On January 1, 2016, Ballieu Company leases specialty equipment with an economic life of 8 years to Anderson Company. The lease contains the following terms and provisions:

	The lease is noncancelable and has a term of 8 years.
	The annual rentals are $31,000, payable at the beginning of each year.
	The interest rate implicit in the lease is 12%.
	Anderson agrees to pay all executory costs and is given an option to buy the equipment for $1 at the end of the lease term, December 31, 2024.
	The cost of the equipment to the lessor is $162,500, and the fair retail value is approximately $172,500.
	The lessor incurs no material initial direct costs.
	The collectibility of the rentals is reasonably assured, and there are no important uncertainties surrounding the amount of unreimbursable costs yet to be incurred by the lessor.
	The lessor estimates that the fair value is expected to be significantly greater than $1 at the end of the lease term.

The lessor calculates that the present value on January 1, 2016 of 8 annual payments in advance of $31,000 discounted at 12% is $172,476.47 (the $1 purchase option is ignored as immaterial).Required:

1.	Next LevelIdentify the classification of the lease transaction from Ballieu's point of view.
2.	Journal entries for Ballieu for the years 2016 and 2017.

CHART OF ACCOUNTS

Ballieu Company

General Ledger

	ASSETS
111	Cash
121	Accounts Receivable
122	Lease Receivable
141	Inventory
152	Prepaid Insurance
181	Equipment
198	Accumulated Depreciation

	LIABILITIES
211	Accounts Payable
231	Salaries Payable
250	Unearned Interest
261	Income Taxes Payable

	EQUITY
311	Common Stock
331	Retained Earnings