Wiley CPAexcel Exam Review 2014 Focus Notes: Regulation

Module 26: Contracts

CONTRACTS

Formation of Contracts

Elements

In order to form a valid contract, there are three required elements

1. Offer
2. Acceptance
3. Consideration

With all three elements, a contract is as sturdy as an oac (okay, so it should be oak) tree.

Offer

Expresses intent to enter into contract

To be effective, the offer must be definite as to terms and received by the offeree

To be definite, an offer generally includes

• Price
• Subject matter
• Time for performance
• Terms considered definite if reasonable person could determine them

An offer may be revoked at any time until accepted

• A promise to hold an offer open for a specified time is not binding unless supported by consideration
• A revocation is effective when received by the offeree

Acceptance

Acceptance is generally effective when dispatched (mailbox rule)

Not effective until received when

• Offer so specifies
• Accepted by unauthorized means
• Sent by means not equal to or better than that used to communicate offer

Acceptance must be the same terms as offer (mirror image rule)

• A modification represents a counteroffer
• Initial offer is rejected and offeree makes a new offer

Rejection

Rejection of an offer is effective when received by the offeror

• Terminates original offer
• If rejection is followed by acceptance, whichever is received first is effective

Consideration

Given in exchange for promise to form contract

Must be legally sufficient

• Bargained for: One promise induces the other promise
• Legal value: Party agrees ...