Advantages and disadvantages of the operating lease

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Question - A company that supplies equipment has introduced a new line of equipment, but its customers are reluctant to purchase the equipment, but they are willing to enter into a lease arrangement if they can classify the lease as an operating lease. Leasing the new equipment will result in a loss of an estimated 25% in equipment sales.

Some company management argues that the company as the leaser can classify the lease as a sales-type lease and avoid further income reduction. Others believe that they should treat the leases as operating leases and minimize the income tax liability in the short term.

Explain why the company should record the leases as an operating lease and the rationale for choosing the operating leases. 

Explain the advantages and disadvantages of the operating lease.

Reference no: EM132819968

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