Digital X-Ray, Inc., has introduced a new line of equipment that may revolutionize the medical profession.  Because of the new technology involved, potential users of the equipment are reluctant to purchase the equipment, but they are willing to enter into a lease arrangement as long as they can classify the lease as an operating lease.  The equipment will replace that Digital X-ray, Inc., has been selling in the past.  It is estimated that a 25% loss of actual sales will occur as a result of the leasing policy for the new equipment.

Management must decide to structure the leases so that they can treat them as operating leases.  Some members of management want to structure the leases so that Digital X-Ray, Inc., as lessor, can classify the lease as a sales-type lease and thus avoid a 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.

1.   You are asked to respond to the questions raised in this mini case.Be sure to cite and paraphrase any authoritative sources in support of your answer.

2.    Please limit your answers to two (2) typed pages.