bargain purchase option

Bargain-Purchase-Price Option

A lease in which the lessee has the option to buy the underlying asset at less than its fair market value at the end of the lease. For example, one may enter into an agreement to rent a house for five years with the option to purchase the house at the end of five years; the price is determined at the beginning of the lease, but must be substantially less than the market value of the house. If the lease is non-cancelable, the Financial Account Standards Board requires that it be considered a capital lease. See also: Rent-to-own.

bargain purchase option

A right granted to a lessee, typically under a personal property lease such as for office equipment,but it could be a real property lease.The right,called the option,gives the lessee the ability to buy the property, at the end of the lease term, for a price substantially less than fair market value.The inclusion of a bargain purchase option in a lease contract is an indication that the contract is really a disguised seller-financing arrangement.As a result,“rent”payments previously written off in their entirety may be disallowed by the IRS because some portion of the rent was really payment of principal on a loan.In addition,under Sarbanes-Oxley,public companies may have to post such arrangements as liabilities on the company's balance sheets,contrary to prior custom and practices.

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There is no transfer of ownership or bargain purchase option, and the term of the lease is for 73% of the asset's remaining useful life (11 out of 15 years).
A bargain purchase option is a "provision allowing the lessee, at his option, to purchase the leased property for a price which is sufficiently lower than the expected fair value of the property at the date the option becomes exercisable that exercise of the option appears, at the inception of the lease, to be reasonably assured.
At the end of the lease term, the lease calls for a bargain purchase option by the lessee for a nominal amount.
the criteria for determining whether a lease should be capitalized are: (1) the transfer of ownership at the end of the lease term, (2) a bargain purchase option that can be exercised by the lessee, (3) a lease term that is equal to or greater than 75 percent of the estimated useful life of the leased asset, or (4) the present value of the lease payments being equal to or greater than 90 percent of the fair market value of the leased asset
2] Capital Lease-typically, called a finance lease, this type is an asset-and-liability issue and the lease typically has a bargain purchase option of $1.
The lease must not contain a bargain purchase option.
This month's column continues with an explanation of a capital lease that includes a bargain purchase option.
Under the R&R approach, assets are 1) the receivable calculated as the present value of the estimated lease payments--the minimum lease payment for the lessor does not include any guaranteed residual value when the lessee is not entitled to the residual profits on the residual and does not include any bargain purchase option, only the lessee's required lease payments are included--using the rate the lessor charges the lessee (generally, the implicit rate in the lease for equipment leases), and 2) the residual derived by subtracting the receivable from the book value of the underlying leased asset, plus any profit and deferred profit.
The bargain purchase option allows the lessee to purchase the asset at a reduced price at the end of the lease.
A bargain purchase option is included, exercisable before the end of the lease term.
Bargain Purchase The lease contains a The lease contains a Option bargain purchase option.
In leases of land only, however, only a transfer of title or the existence of a bargain purchase option (criteria (1) or (2) above) would qualify the lease as a capital lease, because, in these cases, ownership of the land is expected to pass to the lessee.