On January 1, 2019, Hanover Company (lessor) entered a lease to rent out office space. The lease requires the lessee to pay Hanover $200,000 per year, at the beginning of each year, for 10 years. The lease is non-cancellable and non-renewable. The land and building’s cost and current fair value is $5 million, with $2 million allocated to the land and $3 million to the building. The building’s estimated residual value at the end of its 30-year useful life is $0. The interest rate implicit in the lease is 10%.

Required:

Classify this lease for Hanover Company and record its journal entries for the first year of the lease.