20 questions · exam conditions
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Identify Negotiable InstrumentsQuestion 1 of 20

Which payee line alone makes a draft nonnegotiable?

Payable to cash
Payable to Jane
Pay to Jane's order
Payable to bearer
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CPA Quiz

CPA Quiz: Identify Negotiable Instruments

Practice Identify Negotiable Instruments in CPA with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on Identify Negotiable Instruments, giving you a quick way to practice the rules, question types, and explanations that matter most for CPA.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

All questions

Question 1

Which payee line alone makes a draft nonnegotiable?

  1. Payable to cash
  2. Payable to Jane (correct answer)
  3. Pay to Jane's order
  4. Payable to bearer
Explanation: A negotiable draft must be payable to order or bearer. Naming Jane without 'order' or 'bearer' makes it payable only to Jane, not negotiable. The tempting 'cash' is wrong because payable to cash is payable to bearer and therefore negotiable.

Question 2

Under the UCC, which signed note is NOT negotiable?

  1. Bearer $500 note, due June 1
  2. Bearer $500 note, if bid won (correct answer)
  3. $500 order note, on demand
  4. Bearer $500 note, on demand
Explanation: Negotiability requires an unconditional promise. 'If bid won' makes payment conditional, so the note fails Article 3's requirements. The tempting choice is the note 'due June 1': a fixed date is a definite time, not a condition, so that note is negotiable. Thus the only non-negotiable note is the one conditioned on winning the bid.

Question 3

Which added promise keeps a note negotiable?

  1. Keep collateral insured (correct answer)
  2. Do all landscaping work
  3. Provide monthly statements
  4. Send reports to lender
Explanation: A note stays negotiable only if any added promise fits a UCC exception. Maintaining or protecting collateral to secure payment is allowed, so promising to keep collateral insured does not destroy negotiability. The tempting wrong answer is providing monthly statements, but that is an extra undertaking about information, not collateral, so it falls outside the exception and makes the note nonnegotiable.

Question 4

Which time term makes a note nonnegotiable?

  1. Due on demand
  2. 90 days after date
  3. Due at harvest (correct answer)
  4. Due June 1, 2027
Explanation: A negotiable note must be payable on demand or at a definite time. Due at harvest is not definite because the date depends on an uncertain future event. Due on demand is still negotiable, and a fixed date or 90-day term is definite, so those don't destroy negotiability.

Question 5

Which signed writing is a negotiable instrument?

  1. Pay bearer $500 plus work
  2. Pay Jane $500 only, no order
  3. Pay bearer 100 shares only
  4. Pay bearer $500 on demand (correct answer)
Explanation: You need an unconditional promise to pay a fixed amount of money, with words of negotiability such as payable to bearer or order. Paying bearer $500 on demand satisfies each requirement. The tempting 'bearer 100 shares only' is wrong because negotiable instruments must pay money, and shares are not money.

Question 6

What is the difference between a promissory note and a draft under UCC Article 3?

  1. A promissory note involves two parties (maker and payee) and contains a promise to pay; a draft involves three parties (drawer, drawee, and payee) and contains an order to pay. (correct answer)
  2. A promissory note must be payable on demand; a draft must be payable at a definite future date.
  3. A promissory note is used only for real estate transactions; a draft is used only for commercial transactions.
  4. A promissory note requires a bank as the drawee; a draft may use any person as the drawee.
Explanation: A promissory note is a two-party instrument in which the maker promises to pay the payee (or bearer). A draft is a three-party instrument in which the drawer orders the drawee (a third person, often a bank) to pay the payee. A check is the most common form of draft - the depositor (drawer) orders the bank (drawee) to pay the payee. Answer B is incorrect because both instruments may be payable on demand or at a definite time. Answer C incorrectly restricts their use. Answer D is incorrect because a note does not involve a bank or drawee at all.

Question 7

Under UCC Article 3, what must a payable-to-order instrument contain to satisfy the 'payable to order or bearer' requirement?

  1. Any reference to a person's name.
  2. The words 'payable to the order of cash.'
  3. The payment must be conditional on demand.
  4. The instrument must be payable to the order of an identified person (such as 'Pay to the order of Jane Doe') or must be payable to bearer. (correct answer)
Explanation: Under UCC Section 3-109 and 3-104, the order/bearer requirement for negotiability requires either: (1) payable to the order of an identified person ('Pay to the order of Jane Doe') - this is order paper; or (2) payable to bearer or to cash - this is bearer paper. Simply naming a person without 'order' language (e.g., 'Pay Jane Doe') may not satisfy the requirement under strict UCC interpretation, though courts and the UCC have been flexible about this in practice. Answer A (any reference to a name) is insufficient without 'order' or 'bearer' language. Answer B ('pay to the order of cash') would be bearer paper. Answer C describes a payment condition unrelated to the order/bearer requirement.

Question 8

A blank endorsement consists of only the endorser's signature without specifying a new payee. What effect does a blank endorsement have on an instrument?

  1. A blank endorsement converts the instrument into an order instrument requiring further endorsement for negotiation.
  2. A blank endorsement voids the instrument.
  3. A blank endorsement converts the instrument to bearer paper, allowing subsequent negotiation by delivery alone without further endorsement. (correct answer)
  4. A blank endorsement restricts the instrument to the endorser's bank account only.
Explanation: Under UCC Section 3-205(b), a blank endorsement (the endorser's signature alone, without naming a new payee) converts any instrument - including order paper - into bearer paper. Once converted to bearer paper, the instrument may be negotiated by delivery alone, without any further endorsement. This is why blank-endorsed checks left in accessible places can be cashed by anyone who finds them. Answer A reverses the effect; blank endorsement creates bearer, not order, paper. Answer B is incorrect because endorsement does not void an instrument. Answer D describes a restrictive endorsement, not a blank one.

Question 9

A special endorsement specifies a new payee. If Jane Doe writes 'Pay to John Smith, Jane Doe' on the back of a check payable to her, what type of instrument does this create?

  1. Order paper payable to John Smith, requiring John Smith's endorsement plus delivery for further negotiation. (correct answer)
  2. Bearer paper because a new name was added.
  3. A non-negotiable instrument because it has been endorsed.
  4. A restricted instrument that can only be deposited by John Smith.
Explanation: Under UCC Section 3-205(a), a special endorsement identifies a specific person as endorsee and makes the instrument payable to that person's order. After a special endorsement ('Pay to John Smith'), the instrument becomes payable to the order of John Smith - it is order paper requiring John Smith's endorsement plus delivery for any further negotiation. Answer B is incorrect because a special endorsement creates order paper, not bearer paper. Answer C is incorrect because endorsement is a normal step in negotiation; it does not destroy negotiability. Answer D describes a restrictive endorsement (such as 'for deposit only'), not a special endorsement.

Question 10

A certificate of deposit (CD) issued by a bank acknowledges receipt of a deposit and obligates the bank to repay it with interest. Is a CD a negotiable instrument?

  1. No, because CDs are savings products and are not transferable.
  2. No, because CDs are not signed by the maker.
  3. Yes, but only if it has a maturity date of exactly one year.
  4. Yes, if it meets the requirements of UCC Article 3, including being a written promise signed by the bank to pay a fixed amount on demand or at a definite time, payable to order or bearer. (correct answer)
Explanation: A certificate of deposit is a form of promissory note issued by a bank acknowledging deposit of funds and promising repayment with interest. Under UCC Section 3-104(j), CDs are specifically identified as a type of negotiable instrument (a 'note' issued by a bank). They must meet the same formal requirements as other notes. Answer A is incorrect because CDs can be and are transferred. Answer B is incorrect because CDs are indeed signed by the bank. Answer C is incorrect because there is no one-year maturity requirement for CDs as negotiable instruments; they may have various maturities.

Question 11

Under UCC Article 3, what is the effect of adding the words 'without recourse' to an endorsement?

  1. The endorser disclaims secondary liability on the instrument; if the instrument is dishonored, the holder cannot look to the endorser for payment. (correct answer)
  2. The endorser accepts primary liability on the instrument.
  3. The instrument becomes bearer paper that can be transferred without further endorsement.
  4. The endorser guarantees that all prior parties have valid defenses.
Explanation: Under UCC Section 3-415(b), an endorser who endorses 'without recourse' disclaims their secondary (contract) liability on the instrument. Normally, an unqualified endorser promises that if the instrument is dishonored, they will pay. A 'without recourse' (qualified) endorser makes no such promise; the holder cannot seek payment from them if the instrument is dishonored. The endorser still makes transfer warranties. Answer B is incorrect because 'without recourse' reduces, not increases, the endorser's liability. Answer C is incorrect because 'without recourse' relates to payment liability, not the order/bearer status. Answer D is incorrect because transfer warranties, not guarantees of others' defenses, survive a qualified endorsement.

Question 12

A note includes the following clause: 'This note may be accelerated at the holder's option upon default.' Does the acceleration clause destroy negotiability?

  1. No, because UCC Section 3-108(b)(i) expressly provides that an instrument is still payable at a definite time even if it is subject to an acceleration clause, as acceleration merely makes the note payable earlier than the stated maturity. (correct answer)
  2. Yes, because acceleration makes the payment date uncertain.
  3. Yes, because acceleration clauses are not permitted under Article 3.
  4. No, but only if the acceleration is automatic, not at the holder's option.
Explanation: Under UCC Section 3-108(b), an otherwise negotiable instrument remains payable at a definite time even if it is subject to: (1) acceleration clauses (making it payable earlier than stated), (2) extension clauses (allowing extension for a definite time), or (3) prepayment rights. The acceleration clause does not destroy the definite time requirement because it only causes earlier payment, not indefinite payment. Answer B is incorrect because the UCC expressly preserves negotiability for instruments with acceleration clauses. Answer C is incorrect because acceleration clauses are specifically contemplated by Article 3. Answer D is incorrect because Article 3 does not distinguish between automatic and optional acceleration for this purpose.

Question 13

A note contains a clause giving the maker the right to extend the maturity date for up to one additional year. Does this extension clause affect negotiability?

  1. Yes, because the maturity date is not fixed.
  2. No, because UCC Section 3-108(b)(ii) expressly provides that an instrument is payable at a definite time even if it is subject to extension to a further definite time at the option of the maker or holder. (correct answer)
  3. Yes, because extension clauses are prohibited under Article 3.
  4. No, only if the extension is automatic rather than at the maker's option.
Explanation: Under UCC Section 3-108(b)(ii), an instrument payable at a definite time is still negotiable if it permits the maker or holder to extend the maturity to a further definite time. Extension to 'a further definite time' (one additional year in this case) is specifically authorized and does not destroy negotiability. Answer A is incorrect because the UCC expressly permits such extension clauses. Answer C is incorrect because extension clauses are expressly contemplated and permitted. Answer D is incorrect because the Article 3 rule does not distinguish between automatic and optional extensions.

Question 14

A note is payable 'to the order of cash.' Is this order paper or bearer paper, and how is it negotiated?

  1. It is order paper requiring endorsement of the word 'cash' plus delivery.
  2. It is not a negotiable instrument because 'cash' is not a legal entity.
  3. It is bearer paper because 'cash' is not an identified person; it may be negotiated by delivery alone. (correct answer)
  4. It is neither order nor bearer paper and requires a court order to transfer.
Explanation: Under UCC Section 3-109, an instrument is bearer paper if it is payable to 'cash' or 'to the order of cash.' 'Cash' is not an identified person, so the instrument functions as bearer paper - it may be negotiated by delivery alone without endorsement. Answer A is incorrect because 'cash' cannot endorse an instrument. Answer B is incorrect because the UCC specifically recognizes 'pay to the order of cash' as bearer paper. Answer D is incorrect because the instrument is clearly bearer paper requiring only delivery.

Question 15

Under UCC Article 3, which of the following correctly describes a 'teller's check'?

  1. A teller's check is a draft drawn by a bank on another bank, or payable at or through a bank; it is similar to a cashier's check but is drawn on a different bank (such as a correspondent bank) rather than the issuing bank itself. (correct answer)
  2. A teller's check is a check written by a bank teller on the customer's personal account.
  3. A teller's check is issued by the Federal Reserve Bank for large commercial transactions.
  4. A teller's check is a post-dated check that a teller holds until the future date.
Explanation: Under UCC Section 3-104(h), a teller's check is a draft drawn by a bank on another bank, or payable at or through a bank. The key distinction from a cashier's check is that a cashier's check is drawn by a bank on itself (making the issuing bank both drawer and drawee), while a teller's check is drawn by one bank on a different bank - often a correspondent bank. Both represent highly reliable payment instruments backed by a bank's credit. Answer A is correct. Answer B is incorrect; a teller's check is a bank-issued instrument, not a check written by a teller on a customer's personal account. Answer C is incorrect because teller's checks are issued by commercial banks, not the Federal Reserve. Answer D describes a post-dated check, which is an entirely different concept.

Question 16

A note states 'I promise to pay $10,000 to John Doe' without using the words 'to the order of.' Under the strict technical reading of UCC Article 3, which of the following is most accurate?

  1. The note is automatically bearer paper.
  2. The note is fully negotiable order paper.
  3. The note is void and unenforceable.
  4. Under a strict technical reading, the note may not qualify as negotiable order paper because the magic words 'to the order of' or 'to bearer' are missing; however, many courts and modern practice treat such instruments as negotiable when the intent is clear. (correct answer)
Explanation: Under a strict reading of UCC Section 3-104, a negotiable instrument must be 'payable to order or to bearer.' This has historically required the specific words 'pay to the order of [name]' or 'pay to bearer.' A note that simply says 'pay to John Doe' without 'order' or 'bearer' language may technically fail this requirement under strict interpretation. However, many jurisdictions and courts have moved toward a more liberal interpretation recognizing intent-based negotiability. The modern trend accepts such instruments as negotiable, but under strict traditional analysis, the absence of the magic words is a problem. Answer A is incorrect because it lacks bearer language. Answer B overstates the traditional rule. Answer C is incorrect because the note is still enforceable as a contract.

Question 17

A cashier's check is drawn by a bank on itself and is payable to a designated payee. Which of the following correctly describes a cashier's check?

  1. A cashier's check is not a negotiable instrument because the bank is both the drawer and the drawee.
  2. A cashier's check is a promissory note because the bank promises to pay.
  3. A cashier's check is a check in which the bank is both the drawer and the drawee; it is a primary obligation of the bank and is considered more secure than a personal check. (correct answer)
  4. A cashier's check can be stopped by the bank at any time without liability.
Explanation: A cashier's check is a check drawn by a bank (as drawer) on itself (as drawee), payable to a specified payee. Because the bank is the obligor, the cashier's check represents a direct obligation of the bank rather than a customer's obligation. This makes it more secure than a personal check. It is a negotiable instrument under UCC Article 3. Answer A is incorrect because the fact that the bank is both drawer and drawee does not destroy negotiability; it makes it a primary bank obligation. Answer B is incorrect because it is a draft (a type of check), not a promissory note. Answer D is incorrect because banks have very limited rights to stop payment on cashier's checks.

Question 18

A restrictive endorsement 'For Deposit Only - Jane Doe' is written on the back of a check. Which of the following correctly describes the effect of this endorsement?

  1. The restrictive endorsement converts the check to a non-negotiable instrument.
  2. The restrictive endorsement limits the use of the check to deposit into an account, and a bank that pays contrary to the restriction may be liable. (correct answer)
  3. The restrictive endorsement has no legal effect and the check may be cashed freely.
  4. The restrictive endorsement automatically deposits the check into the endorser's account.
Explanation: Under UCC Section 3-206, a restrictive endorsement such as 'For Deposit Only' or 'Pay Any Bank' limits the further negotiation of the instrument. The instrument must be applied consistently with the restriction. A depositary bank (or any bank in the chain of collection) that pays the check contrary to the restriction may be liable for conversion. Answer A is incorrect because the check remains negotiable (as it can be transferred) but restricted in its application. Answer C is incorrect because restrictive endorsements have legal effect on banks. Answer D is incorrect because the endorsement does not automatically deposit the check; it must be presented to a bank for deposit.

Question 19

A note is payable 'ninety days after sight.' Is this payable at a definite time?

  1. No, because 'after sight' is a contingency.
  2. No, because 'ninety days' is too vague a time period.
  3. Yes, if the note is payable to bearer.
  4. Yes, 'after sight' means after the instrument is presented and accepted (or seen); once presented, the definite time becomes certain, and UCC Section 3-108 recognizes such instruments as payable at a definite time. (correct answer)
Explanation: Under UCC Section 3-108(a)(ii), an instrument is payable at a definite time if it is payable at a fixed period after sight or acceptance. 'Ninety days after sight' means 90 days after the instrument is presented to the drawee. The time becomes certain upon presentment, and such instruments are expressly recognized as payable at a definite time. Answer A is incorrect because 'after sight' is a recognized definite time mechanism in commercial paper law. Answer B is incorrect because '90 days' is a clear and calculable period. Answer C is incorrect because the order/bearer status is irrelevant to the definiteness of time.

Question 20

A note states that it is payable 'at the maker's discretion' with no fixed payment date. Does this satisfy the 'payable on demand or at a definite time' requirement for negotiability?

  1. No, because payment at the maker's discretion is neither on demand nor at a definite time - it makes payment uncertain and destroys negotiability. (correct answer)
  2. Yes, because the maker has agreed to pay.
  3. Yes, because any payment promise satisfies the time requirement.
  4. No, but only if the note is for more than $10,000.
Explanation: Under UCC Section 3-108, an instrument must be payable on demand (payable when presented, or containing no time of payment) or at a definite time. Payment 'at the maker's discretion' is neither - it makes payment entirely contingent on the maker's willingness, creating an uncertain and indefinite time of payment that destroys negotiability. Answer B is incorrect because the maker's general agreement to pay is insufficient if the time is indefinite. Answer C is incorrect because not just any payment promise satisfies the requirement; the time must be definite or on demand. Answer D is incorrect because there is no dollar threshold for this requirement.