On January 1, Teague Company leased office equipment from Sprague Corporation. The lease qualifies as an operating lease. The term is three years and calls for semiannual payments of $25,000 each, payable on June 30 and December 31 of each year. Sprague acquired the machines at a cost of $150,000 on January 1 of the current year. The expected life is five years with no residual value expected.

1. Prepare the appropriate journal entries for the lessee for the first year.
2. Show how the lessor would disclose this lease on the face of the balance sheet for December 31 of the current year.

What will be an ideal response?

1. Journal Entries
January 1
Machinery 150,000
Cash 150,000

June 30
Cash 25,000
Rent Revenue 25,000

December 31
Cash 25,000
Rent Revenue 25,000
Depreciation Expense 30,000
Accumulated Depreciation 30,000

Property Plant and Equipment
Equipment 150,000
less Accumulated Depreciation (30,000)