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EFFECT OF A BARGAIN PURCHASE OPTION
A bargain purchase option (BPO) is a provision of some lease
contracts that gives the lessee the option of purchasing the leased
property at a “bargain” price. The expectation that the option price
T15-12a
15-22 Intermediate Accounting, 8/e
WHEN A BPO IS EXERCISABLE
BEFORE THE END OF THE LEASE TERM
Since a BPO is expected to be exercised, the lease term ends
for accounting purposes when the option becomes
exercisable.
For example, let’s say a BPO in a six-year lease could be
exercised at the end of the fifth year. The effect this
would have on accounting for the lease is to change the
lease term to five years, from six.
RESIDUAL VALUE
LESSEE OBTAINS TITLE
If the lessee obtains title to the leased asset, the lessor’s
computation of lease payments is unaffected by any
residual value.
The residual value influences the lessee only by the fact
that depreciation calculations reflect a reduced depreciable
LESSOR RETAINS TITLE
If the lessor retains title to the leased asset, the amount
needed to be recovered through periodic lease payments is
reduced by the present value of the residual value.
On the other side of the transaction, whether the lessee
considers the “purchase” price of the copier to include the
15-24 Intermediate Accounting, 8/e
RESIDUAL VALUE
On January 1, 2016, Sans Serif Publishers, Inc. leased a color
copier from CompuDec Corporation at a “price” of $479,079.
The lease agreement specifies annual payments beginning
January 1, 2016, the inception of the lease, and at each December
LESSOR’S CALCULATION OF THE LEASE PAYMENTS INCLUDING A
RESIDUAL VALUE
Amount to be recovered (fair value) $479,079
T15-14
LESSEE’S CALCULATION OF THE AMOUNT RECORDED AS A
LEASED ASSET AND LIABILITY INCLUDING A RESIDUAL VALUE
On the other side of the transaction, the lessee (Sans Serif
Publishers) considers the “purchase” price of the copier to
include, at a minimum, the present value of the periodic lease
payments ($445,211):
T15-15
15-26 Intermediate Accounting, 8/e
AMORTIZATION SCHEDULE
WITH RESIDUAL VALUE
OR WITH BPO
Effective Decrease Outstanding
Payments Interest in Balance Balance
10% x Outstanding Balance
1/1/16 479,079
1/1/16 92,931 92,931 386,148
12/31/16 92,931 .10 (386,148) = 38,615 54,316 331,832
EFFECT OF A RESIDUAL VALUE: A SUMMARY
Is the residual value of a leased asset included in (a) the lessor’s gross investment in
the lease [thus affecting the computation by the lessor of the amount of the periodic
Lessor’s Lessee’s
a b c
Minimum Minimum
Computation Lease Lease
of Payments Payments Payments
Lessee gets the residual value –
by transfer of title or the expected No No No
exercise of a bargain purchase option
Lessor gets the residual value
(title does not transfer; no
T15-17
15-28 Intermediate Accounting, 8/e
EXECUTORY COSTS
Minimum lease payments exclude “executory costs” to be
paid by the lessee, such as maintenance, insurance, and taxes.
Sometimes, as an expediency, a lease contract will specify
that the lessor is to pay executory costs, but that the lessee
T15-18
DISCOUNT RATE
The lessor’s implicit rate is the effective interest rate the lease
payments provide the lessor over and above the “price” at
T15-19
15-30 Intermediate Accounting, 8/e
INTERNATIONAL FINANCIAL REPORTING STANDARDS
Joint Lease Project. The IASB and FASB are
collaborating on a joint project for a revision of leasing
INTERNATIONAL FINANCIAL REPORTING STANDARDS
Leases of land and buildings. Under IAS No. 17,
T15-21
