What is Residual Value of Leased Property?

• A. Estimated fair value of the lease property at the end of the lease.
• B. Estimated tax value of the asset.
• C. Net book value at end of lease.
• D. The cost to replace.

Answer: (A)

Residual value is the estimated fair value of the leased property at the end of the lease term. It represents what the asset is expected to be worth when returned to the lessor, based on factors like wear,market conditions, and remaining useful life. This value is not a tax value, not the asset’s current net book value on the lessee’s books, and not the replacement cost. It matters for lease accounting because it helps determine depreciation and the economics of the lease—the expected end-of-lease worth influences how the asset is capitalized, depreciated, and how the lease payments are evaluated. For example, if a piece of equipment costs 100 and is expected to be worth 20 at the end, the depreciation base and the lease’s economics reflect that residual value.