Question

In: Accounting

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

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

Solutions

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.

· Please do upvote if you found the answer useful.
· Feel free reach in the comment section in case of any clarification or queries.

Related Solutions

For a capital lease with no salvage value or bargain purchase option, the amount recorded initially...
For a capital lease with no salvage value or bargain purchase option, the amount recorded initially by the lessee as the leased asset should normally: Select one: a. Exceed the total of the minimum lease payments. b. Exceed the present value of the minimum lease payments at the beginning of the lease. c. Equal the total of the minimum lease payments. d. Equal the present value of the minimum lease payments at the beginning of the lease.
What is Goodwill?How is it treated under the Purchase method?
What is Goodwill?How is it treated under the Purchase method?
define a capital lease. What is the criteria to categorize a lease as a capital lease?...
define a capital lease. What is the criteria to categorize a lease as a capital lease? Which financial statements are impacted upon the determination that a lease is a capital lease?
Suppose a company wants to decide whether to lease or purchase an asset. Purchase: The capital...
Suppose a company wants to decide whether to lease or purchase an asset. Purchase: The capital cost required to purchase the asset is $1,000,000 (at time zero) with a salvage value of $500,000 at the end of the 5th year. The purchased asset can be depreciated based on MACRS 5-year life depreciation with the half year convention (table A-1 at IRS (https://www.irs.gov/publications/p946) over six years (from year 0 to year 5). Lease: The asset can be leased for 5 years...
(Lessor Entries; Sales-Type Lease with Option to Purchase) Castle Leasing Company signs a lease agreement on...
(Lessor Entries; Sales-Type Lease with Option to Purchase) Castle Leasing Company signs a lease agreement on January 1, 2017, to lease electronic equipment to Jan Way Company. The term of the non-cancelable lease is 2 years, and payments are required at the end of each year. The following information relates to this agreement. 1. Jan Way has the option to purchase the equipment for $16,000 upon termination of the lease. It is not reasonably certain that Jan Way will exercise...
Find the FASB rules that define how to compute the goodwill (or gain on bargain purchase)...
Find the FASB rules that define how to compute the goodwill (or gain on bargain purchase) in a business combination. Then find the general rule that says goodwill should not be amortized. (You may look for the allowable alternative of amortizing goodwill, for private companies.)
How are direct combination costs, contingent consideration, and a bargain purchase reflected in recording an acquisition...
How are direct combination costs, contingent consideration, and a bargain purchase reflected in recording an acquisition transaction?
1.What is glaucoma and how can it be treated? 2.What happens if it is not treated?...
1.What is glaucoma and how can it be treated? 2.What happens if it is not treated? 3.What is noise-inducing hearing loss? 4. Name people that are higher likely to get this and what is the treatment?
You have the option to purchase or lease a five-axis horizontal machining center. Any revenues generated...
You have the option to purchase or lease a five-axis horizontal machining center. Any revenues generated from the operation of the machine will be the same whether it is leased or purchased. Considering the information given, should you lease or purchase the machine? Conduct after-tax analyses of both options. The effective income tax rate is 38%, the evaluation period is five years, and the MARR is 9% per year. Notes: (1) Under the Lease Option, maintenance costs are included in...
A company is considering whether to lease or purchase some specialized equipment. The capital budgeting analysis...
A company is considering whether to lease or purchase some specialized equipment. The capital budgeting analysis indicating the equipment should be secured already has not been completed. The equipment has a five-year economic and tax life, and the company uses a straight-line depreciation method. The equipment costs $1,000,000 if purchased or it can be leased for five-years at $280,000 per year. The first lease payment is payable in advance. The equipment’s salvage value is estimated to be $100,000. Revenue is...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT