Summary: A company introduced new equipment. New equipment would replace equipment that a company has been selling in the past.

Team one plans to enter a product into a lease arrangement by classifying the lease as an operating lease. Thus, leasing the new equipment will result in a loss of 25% in equipment sales. Some members believe in treating the leases as operating leases and minimize the income tax liability in the short term.

Team two prefer to classify the lease as a sales-type lease and thus avoid further reduction of income.

Questions:

1. Please explain briefly how the financial statements would be affected under operating lease and sales-type lease approaches? Which team is right?

2. How could leases be structured to permit the lessee to treat the lease as an operating lease and the lessor to treat it as a sales-type lease?

3. Please explain briefly with examples of operating lease and sales-type lease, including its advantages and disadvantages on the above case.