Division of Agricultural Sciences and Natural Resources • Oklahoma State University
A	lease	may	be	categorized	as	a	rental	of	property	or	an
acquisition	of	property	by	financing.		If	the	lease	agreement
transfers	essentially	all	ownership	rights	and	risks	to	the	les-
see,	there	is	an	acquisition	of	property.		If	ownership	rights
and	risks	do	not	transfer	to	the	lessee,	the	lessee	is	simply
renting	 the	property.	 	The	distinction	must	be	made	when
accounting	for	the	asset.
A	capital lease	is	an	arrangement	that	is	termed	a	lease	but
has	the	qualities	of	a	purchase.		This	is	sometimes	referred	to
as	a	lease-purchase agreement.		The	lessor	may	be	a	dealer
who	also	sells	assets	of	the	same	type	or	a	lending	institution
which	finances	the	lease.		The	lessee	takes	possession	of
the	property	and	is	usually	responsible	for	repair	expenses.
The	lessee	is	also	required	to	make	periodic	lease	payments
which	are	similar	in	amount	to	loan	payments	that	would	be
required	to	purchase	the	asset	during	the	term	of	the	lease.
The	 lessee	acquires	an	ownership	 interest	 in	 the	property
and	also	incurs	a	liability	for	the	principal	amount	which	was
financed,	plus	any	interest	accrued	to	the	date	of	the	balance
sheet.	Generally	Accepted	Accounting	Procedures	(GAAP)
should	be	used	to	identify	and	report	capital	leases.1
Capital Lease:		A	lease	in	which	the	lessee	effectively	acquires
ownership	interest	in	the	asset	being	leased.
Asset’s Economic Life: 	The	economic	 life,	or	useful	 life,
of	an	asset	is	an	estimate	of	the	length	of	time,	usually
number	of	years,	that	an	asset	will	be	used	to	produce
revenues.		This	estimate	may	be	revised	when	it	becomes
apparent	that	the	original	estimate	is	not	correct.
Bargain Purchase Option: 	A	bargain	purchase	option	means
that	the	leased	asset	can	be	purchased	by	the	lessee	at
the	end	of	the	lease	term	for	an	amount	significantly	less
than	the	fair	market	value	of	the	asset	at	that	time.
Capitalizing the Lease:		An	accountin