What is a bargain purchase option? How is it treated for a capital lease?

Expert Solution

Bargain purchase option is the price at which the leasee has the option to purchase the leased asset at the end of the lease term at a aubstantially low price.

The leasee is required to record lease liability and Right of Use asset in case of Capital lease.The lease liability and the ROU asset are measured on the commencement date using the Implicit rate of interest or incremental borrowing rate(if implicit rate is not known) at lease commencement date . The lease liability is accounted for by the interest method subsequently and the ROU asset is subject to depreciation on the straight-line basis over the lease term.

The calculation of lease liability & Right of Use asset includes the Bargain Purchase option also. The bargain purchase option is recorded at the present value on the date of lease inception.

Lease liability
Present value of Lease payment
Present value of Bargain purchase option

ROU Asset
Initial Lease liablity
Initial direct cost incurred by leasee

Therefore, it can be seen that the bargain purchase option is recorded at the present value at the inception of the lease contract in case of capital lease by the Leasee and subsequently it is measured with interest method in lease liability and ROU asset is depreciated over the lease term.

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ekkarill92 answered 2 years ago

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