What defines a bargain purchase option in a lease?

• A. An option to renew the lease for an extended period at market price.
• B. An option allowing the lessee to buy the asset at a price below fair market value at end of term.
• C. An obligation to return the asset at end of term.
• D. An option to extend the lease term indefinitely.

Answer: (B)

A bargain purchase option is an option in a lease that would allow the lessee to buy the underlying asset at a price that is significantly below its expected fair value at the end of the lease, and that exercise is considered reasonably certain. This combination signals that ownership is effectively being transferred through the lease, which is why such an option makes the lease a finance lease for accounting purposes.

In the example described, the lessee can purchase the asset at a price below fair market value at the end of the term, and that favorable price makes exercising the option highly likely. That directly matches the defining feature of a bargain purchase option. The other scenarios describe renewal, return obligations, or indefinite extension, which do not indicate a purchase option that is expected to be exercised and thus do not define a bargain purchase option.