Jody owns kuppajava kiosks, a sole proprietorship. jody’s liability is

Chapter 36 Sole Proprietorships and Franchises N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N + = A question new to this edition of the Test Bank. A question modified from the previous edition of the Test Bank. A question included in the previous edition of the Test Bank. TRUE/FALSE QUESTIONS A1. The simplest form of business is a sole proprietorship. ANSWER: T NAT: AACSB Analytic A2. 706 AICPA Legal TYPE: N A franchise contract may use only one type of business organization—the sole proprietorship. ANSWER: F NAT: AACSB Reflective A3. PAGE: PAGE: 706 TYPE: AICPA Critical Thinking N 706 AICPA Legal N A franchise is a contractual arrangement. ANSWER: T NAT: AACSB Analytic PAGE: TYPE: 441 © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 442 A4. TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS In a sole proprietorship, the proprietor shares the burden of any losses or liabilities incurred by the business enterprise with the government. ANSWER: F NAT: AACSB Analytic PAGE: 707 AICPA Legal TYPE: N © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 443 CHAPTER 36: SOLE PROPRIETORSHIPS AND FRANCHISES A5. A sole proprietorship lacks continuity on the death of the proprietor. ANSWER: T NAT: AACSB Analytic A6. 708 AICPA Legal TYPE: N PAGE: 708 AICPA Legal TYPE: N PAGE: 709 TYPE: AICPA Critical Thinking + PAGE: 709 TYPE: AICPA Critical Thinking N Laws governing franchising are designed in part to prevent franchisors from terminating franchises without good cause. ANSWER: T NAT: AACSB Analytic A11. PAGE: A franchise relationship may be governed by the law covering sales contracts as expressed in Article 2 of the Uniform Commercial Code. ANSWER: T NAT: AACSB Reflective A10. N A manufacturer’s license to a dealer to sell a product is a chain-style business operation. ANSWER: F NAT: AACSB Reflective A9. TYPE: A franchisee can operate as an independent businessperson but cannot then obtain the advantages of a national organization. ANSWER: F NAT: AACSB Analytic A8. 707 AICPA Legal A franchisor is the purchaser of a franchise. ANSWER: F NAT: AACSB Analytic A7. PAGE: PAGE: 709 AICPA Legal TYPE: N Some states require franchisors to provide presale disclosures to prospective franchisees. ANSWER: T PAGE: 710 TYPE: N © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 444 TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS NAT: AACSB Analytic AICPA Legal © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 445 CHAPTER 36: SOLE PROPRIETORSHIPS AND FRANCHISES A12. If a party to a franchise contract fails to perform its contractual duties, the other party may be subject to a lawsuit for breach of contract. ANSWER: F NAT: AACSB Analytic A13. TYPE: + PAGE: 711 AICPA Legal TYPE: N PAGE: 711 AICPA Legal TYPE: N PAGE: 712 AICPA Legal TYPE: N PAGE: 712 AICPA Legal TYPE: N Normally, a franchisee receives a windfall on the termination of a franchise. ANSWER: F NAT: AACSB Reflective A19. 711 AICPA Legal The duration of a franchise is a matter to be determined between the parties. ANSWER: T NAT: AACSB Analytic A18. PAGE: A franchisor can require a franchisee to purchase certain supplies from the franchisor at an established price. ANSWER: T NAT: AACSB Analytic A17. + The day-t-day operation of franchise business normally is left up to the franchisee. ANSWER: T NAT: AACSB Analytic A16. TYPE: Typically, the franchisee determines the territory to be served by the franchise. ANSWER: F NAT: AACSB Analytic A15. 711 AICPA Legal A franchisee ordinarily pays an initial fee or lump sum price for a franchise license. ANSWER: T NAT: AACSB Analytic A14. PAGE: PAGE: 713 TYPE: AICPA Critical Thinking N Good faith and fair dealing are not important in terminating a franchise relationship. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 446 TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS ANSWER: F NAT: AACSB Analytic A20. PAGE: 713 AICPA Legal TYPE: N A franchisor’s decision to terminate a franchise may be made in the normal course of business operations. ANSWER: T NAT: AACSB Analytic PAGE: 715 AICPA Legal TYPE: N MULTIPLE CHOICE QUESTIONS A1. Hermione starts up, and assumes the financial risk of, Graphic Ads, a new enterprise. Hermione is a. b. c. d. a franchisee. a franchisor. an agent. a sole proprietor. ANSWER: D NAT: AACSB Reflective A2. PAGE: 706 AICPA Legal TYPE: = Carl sells Direct Marketing Enterprises, a sole proprietorship, to Eve. This is a transfer of a. b. c. d. a license. a trade name. the formula to make a product. the ownership of the business. ANSWER: D NAT: AACSB Reflective PAGE: 706 AICPA Legal TYPE: = © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 447 CHAPTER 36: SOLE PROPRIETORSHIPS AND FRANCHISES A3. Jim organized, and owns and operates, Jim’s Landscaping Service in the simplest form of business organization. This is a. b. c. d. a corporation. a limited liability company. a partnership. a sole proprietorship. ANSWER: D NAT: AACSB Reflective A4. TYPE: = limited by state statute and varies from state to state. limited to the extent of capital expenditures. limited to the extent of his or her original investment. unlimited. ANSWER: D NAT: AACSB Reflective PAGE: 707 AICPA Legal TYPE: = Real Events Promotion Corporation licenses trademarks to Stadium Souvenirs, Inc., to use in selling caps, sweatshirts, and similar goods. This is a. b. c. d. a franchise. an entrepreneur. a principal-agent relationship. a sole proprietorship. ANSWER: A NAT: AACSB Reflective A6. 706 AICPA Legal Jody owns KuppaJava Kiosks, a sole proprietorship. Jody’s liability is a. b. c. d. A5. PAGE: PAGE: 708 AICPA Legal TYPE: = Otis is interested in buying a franchise from Plentiful Markets Inc. This transaction, like other franchise deals, is regulated to protect a. b. c. certain types of anticompetitive agreements. franchisors from dishonest prospective franchisees. prospective franchisees from dishonest franchisors. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 448 TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS d. the government’s power to restrict freedom of contract. ANSWER: C NAT: AACSB Reflective PAGE: 709 AICPA Legal TYPE: = © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 449 CHAPTER 36: SOLE PROPRIETORSHIPS AND FRANCHISES A7. Pilar is interested in buying a franchise from Quixotic Bike Corporation. Quixotic must disclose material facts that Pilar needs to make an informed decision concerning this purchase, according to a. b. c. d. no law. the Petroleum Marketing Practices Act of 1979. the Federal Trade Commission’s Franchise Rule. the Uniform Commercial Code. ANSWER: C NAT: AACSB Reflective A8. TYPE: + a license. a trade name. the formula to make a product. the ownership of the business. ANSWER: B NAT: AACSB Reflective PAGE: 709 AICPA Legal TYPE: = 709 TYPE: AICPA Critical Thinking = Effervescent Soda Bottling Company is a. b. c. d. a chain-style franchise. a distributorship franchise. a manufacturing franchise. no franchise. ANSWER: C NAT: AACSB Reflective A10. 709 AICPA Legal Burger Heaven, Inc., conducts a chain-style franchise. This involves the transfer to Chester, one of its franchisees, of a. b. c. d. A9. PAGE: PAGE: In-Home Maid Service Company uses a Web site to provide downloadable information to prospective franchises. This online information is the equivalent of an offer that must comply with a. b. the Automobile Dealers’ Franchise Act of 1965. the Petroleum Marketing Practices Act of 1979. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 450 TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS c. d. the Federal Trade Commission’s Franchise Rule. the state Franchise Disclosure Document, or FDD. ANSWER: C NAT: AACSB Reflective PAGE: 709 AICPA Legal TYPE: N © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 451 CHAPTER 36: SOLE PROPRIETORSHIPS AND FRANCHISES A11. Leo buys an exclusive territory in which he is authorized to set up a plant to make Midwest Dairy, Inc., products. After receiving the formula, Leo begins making Nice Icebrand ice cream and other Midwest products. This is a. b. c. d. a chain-style franchise. a distributorship franchise. a manufacturing franchise. no franchise. ANSWER: C NAT: AACSB Reflective A12. 709 TYPE: AICPA Critical Thinking = Echo enters into an agreement with Deep Pan Pies, Inc., to operate a franchise in Centre City. Later, Deep grants franchises to others within the city. Echo files a suit to close them. If the court rules in Echo’s favor it will most likely be on the ground that a. b. c. d. Deep violated the antitrust laws. Deep violated the implied covenant of good faith and fair dealing. Echo paid a franchise fee. Echo was the first Deep franchisee in Centre City. ANSWER: B NAT: AACSB Reflective A13. PAGE: PAGE: 711 AICPA Legal TYPE: N Flip Gymnastics & Karate, Inc., grants a franchise to Gibby to operate a Flip gym. Flip may require Gibby to pay the franchisor a percentage of his a. b. c. d. annual sales or volume of business. weekly payroll expense. monthly overhead savings. none of the choices. ANSWER: A NAT: AACSB Reflective PAGE: 711 AICPA Legal TYPE: N © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 452 A14. TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS Stacy contracts to buy a franchise from Tender Steak House Company. In this contract, as in most franchise contracts, the determination of the territory to be served is made by a. b. c. d. a court. Stacy. Tender Steak House. the Federal Trade Commission. ANSWER: C NAT: AACSB Reflective A15. 711 AICPA Legal TYPE: = Dominique buys a franchise from Cheyenne Artisans, Inc. This provides Cheyenne with an outlet for the firm’s goods, some of which Dominique is required to buy at an established price. In their agreement, Cheyenne may also specify a. b. c. d. the franchisor’s non-culpability for any breach of the agreement. the franchise’s business organizational form. the retail prices at which Dominique must resell the goods she buys. none of the choices. ANSWER: B NAT: AACSB Reflective A16. PAGE: PAGE: 711 AICPA Legal TYPE: N Inger is a franchisee of Honey Bear Restaurants, LLC Their contract gives Honey Bear the right to control virtually all aspects of Inger’s operation, including the hiring of employees. One of the employees, Joris commits a tort against Kiley, one of Inger’s customers. Kiley files a suit against Honey Bear. Honey Bear is most likely a. b. c. d. liable because Honey Bear exercises control over Inger’s operation. liable because Kiley was Honey Bear’s customer. not liable because Inger is responsible for the employees. not liable because Kiley was Inger’s customer. ANSWER: A NAT: AACSB Reflective PAGE: 711 AICPA Legal TYPE: N © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 453 CHAPTER 36: SOLE PROPRIETORSHIPS AND FRANCHISES A17. Sweet Styles, Inc., a franchisor of clothing stores, wishes to standardize the pricing practices of its franchisees that have engaged in price-cutting to increase their respective shares of the market. The most prudent action might be for Sweet to a. b. c. d. mandate the prices at which its franchisees sell their products. suggest the prices at which its franchisees sell their products. require its franchisees to buy inventory exclusively from Sweet. threaten its franchisees with a material breach of contract. ANSWER: B NAT: AACSB Reflective A18. 712 AICPA Legal TYPE: N Star Resorts Corporation wants to terminate its franchise arrangement with Tony. Their contract does not provide for notice of termination or set a time for winding up the business. This means that to wind up, Tony a. b. c. d. has a reasonable time, with notice. has whatever time A determines, with or without notice. is entitled to notice, but nothing more. must close immediately. ANSWER: A NAT: AACSB Reflective A19. PAGE: PAGE: 712 AICPA Legal TYPE: = Bret buys a franchise from Comida Mexicano Ltd. If their agreement is like most franchise agreements, it will specify that Comida can terminate the franchise a. b. c. d. at will. for any reason. for cause only. for no reason. ANSWER: C NAT: AACSB Reflective PAGE: 712 AICPA Legal TYPE: = © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 454 A20. TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS Mika buys a Nuance Cabinets, Inc., franchise, which the franchisor later terminates. In determining whether the termination was proper, a court will generally a. b. c. d. balance the rights of both parties. emphasize the right of Nuance to its business operation. focus on the right of Mika to be dealt with fairly. underscore the interest of consumers in affordability. ANSWER: A NAT: AACSB Reflective PAGE: 715 AICPA Legal TYPE: = ESSAY QUESTIONS A1. Owen plans to open Owen’s Pets Store, a pet supplies outlet, and to hire Quinn and Ruth. Owen will invest only his own money. He does not expect to make any profit for at least two years and to make almost no profit for the first three years, but he hopes to expand eventually. Which form of business organization would be most appropriate? ANSWER: When a business is relatively small and is not diversified, employs relatively few people, has modest profits, and is not likely to expand significantly or require extensive financing in the immediate future, the most appropriate form for doing business may be a sole proprietorship. A sole proprietorship is easier and less costly to start than other forms of business, because few legal forms are involved. This form is also more flexible than other forms because the owner is free to make business decisions without consulting others. Taxes are paid on the business’s income as the owner’s personal income. PAGES: 706–708 NAT: AACSB Reflective A2. TYPE: AICPA Decision Modeling = Doc’s Sports Club and Elite Fitness Corporation enter into a franchise agreement that provides for its termination at any time for “cause.” Doc’s fails to meet Elite’s membership sales quota. Is this “cause” for termination? Explain. ANSWER: Yes, a franchisee’s failure to meet a franchisor’s specified sales quota can be sufficient cause for the franchisor’s termination of the franchise relationship. The parties to a franchise agreement determine what will constitute the grounds for a © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 455 CHAPTER 36: SOLE PROPRIETORSHIPS AND FRANCHISES termination of their relationship, and set these bases out in their agreement. Here, the parties’ agreement specified a sales quota for the franchisee to meet. The agreement also provided that it could be terminated for “cause.” When the franchisee failed to satisfy the quota, it breached the franchise agreement. In other cases, if a franchisor is acting in good faith, “cause” may include any other breach of the franchise agreement, as well as the death or the disability of the franchisee, or the insolvency of the franchisee. Typically, in all cases, notice must be provided, and a franchisee must be given reasonable time to wind up the business. PAGES: 712–713 NAT: AACSB Reflective TYPE: AICPA Decision Modeling = © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Name: Description: ...