Which of the following is considered a financial lease?

A financial lease, also known as a capital lease, is characterized by conditions that transfer substantial risks and rewards of ownership from the lessor to the lessee. A lease with a purchase option fits this definition because it allows the lessee to take ownership of the asset at the end of the lease term by purchasing it, indicating that the lease is effectively a long-term financing arrangement for the asset.

In financial leasing, the lessee is responsible for the maintenance, insurance, and taxes associated with the lease. By including a purchase option, the lessee is materially invested in the asset, which further aligns with the characteristics of financial leasing. This contrasts with other types of leases, which may not convey ownership benefits or responsibilities.

Other options represent leases that do not typically transfer ownership risks or rewards similarly to a financial lease. For example, a month-to-month lease tends to be an operating lease, providing flexibility without long-term commitment. A lease that cannot be renewed does not provide the long-term benefits associated with financial leases. Likewise, a lease paid by the employee may indicate personal choice rather than a structured financial arrangement reflecting a transfer of ownership risk or reward.