What is a Bargain Purchase Option?

What is a Bargain Purchase Option?

• A. A provision allowing lessee to purchase the property for a price sufficiently lower than the expected fair market value of the property at the date the option becomes exercisable. It is reasonably assured the purchase option will be exercised.
• B. A renewal option at a discount to market.
• C. A provision to terminate the lease.
• D. A provision to renew at market value.

Answer: (A)

A bargain purchase option is a lease provision that gives the lessee the option to buy the asset at a price that is sufficiently below the expected fair value at the date the option becomes exercisable, such that exercise is reasonably assured. Because the price is so favorable, it’s highly likely the lessee will exercise, effectively transferring ownership at the end of the lease. Under lease accounting, this indicates the lease is a finance lease rather than an operating lease, and the asset is treated as a finance asset with depreciation and interest costs. The other options describe renewal or termination features, not a purchase option at a bargain price, so they don’t fit.

A bargain purchase option is a lease provision that gives the lessee the option to buy the asset at a price that is sufficiently below the expected fair value at the date the option becomes exercisable, such that exercise is reasonably assured. Because the price is so favorable, it’s highly likely the lessee will exercise, effectively transferring ownership at the end of the lease. Under lease accounting, this indicates the lease is a finance lease rather than an operating lease, and the asset is treated as a finance asset with depreciation and interest costs. The other options describe renewal or termination features, not a purchase option at a bargain price, so they don’t fit.