Bargain Purchase Option refers to which scenario?

Bargain Purchase Option refers to which scenario?

• A. Lessee renewing at market rent
• B. Lessee purchasing lease for less than fair value
• C. Lessee returning asset early
• D. Lessee paying more than fair value

Answer: (B)

A bargain purchase option is a provision in a lease that lets the lessee buy the asset at a price that is substantially below its expected fair value at the end of the lease. That means the lessee is effectively guaranteed ownership for a price much lower than what the asset would be worth, making exercise of the option highly likely. That’s why the scenario described fits: the lessee has the option to purchase the asset for a price less than its fair value, which is the hallmark of a bargain purchase option. This option often leads to treating the lease as a finance lease because ownership is expected to transfer to the lessee. The other scenarios don’t reflect a bargain purchase option. Renewing at market rent involves continuation of the lease without a favorable purchase price, returning the asset ends the lease without transfer of ownership, and paying more than fair value does not indicate a favorable purchase option.

A bargain purchase option is a provision in a lease that lets the lessee buy the asset at a price that is substantially below its expected fair value at the end of the lease. That means the lessee is effectively guaranteed ownership for a price much lower than what the asset would be worth, making exercise of the option highly likely.

That’s why the scenario described fits: the lessee has the option to purchase the asset for a price less than its fair value, which is the hallmark of a bargain purchase option. This option often leads to treating the lease as a finance lease because ownership is expected to transfer to the lessee.

The other scenarios don’t reflect a bargain purchase option. Renewing at market rent involves continuation of the lease without a favorable purchase price, returning the asset ends the lease without transfer of ownership, and paying more than fair value does not indicate a favorable purchase option.