Why the company should record the leases as sale-type lease

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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.

Problem 1: Explain why the company should record the leases as a sale-type lease and the rationale for choosing the sale-type leases.

Problem 2: Explain the advantages and disadvantages of the sale-type lease.

Reference no: EM132787247

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