Bargain Purchase Option (BPO) refers to what?

Bargain Purchase Option (BPO) refers to what?

• A. Option at the end of the lease that allows the lessee to purchase outright the leased asset at a bargain
• B. A guarantee of the asset's residual value
• C. A right to extend the lease on favorable terms
• D. An option to surrender the asset during the lease without penalty

Answer: (A)

A bargain purchase option is an end-of-lease option that lets the lessee buy the asset for a price that is substantially below its expected fair value. Because the price is so favorable, exercise of the option is highly likely, which makes the lessee effectively own the asset at the end of the lease. This is why the option is (or would be) treated as part of the minimum lease payments when evaluating the lease and its classification. It’s not about guaranteeing residual value, extending the lease on favorable terms, or surrendering the asset without penalty.

A bargain purchase option is an end-of-lease option that lets the lessee buy the asset for a price that is substantially below its expected fair value. Because the price is so favorable, exercise of the option is highly likely, which makes the lessee effectively own the asset at the end of the lease. This is why the option is (or would be) treated as part of the minimum lease payments when evaluating the lease and its classification. It’s not about guaranteeing residual value, extending the lease on favorable terms, or surrendering the asset without penalty.