Which type of lease is typically chosen when the lessee intends to own the asset at the end of the term?

Which type of lease is typically chosen when the lessee intends to own the asset at the end of the term?

• A. Operating lease
• B. Capital or financing lease
• C. Gross lease
• D. Net lease

Answer: (B)

When ownership at the end of the term is the goal, the lease is arranged as a financing or capital lease. This structure mirrors how a loan works: the lessee effectively takes on the risks and rewards of owning the asset, and the lease term often covers most of the asset’s useful life. There is frequently a bargain purchase option or other features that make ownership likely at the end. Because of this, the lessee records the asset and a corresponding liability on the balance sheet, and each payment is split between interest expense and a reduction of the liability, while the asset is depreciated over its useful life. In contrast, an operating lease keeps ownership with the lessor, and payments are treated as rental expenses rather than as a way to acquire the asset. Gross versus net leases pertain to who pays for operating costs and do not indicate a plan to own the asset, so they don’t align with the intention to own the asset at term end.

When ownership at the end of the term is the goal, the lease is arranged as a financing or capital lease. This structure mirrors how a loan works: the lessee effectively takes on the risks and rewards of owning the asset, and the lease term often covers most of the asset’s useful life. There is frequently a bargain purchase option or other features that make ownership likely at the end. Because of this, the lessee records the asset and a corresponding liability on the balance sheet, and each payment is split between interest expense and a reduction of the liability, while the asset is depreciated over its useful life.

In contrast, an operating lease keeps ownership with the lessor, and payments are treated as rental expenses rather than as a way to acquire the asset. Gross versus net leases pertain to who pays for operating costs and do not indicate a plan to own the asset, so they don’t align with the intention to own the asset at term end.