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
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.