Question

If it is "reasonably certain" that the lessee will exercise a purchase option: A) The lease...

If it is "reasonably certain" that the lessee will exercise a purchase option: A) The lease is classified as a finance/sales-type lease. B) Both the lessee and the lessor consider the exercise price of the option to be an additional cash payment. C) It's assumed that the lease term ends on the date that the option is expected to be exercised. D) All of these answer choices are correct.

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Answer #1

Solution:

If it is "reasonably certain" that the lessee will exercise the purchase option, the accounting for the lease is affected in three ways:

1. The lease is classified as a finance/sales-type lease.
2. Both the lessee and the lessor consider the exercise price of the option to be an additional cash payment.
3. It's assumed that the lease term ends on the date that the option is expected to be exercised.

Hence option D "All of these answer choices are correct." is correct.

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