University:
Indiana University Bloomington
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

327

Pages:

2
Author:

bratrochanter

Summary: Commercial Paper and Negotiable Instruments Commercial Paper Overview Commercial paper includes financial instruments like drafts and checks, which facilitate payments and credit in business transactions. In "cash on delivery" situations, sellers use a bill of lading and a draft to receive payment. When credit is extended, a time draft is used, obligating the buyer (acceptor) to pay at a future date. Insurance claims often involve drafts, where a bank pays upon authorization by the issuer. Key Types of Commercial Paper 1. Drafts Definition: A draft is a written order by one party (drawer) instructing another (drawee) to pay a specific amount to a third party (payee). o Usage: Common in transactions like freight shipments or vehicle auctions. o Checks as Drafts: A check is a draft payable on demand, with the bank acting as the drawee. Special forms include:  Cashier’s Check: Drawer and drawee are the same bank.  Teller’s Check: Drawn by one bank on another. 2. Checks o Process: The drawer (e.g., Elizabeth Brown) orders their bank (drawee) to pay a specified amount to the payee. o Electronic Checks (E-Checks): Information from a paper check is converted into an electronic transaction for quicker processing, known as check conversion. o Formal Requirements for Negotiability To qualify as a negotiable instrument, certain conditions must be met under Article 3 of the UCC: 1. In Writing o Can be handwritten, typed, or printed on any material. 2. Signed by Issuer o The instrument must bear the signature of the maker (for notes) or drawer (for drafts/checks). 3. Unconditional Promise or Order to Pay o Must not be contingent on any external conditions (e.g., "Pay $2,500 if roof is replaced" is non-negotiable). 4. Payable to Order or Bearer o Includes phrases like “Pay to the order of” or “Pay bearer.” 5. Payable on Demand or at a Definite Time o Must specify when payment is due. 6. No Other Undertaking or Instruction o The document cannot include obligations beyond paying money, except for permissible clauses like collateral security or waiver of legal benefits. Holder in Due Course (HDC) Protections    HDC Definition: A person who acquires a negotiable instrument for value, in good faith, and without knowledge of defects or claims. Rights: HDCs take the instrument free from most defenses except certain fundamental ones (e.g., fraud, duress, infancy). Consumer Protections: FTC rules and some state laws provide additional defenses in consumer transactions, limiting HDC rights. Negotiability vs. Validity Negotiability concerns an instrument’s ability to circulate as a substitute for money. Even if an instrument is void (e.g., issued for a gambling debt), it remains negotiable if it meets formal requirements. However, enforceability depends on underlying legal validity.