For the example provided in the fact pattern, assuming that no interest is payable/receivable on the

deposit, the following journal entries would need to be recorded in t0 and t1:

For the lessee:

t0:

DrCr

Deposit61.4

Deferred lease expenses38.6

Cash (100.0)

No impact on the profit and loss.

t1:

DrCr

Deposit3.0*

Interest income (3.0)

-to recognise the interest income applying the effective interest method-

Deferred lease expenses (3.9)

Operating lease expenses3.9

-to recognise the additional rent on a straight-line basis over the lease term-

For the lessor:

t0:

DrCr

Cash100

Deferred lease income (38.6)

Payable (61.4)
No impact on profit or loss

t1:

DrCr

Payable (3.0)

Interest expense 3.0

-to recognise the interest expense applying the effective interest method-

Rental income (3.9)

Deferred lease income3.9

-to recognise the additional rent on a straight-line basis over the lease term-

*estimated based on a 5% interest rate

The impact on profit or loss is a net loss (for the lessee)/net profit (for the lessor) of 0.9 CU arising
due to the recognition of the deferred lease expenses (lessee) / deferred lease income (lessor) on a
straight line basis over the lease term (10 years) and the recognition of interest income / interest
expense as an increase in revenue / expense over the term of the deposit.