A lease contains a bargain purchase option.In determining the lessee's capitalizable cost at the beginning of the lease term,the payment called for by the bargain purchase option would be
A) subtracted at its present value.
B) added at its exercise value.
C) added at its present value.
D) subtracted at its exercise price.

Question

Quizplus · Accepted Answer

When a lease contains a bargain purchase option, it is likely that the lessee will exercise this option at the end of the lease term. Therefore, the payment called for by the bargain purchase option should be added to the capitalizable cost at the beginning of the lease term, discounted at its present value. This is because the present value of the payment represents its cost to the lessee at the beginning of the lease term. Adding it at its exercise value or subtracting it at its exercise price would not accurately reflect the cost to the lessee at the beginning of the lease term.

A Lease Contains a Bargain Purchase Option