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Evaluate how a bargain purchase option can affect the decision to capitalize a lease

Evaluate how a bargain purchase option can affect the decision to capitalize a lease

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Answer #1

A bargain purchase option is a provision in a lease agreement that permits the lessee to buy the leased asset towards the end of the lease period at a price generously below its fair market value.

As per the Financial Account Standard Board's rules, a bargain purchase option would require the lessee to treat the lease as a capital lease instead of working it as an operating lease.

The capital lease is recorded in a sum equivalent to the present value of all the minimum lease payments over the term of the lease.

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