Accounting for Leases, accounting homework help

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TopNotch
Medical, 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 arrangement if they can classify the lease as an
operating lease. The new equipment will replace equipment that TopNotch
has been selling in the past. Leasing the new equipment will result in
losing an estimated 25% in equipment sales.

Some
members of management want to structure the leases so that TopNotch, as
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
statements 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 the accountant for TopNotch, explain how
TopNotch should record the leases. Be sure to support your rationale.

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