MULTIPLE-CHOICE QUESTIONS WITH ANSWERS RELATED TO VALUATION OF LEASED PLANT AND MACHINERY
Which of the following methods is commonly used for valuing leased plant and machinery?
a) Straight-line depreciation method
b) Diminishing balance method
c) Net present value method
d) Units of production method
Answer: c) Net present value method
When valuing leased plant and machinery, which factor is NOT typically considered?
a) Salvage value
b) Expected inflation rate
c) Lease duration
d) Initial purchase price
Answer: d) Initial purchase price
In the context of leasing, what does the term “residual value” refer to?
a) The value of the leased asset at the end of the lease term
b) The monthly rental payment
c) The cost of maintenance during the lease term
d) The interest rate used for discounting cash flows
Answer: a) The value of the leased asset at the end of the lease term
Which financial parameter is most important in determining the value of leased plant and machinery?
a) Interest rate
b) Depreciation rate
c) Lease term
d) Market demand
Answer: a) Interest rate
What effect does a longer lease term generally have on the present value of leased plant and machinery?
a) Decreases it
b) Increases it
c) No effect
d) Depends on the depreciation method
Answer: b) Increases it
Which accounting standard in India primarily deals with lease accounting and valuation?
a) Indian Accounting Standard (Ind AS) 16
b) Indian Accounting Standard (Ind AS) 109
c) Indian Accounting Standard (Ind AS) 38
d) Indian Accounting Standard (Ind AS) 2
Answer: a) Indian Accounting Standard (Ind AS) 16
What is the primary purpose of valuing leased plant and machinery?
a) To determine the tax liability
b) To assess the financial health of the lessor
c) To calculate the lease rental amount
d) To reflect the fair value of the leased asset in financial statements
Answer: d) To reflect the fair value of the leased asset in financial statements
Which of the following factors is NOT typically considered when determining the useful life of leased plant and machinery?
a) Wear and tear
b) Technological obsolescence
c) Remaining lease term
d) Expected market demand
Answer: c) Remaining lease term
In lease accounting, what term is used to describe the difference between the carrying amount of the leased asset and its residual value?
a) Lease liability
b) Lease receivable
c) Leasehold improvement
d) Leasehold value
Answer: d) Leasehold value
Which of the following statements is true regarding finance leases?
a) The lessor retains ownership of the leased asset
b) Lease payments are treated as operating expenses
c) The lessee records the leased asset as an asset and a liability
d) The lease term is typically shorter than operating leases
Answer: c) The lessee records the leased asset as an asset and a liability
Which depreciation method is commonly used for valuing leased plant and machinery in India?
a) Sum-of-the-years-digits method
b) Double declining balance method
c) Units of production method
d) Modified accelerated cost recovery system (MACRS)
Answer: b) Double declining balance method
Which of the following factors is NOT considered when estimating the residual value of leased plant and machinery?
a) Market demand
b) Maintenance costs
c) Inflation rate
d) Initial purchase price
Answer: d) Initial purchase price
How does the choice of discount rate affect the present value of leased plant and machinery?
a) Higher discount rate decreases present value
b) Lower discount rate increases present value
c) Discount rate has no effect on present value
d) Discount rate affects only the residual value
Answer: b) Lower discount rate increases present value
Which financial statement is affected by the valuation of leased plant and machinery?
a) Income statement
b) Balance sheet
c) Cash flow statement
d) Statement of changes in equity
Answer: b) Balance sheet
What is the primary role of a valuation expert in determining the value of leased plant and machinery?
a) Negotiating lease terms with the lessor
b) Assessing the creditworthiness of the lessee
c) Providing an unbiased estimation of the asset’s fair value
d) Ensuring compliance with tax regulations
Answer: c) Providing an unbiased estimation of the asset’s fair value
Under which category of leases would the lessee typically bear all risks and rewards associated with ownership?
a) Finance lease
b) Operating lease
c) Sales-type lease
d) Direct financing lease
Answer: a) Finance lease
Which accounting principle requires the valuation of leased plant and machinery to reflect economic substance rather than legal form?
a) Materiality principle
b) Consistency principle
c) Substance over form principle
d) Prudence principle
Answer: c) Substance over form principle
How does the residual value of leased plant and machinery affect lease payments?
a) Higher residual value leads to higher lease payments
b) Higher residual value leads to lower lease payments
c) Residual value has no effect on lease payments
d) Residual value affects only the lease term
Answer: b) Higher residual value leads to lower lease payments
When using the net present value (NPV) method for valuing leased plant and machinery, what is discounted to determine the present value?
a) Future lease payments
b) Salvage value
c) Initial purchase price
d) Maintenance costs
Answer: a) Future lease payments
Which of the following factors is NOT typically considered when estimating the useful life of leased plant and machinery?
a) Technological advancements
b) Government regulations
c) Maintenance schedule
d) Lessor’s financial stability
Answer: d) Lessor’s financial stability
In the context of lease accounting, what does the term “lease term” refer to?
a) Total duration of the lease agreement
b) Periodic lease payments
c) Residual value of the leased asset
d) Present value of future lease payments
Answer: a) Total duration of the lease agreement
Which of the following is NOT a characteristic of a finance lease?
a) Ownership of the asset transfers to the lessee at the end of the lease term
b) Lease term is a major part of the asset’s economic life
c) Lessee bears substantially all risks and rewards of ownership
d) Lease payments are treated as operating expenses
Answer: d) Lease payments are treated as operating expenses
Which method of depreciation allocates a consistent amount of depreciation expense each period?
a) Straight-line method
b) Double declining balance method
c) Units of production method
d) Sum-of-the-years-digits method
Answer: a) Straight-line method
What is the purpose of adjusting the lease payments for the present value when valuing leased plant and machinery?
a) To account for changes in market demand
b) To reflect the time value of money
c) To compensate for potential maintenance costs
d) To account for inflationary factors
Answer: b) To reflect the time value of money
Which of the following statements is true regarding the lessee’s treatment of leased plant and machinery?
a) Leased assets are recorded as operating expenses
b) Leased assets are not recorded on the balance sheet
c) Leased assets are recorded as assets and liabilities
d) Lease payments are capitalized as revenue
Answer: c) Leased assets are recorded as assets and liabilities
Under Ind AS 17 (Leases), what criteria must a lease meet to be classified as a finance lease?
a) The lease term is less than 12 months
b) The present value of lease payments equals or exceeds 90% of the fair value of the asset
c) The lease transfers ownership of the asset to the lessee by the end of the lease term
d) The lease payments are fixed throughout the lease term
Answer: c) The lease transfers ownership of the asset to the lessee by the end of the lease term
Which financial statement is affected when a lessee records a finance lease?
a) Income statement
b) Balance sheet
c) Cash flow statement
d) Statement of changes in equity
Answer: b) Balance sheet
In lease accounting, what is the lessee’s initial measurement of the leased asset in a finance lease?
a) Fair value of the asset
b) Present value of minimum lease payments
c) Historical cost of the asset
d) Residual value of the asset
Answer: b) Present value of minimum lease payments
How does the residual value of leased plant and machinery impact the lessee’s balance sheet under a finance lease?
a) It increases the asset value
b) It decreases the asset value
c) It affects only the liability side of the balance sheet
d) It has no impact on the balance sheet
Answer: a) It increases the asset value
What role does the residual value play in determining the lease payments in a finance lease?
a) Higher residual value leads to higher lease payments
b) Lower residual value leads to higher lease payments
c) Residual value has no effect on lease payments
d) Higher residual value leads to lower lease payments
Answer: d) Higher residual value leads to lower lease payments
Which of the following is NOT typically included in the calculation of the present value of minimum lease payments in a finance lease?
a) Guaranteed residual value
b) Bargain purchase option price
c) Expected maintenance costs
d) Lease payments
Answer: c) Expected maintenance costs
In lease accounting, what is the significance of the lease term?
a) It determines the depreciation method
b) It affects the allocation of lease payments
c) It determines the residual value of the leased asset
d) It determines the fair value of the leased asset
Answer: b) It affects the allocation of lease payments
Which of the following is a characteristic of an operating lease?
a) Lessee records the leased asset as an asset and a liability
b) Lessee bears substantially all risks and rewards of ownership
c) Lease term is a major part of the asset’s economic life
d) Lease payments are treated as operating expenses
Answer: d) Lease payments are treated as operating expenses
What impact does the choice of discount rate have on the present value of lease payments in a finance lease?
a) Higher discount rate decreases present value
b) Lower discount rate decreases present value
c) Discount rate has no effect on present value
d) Discount rate affects only the residual value
Answer: a) Higher discount rate decreases present value
How does the useful life of leased plant and machinery affect its valuation?
a) Longer useful life decreases present value
b) Longer useful life increases present value
c) Useful life has no effect on present value
d) Useful life affects only the residual value
Answer: b) Longer useful life increases present value
Which accounting principle emphasizes the importance of substance over form in lease accounting?
a) Conservatism principle
b) Materiality principle
c) Substance over form principle
d) Consistency principle
Answer: c) Substance over form principle
Under Ind AS 116 (Leases), how does a lessee account for lease payments in a finance lease?
a) As a reduction of the liability
b) As an increase in the liability
c) As interest expense
d) As depreciation expense
Answer: a) As a reduction of the liability
What is the primary objective of valuing leased plant and machinery in India?
a) To maximize the lessor’s profit
b) To determine the fair market value for taxation purposes
c) To reflect the economic substance of the lease transaction
d) To minimize the lessee’s financial liability
Answer: c) To reflect the economic substance of the lease transaction
Which of the following factors is NOT considered when estimating the fair market value of leased plant and machinery?
a) Age of the asset
b) Brand reputation of the lessor
c) Maintenance history
d) Market demand for similar assets
Answer: b) Brand reputation of the lessor
In the context of lease accounting, what does the term “lease term” refer to?
a) The duration of the lease agreement
b) The residual value of the leased asset
c) The frequency of lease payments
d) The interest rate used for discounting lease payments
Answer: a) The duration of the lease agreement
Which of the following statements is true regarding operating leases?
a) Operating leases transfer ownership of the asset to the lessee
b) Operating leases are usually for the entire economic life of the asset
c) Operating leases involve significant risks and rewards of ownership for the lessee
d) Operating leases typically do not appear on the lessee’s balance sheet
Answer: d) Operating leases typically do not appear on the lessee’s balance sheet
How does the choice of depreciation method affect the valuation of leased plant and machinery?
a) It affects the timing of lease payments
b) It affects the allocation of lease payments over the lease term
c) It has no effect on the valuation
d) It affects only the residual value of the asset
Answer: b) It affects the allocation of lease payments over the lease term
Which of the following statements is true regarding the valuation of leased plant and machinery?
a) Valuation is solely based on the lessor’s financial statements
b) Valuation should reflect the fair value of the leased asset
c) Valuation is not required for finance leases
d) Valuation is performed only at the end of the lease term
Answer: b) Valuation should reflect the fair value of the leased asset
Under Ind AS 116 (Leases), how does a lessor account for lease income from a finance lease?
a) Recognizes lease income evenly over the lease term
b) Recognizes lease income as a finance charge
c) Recognizes lease income as interest income
d) Recognizes lease income as operating income
Answer: c) Recognizes lease income as interest income
Which of the following is NOT a factor influencing the fair market value of leased plant and machinery?
a) Economic conditions
b) Availability of financing options
c) Country of origin
d) Lease duration
Answer: c) Country of origin
How does the residual value of leased plant and machinery affect the lessee’s risk exposure?
a) Higher residual value decreases lessee’s risk
b) Higher residual value increases lessee’s risk
c) Residual value has no impact on lessee’s risk
d) Residual value affects only lessor’s risk
Answer: a) Higher residual value decreases lessee’s risk
Which financial statement is affected when a lessor recognizes lease income from a finance lease?
a) Income statement
b) Balance sheet
c) Cash flow statement
d) Statement of changes in equity
Answer: a) Income statement
What is the primary purpose of lease valuation in India?
a) To determine the fair value of leased assets for tax assessment
b) To comply with regulatory requirements set by SEBI
c) To reflect the true economic substance of lease transactions in financial statements
d) To facilitate lease negotiations between lessors and lessees
Answer: c) To reflect the true economic substance of lease transactions in financial statements
How does the residual value of leased plant and machinery affect lease negotiations?
a) Higher residual value increases lease payments
b) Higher residual value decreases lease payments
c) Residual value has no impact on lease payments
d) Residual value affects only the lease term
Answer: b) Higher residual value decreases lease payments
Which accounting standard in India primarily governs the accounting treatment of leases?
a) Indian Accounting Standard (Ind AS) 1
b) Indian Accounting Standard (Ind AS) 17
c) Indian Accounting Standard (Ind AS) 109
d) Indian Accounting Standard (Ind AS) 16
Answer: b) Indian Accounting Standard (Ind AS) 17
