Accounting for Leases: Depreciation and Bargain Purchase. CPA exam

How do you record depreciation and a bargain purchase option in a lease? This lease accounting tutorial explains lease depreciation and amortization from both the lessor and lessee perspective and shows how a bargain purchase option affects the lease liability — built for CPA exam candidates and accounting students studying FAR and intermediate accounting. Try it free at farhatlectures.com — interactive exercises, lectures, simulations, cases, multiple choice, and AI tools for CPA, CMA, EA and students. Video Timeline & Key Concepts: 0:00 — Introduction 0:25 — Depreciation and amortization overview, and the lessor's perspective: the lessor depreciates the asset only for an operating lease, since in a sales-type or direct-finance lease the asset is removed from the books 2:14 — Lessee's perspective: the lessee amortizes the right-of-use asset, typically on a straight-line basis 3:57 — The general rule: with no reasonable certainty of ownership, the asset is amortized over the shorter of the lease term or the useful life 5:30 — Bargain purchase option introduced: an offer so favorable a reasonable person would accept it 5:41 — Defining a true bargain purchase option 6:53 — Calculating the present value of the lease payments and the bargain purchase amount at the appropriate discount rate Frequently Asked Questions: When does the lessor depreciate a leased asset? The lessor depreciates the asset only when the arrangement is an operating lease. In a sales-type or direct-finance lease the asset is derecognized and transferred off the lessor's books, so the lessor records no depreciation on it. How does the lessee amortize the right-of-use asset? The lessee amortizes the right-of-use asset, usually using the straight-line method. When there is no reasonable certainty that the lessee will obtain ownership, the asset is amortized over the shorter of the lease term or the asset's useful life. What is a bargain purchase option? A bargain purchase option is a purchase offer so favorable that a reasonable person would be expected to exercise it. Because exercise is essentially assured, its effect must be reflected in the lease accounting. How does a bargain purchase option affect the lease liability? When a true bargain purchase option exists, the option amount is included in the measurement of the lease liability. The lessee discounts both the lease payments and the bargain purchase amount to present value at the appropriate interest rate. Who should watch this lease accounting lesson? This lesson is designed for CPA exam candidates and college accounting students who need to understand lease depreciation, amortization, and bargain purchase options within the FAR section and intermediate accounting. #CPAexam #CMAexam #enrolledagentexam #accountingcourses #collegecourses #courses #FAR #leaseaccounting #bargainpurchaseoption #depreciation #rightofuseasset #ProfessorFarhat