Pacific Ltd has entered into an agreement to lease a crane to Masters Ltd. The lease agreement details are as follows.

Length of lease	5 years
Commencement date	1 July 2022
Annual lease payment, payable 30 June each year commencing 30 June 2023	$12000
Fair value of the crane at 1 July 2022	$48776
Estimated economic life of the crane	8 years
Estimated residual value of the crane at the end of its economic life	$2000
Residual value at the end of the lease term, of which 50% is guaranteed by Masters Ltd	$6000
Interest rate implicit in the lease	9%

The lease is cancellable, but a penalty equal to 50% of the total lease payments is payable on cancellation. Masters Ltd does not intend to buy the crane at the end of the lease term. Pacific Ltd incurred $1800 to negotiate and execute the lease agreement. Pacific Ltd purchased the crane for $48776 just before the inception of the lease.

Required

1. Prepare a schedule of lease payments for Masters Ltd.

2. Prepare journal entries to record the lease transactions for the year ended 30 June 2023 in the records of Masters Ltd.

3. State how Pacific Ltd should classify the lease. Give reasons for your answer.