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Question

Difficulty: MediumForms and Instruments of Credit

A merchant receives a bill of exchange drawn on them by a manufacturer for goods delivered on credit. Before this instrument becomes a legally binding obligation on the merchant to pay at maturity, which action must the merchant take?

  1. Sign and write 'Accepted' across the face of the billAnswer
  2. B
    Endorse the back of the bill and hand it over to a commercial bank
  3. C
    Present the instrument to customs officials alongside a certificate of origin
  4. D
    Pay a cash deposit equal to half of the total bill value immediately

Answer

The merchant must write 'Accepted' across the face of the bill of exchange and sign it to assume legal liability for payment.
Signing and writing 'Accepted' across the face of a bill converts the drawee into the acceptor, creating a formal legal obligation to pay the amount specified when the bill matures.

Step-by-Step Solution

1
Identify the credit instrument and the roles of the parties involved.
The instrument is a bill of exchange. The manufacturer is the drawer (creditor) and the merchant is the drawee (debtor).
A bill of exchange is an unconditional order in writing addressed by one person to another.
2
Determine the legal requirement for drawee liability.
The drawee becomes the acceptor only upon signing their acceptance on the instrument.
Prior to acceptance, the bill of exchange is merely a demand for payment, not a binding promise by the drawee.

Key Concept

Acceptance of a Bill of Exchange
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Topics

Forms and Instruments of Credit

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