Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

3. Accrual Accounting Concepts

Revenue Recognition and Expense Recognition

Financial Accounting

3. Accrual Accounting Concepts

Revenue Recognition and Expense Recognition

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Multiple Choice

If it is "reasonably certain" that the lessee will exercise a purchase option in a lease agreement, how should this affect the accounting treatment of the lease by the lessee?

The lease should be classified as an operating lease regardless of the purchase option.

The purchase option should be ignored until it is actually exercised.

The lease term should include the period up to the purchase option, and the purchase price should be included in the lease liability.

Only the lease payments up to the purchase option date should be recognized as a liability.

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Verified step by step guidance

Understand the concept of 'reasonably certain' in lease accounting. This term indicates that the lessee is highly likely to exercise the purchase option based on economic incentives or contractual obligations.

Review the accounting standards (e.g., ASC 842 or IFRS 16) which state that if it is 'reasonably certain' the lessee will exercise the purchase option, the lease term should include the period up to the purchase option date.

Recognize that the purchase price of the asset should be included in the lease liability calculation, as it represents a future obligation that the lessee is expected to fulfill.

Calculate the lease liability by summing the present value of lease payments over the lease term (including the period up to the purchase option date) and the present value of the purchase price. Use the lessee's incremental borrowing rate or the rate implicit in the lease for discounting.

Ensure that the right-of-use asset is adjusted to reflect the inclusion of the purchase price in the lease liability, as this impacts the lessee's balance sheet presentation.