What does a nominal purchase option price in a capital lease indicate?

What does a nominal purchase option price in a capital lease indicate?

• A. Ownership transfers to the lessee at end if exercised
• B. Ownership remains with the lessor
• C. No transfer of ownership occurs
• D. The lease is non-taxed

Answer: (A)

A nominal purchase option price signals a bargain purchase option, which means the lessee is expected to obtain ownership of the asset at the end of the lease by exercising that option. This feature is a primary indicator that the lease is a capital (finance) lease, because it effectively transfers ownership to the lessee upon exercise. As a result, the asset is recorded on the lessee’s balance sheet and depreciated, with the lease payments treated as principal and interest. The other ideas don’t fit: a bargain purchase option implies ownership will transfer rather than stay with the lessor, so it’s not “no transfer of ownership.” It’s not about tax treatment, which is not the factor determining lease class in this context.

A nominal purchase option price signals a bargain purchase option, which means the lessee is expected to obtain ownership of the asset at the end of the lease by exercising that option. This feature is a primary indicator that the lease is a capital (finance) lease, because it effectively transfers ownership to the lessee upon exercise. As a result, the asset is recorded on the lessee’s balance sheet and depreciated, with the lease payments treated as principal and interest.

The other ideas don’t fit: a bargain purchase option implies ownership will transfer rather than stay with the lessor, so it’s not “no transfer of ownership.” It’s not about tax treatment, which is not the factor determining lease class in this context.