In which of the following cases is an overdraft created in a drawer\'s account?
ID: 2786079 • Letter: I
Question
In which of the following cases is an overdraft created in a drawer's account?
when a properly payable check issued by the drawer is presented for payment, but the drawer's account does not have sufficient funds in it
when the drawer issued a stop-payment order for a check, but the bank still goes ahead and pays the holder of the check
when the bank pays the holder of a check in which the amount payable is altered to indicate a higher amount than was originally intended
when the payee presents the check after six months from the date of the check and the bank still pays the holder
A.when a properly payable check issued by the drawer is presented for payment, but the drawer's account does not have sufficient funds in it
B.when the drawer issued a stop-payment order for a check, but the bank still goes ahead and pays the holder of the check
C.when the bank pays the holder of a check in which the amount payable is altered to indicate a higher amount than was originally intended
D.when the payee presents the check after six months from the date of the check and the bank still pays the holder
Explanation / Answer
The correct answer is A. Overdraft is a facility provided by the banks to the customers where even if there are not sufficient balance in the account, the bank will make the payment.
The additional amount that the Bank will be able to make depends on the Overdraft Limit.
Thus if I take an example, The Drawer issues a cheque of 1000 Dollars. The amount in the Bank is 950 Dollars. The overdraft Limit is say 100 dollars.
In this case even though the balance in the bank is less by 50 dollars, the bank will proceed with the payment on the cheque as the extra amount paid is within the overdraft limit of 100 dollars.