Java JDK on OSX Mountain Lion

I am trying to run la Clojure that requires the JDK I have downloaded and installed sun version 7 on OSX Mountain Lion (OSX 10.8.2) this is what I have;

brooke  java -version
java version "1.7.0_09"
Java(TM) SE Runtime Environment (build 1.7.0_09-b05)
Java HotSpot(TM) 64-Bit Server VM (build 23.5-b02, mixed mode)
➜  brooke  whereis java

When I go to settings project General for project SDK it show <no SDK> and it opens finder for the new one which doesn't allow me to select /usr/bin/java

How do I set up JDK?

Your JDK home path should be "/Library/Java/JavaVirtualMachines/1.7.0.jdk/Contents/Home".
The bundled JDK 1.6 locates in "/System/Library/Java/JavaVirtualMachines/1.6.0.jdk/Contents/Home"
It is JAVA_HOME, not where java is.