Purchase Option Example On January 1, 2024, Sans Serif Publishers leased printing equipment from First LeaseCorp. First LeaseCorp purchased the equipment from CompuDec Corporation at a cost of $479,079. The lease agreement specifies six annual payments of $92,931 beginning January 1, 2024, the beginning of the lease, and on each December 31 from 2024 through 2028. On December 31, 2029, at the end of the six-year lease term, the equipment is expected to be worth $75,000, and Sans Serif has the option to purchase it for $60,000 on that date. The residual value after seven years is zero. The interest rate in these financing arrangements is 10%. In addition to the annual lease payments, the lessor also receives 60,000 on December 31, 2029, when the lessee exercises the purchase option. So, the total value of the lease for the lessee and lessor is: Purchase Option Example Sans Serif (Lessee) Right-of-use asset Lease payable January 1, 2024 $479,079 479,079 First LeaseCorp (Lessor) Lease receivable (PV of lease payments plus $60,000) $479,079 Equipment $479,09 Another point is that the lessee amortizes the right-of-use asset based on useful life of the asset not the lease term. Sans Serif (Lessee) Each December 31 over the life of the asset Amortization expense ($479,079 7) Right-of-use asset $68,440 68,440 Purchase Option Example When purchase option is exercised on December 31, 2029: December 31, 2029 Sans Serif (Lessee) Interest expense (10% x $54,542) Lease payable Cash $5,458 54,542 60,000 First LeaseCorp (Lessor) Cash (exercise price) $60,000 Lease receivable Lease revenue $54,542 5,458