Residual value: When the lessor (owner) of the asset gets back the leased asset at the end of the term of lease, the value of asset itself, which at the commencement of the lease is termed as residual value. This would provide another source of recovery of the lessor’s investment. Purchase option: Purchase option is provision of certain lease contracts which provides the lessee the option to purchase the leased asset during the period of lease or at the end of the lease term at a particular exercise price. To compare: the way a bargain purchase option and a residual value are treated by the lessee, when determining minimum lease payments.

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Chapter 15, Problem 15.9Q

To determine

Residual value:

When the lessor (owner) of the asset gets back the leased asset at the end of the term of lease, the value of asset itself, which at the commencement of the lease is termed as residual value. This would provide another source of recovery of the lessor’s investment.

Purchase option:

Purchase option is provision of certain lease contracts which provides the lessee the option to purchase the leased asset during the period of lease or at the end of the lease term at a particular exercise price.

To compare: the way a bargain purchase option and a residual value are treated by the lessee, when determining minimum lease payments.

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