On January 1, 2013, Ali's Sports Company, an sports equipment manufacturer, entered into an arrangement, as the lessor, to lease equipment with the following terms:

- An $80,000 annual lease payment - due at the beginning of each year.

- The lease term is 6 years.

- There is a guaranteed residual value of $25,000 at the end of the lease

- The lease has an interest rate of 5.4% - implied.

- The equipment has a cost of $345,000, which is included in inventory.

- The selling price of the equipment is $460,000, which is the fair market value.

- The economic useful life of the equipment is eight years.

- Ali's Sports Company has a December 31 year end.

Required [Show All Working]

1) Determine the classification of the lease.

2) Prepare all the journal entries for 2013 related to this lease.