Which statement about Bargain Renewal Option is true?

• A. The renewal rent is sufficiently lower than expected fair value, and exercise is reasonably assured.
• B. The renewal rent is higher than fair value.
• C. The renewal occurs automatically regardless of market value.
• D. The option is always out of the lessee's control.

Answer: (A)

In lease accounting, a bargain renewal option is an option to extend the lease at a rent that’s well below the expected fair value, creating a strong economic incentive to exercise. Because the renewal is so favorable, exercising it is reasonably assured, which means the renewal period is included in the lease term for measurement purposes (lease liabilities and right-of-use assets).

That’s why the statement describing the renewal rent as sufficiently lower than expected fair value and indicating that exercise is reasonably assured is the correct characterization. If renewal rent were higher than fair value, or if renewal occurred automatically regardless of market value, or if the option were always out of the lessee’s control, none of those would meet the criteria of a bargain renewal option.