Lessee Company entered into a lease contract with Lessor Company. Both companies are calendar year companies that prepare annual financial statements. Both use straight-line depreciation with a beginning of month convention. Information about the lease contract is as follows: Inception date: January 1. Year 1 Commencement date: January 1, Year 1 Lease term: 5 years Lessor makes no lease incentive payments. First recurring lease payment of $100,000 occurs on January 1, Year 1 Lease payments of $100,000 will be made on December 31 of Years 1 through 4. Lessor expects a residual value of $20,000. This amount is guaranteed by the lessee. The fair value of the asset is $425,000. The lease agreement does not transfer ownership of the equipment and it does not contain purchase option. The lessor incurred initial direct costs of $7,000 on January 1, Year 1. Lessee can compute Lessor's implicit rate. The leased asset has a 6-year expected life. Lessee is in excellent financial health. Required: a. Compute the implicit rate. b. Determine the lease classification for both lessee and lessor. c. Prepare the necessary journal entries for the lessee for Year 1.