This question has been posted before but the answers vary greatly.

Questions:

1. Should Medic-Tech (Lessor) classify the leases as sales-type leases and avoid further reduction of income? If so, how will this impact the financial statements?

2. Should Medic-Tech (Lessor) classify the leases as operating leases and minimize the income tax liability in the short-term? If so, how will this impact the financial statements?

3. Can Medic-Tech (Lessor) classify the leases as sales-type leases while the lessees classify the leases as operating leases? If so, how will this impact the financial statements?

FACTS:

Medic-Tech, Inc. is a supplier of medical equipment. It recently introduced a new line of equipment that may revolutionize the medical profession. Because of the new technology, potential users of the equipment are reluctant to purchase the equipment, but they are willing to enter into a lease agreement if they can classify the lease as an operating lease. The new equipment will replace equipment that Medic-Tech has been selling in the past. Leasing the new equipment will result in the loss of an estimated 25% in equipment sales.

Some members of management want to structure the leases so that, Medic-Tech as the lessor, can classify the lease as a sales-type lease and thus avoid further reduction of income. Others believe that they should treat the leases as operating leases and minimize the income tax liability in the short-term. They are uncertain, however, as to how the financial statement would be affected under these two different approaches. They also are uncertain as to how leases could 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.

As teams of accountants for Medic-Tech, explain how Medic-Tech should record the leases. Be sure to support your rationale and explain the advantages and disadvantages of the method or approach your team chose.