it is no crime for you to seek the bounty of your lord (Al Baqarah 2:198) At the end of this chapter you will, insha Allah you will be able to:
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1 Chapter 7. Accounting for Murabahah, Murabaha to the Purchase Orderer المرابحة والمرابحة للا مر بالشراء ل س ع ل كم جناح أن تبتغوا فضلا من ربكم it is no crime for you to seek the bounty of your lord (Al Baqarah 2:198).. واستدل عل ا بالق اس على التول ة فقد اشترى رسول الله (ص) لل جرة بالتول ة لا ن ح ن أراد أبو بكر بت ا ل قال بل بالثمن.. الناقة من أبي بكر The Murabaha is also analogous to a form of sale called Tawliyyah (to sell as per the purchasing price without making profit. This is because the Prophet (BBUH) purchased a she-camel from Abubaker for use as transportation means to migrate to Medina. Abubaker had wanted to give it to the prophet free of charge but the prophet refused and said: I will preferably take it at the acquisition price. CHAPTER LEARNING OBJECTIVES: Chapter 7 At the end of this chapter you will, insha Allah you will be able to: i. Explain the meaning of and differences between murabaha, murabaha to the purchase orderer and how they are used by Islamic banks to finance customers ii. List the principles of murabaha and mtpo financing as well as the rules iii. iv. Journalise accounting entries for murabaha and mtpo. Prepare the balance sheet and income statement extracts for murabaha transactions v. Apply accounting treatment for penalties vi. Account for deposits, refundable and non-refundable.
2 Chapter 7. Accounting for Murabahah, Murabaha to the Purchase Orderer المرابحة والمرابحة للا مر بالشراء 7.1 Introduction If you are still with me after the previous two long (and perhaps boring) chapters, you will be well rewarded. This is the first chapter where we start making accounting entries (at last!). Murabaha or cost plus markup sale is the first of asset based financing contracts employed by Islamic banks. It is the most widely used financing instrument as it somehow resembles a loan contract. Other asset based financing contracts are salam and istisna a. In contrast to these, we have contract based on services i.e ijarah, ijarah muntahia bi tamlik (or ijarah thumma al bai (the Malaysian version) and wakalah (agency contracts). In this chapter, we will first define murabaha, murabaha to the purchase orderer. We will then discuss the rules and principles of the contracts to understand what) accounting entries are needed. We will then learn the accounting entries on contract intiation, instalment receipts, revenue recognition, recognition and measurement of assets, and the accounting treatments for termination, deposits and penalties. I will illustrate with some examples and will finally leave you to do the problems in the chapter some of which have answers at the back of the book. 7.2 Definition of Murabaha and Murabaha to the purchase orderer. When a business wants to purchase an asset, they have four choices: (i) (ii) (iii) (iv) (v) pay cash difficult if it is a big ticket item, say vehicle, machinery or buildings get it on credit from the vendor, possibly through interest free credit card; you can forget about getting interest free credit from a car dealer or housing developer. Get a loan to buy the asset either from a conventional financial institution. Get an Islamic financing from an IFI. Defer or forget about the intended purchase. In a conventional financing, the buyer usually pays a deposit to the vendor and the remaining amount is financed through a loan or hire purchase or leasing, the substance of which is he pays in installments, include interest for the time, he uses the bank s money. If he goes to an Islamic Financial Institution, he has various financing options; murabaha, musharaka mutanaqissa, ijarah muntahi bitamlik and others (if the goods are not available, salam and istisna can be used). We will learn murabaha in this chapter and the rest later, inshaallah.
3 Chapter 7. Accounting for Murabahah, Murabaha to the Purchase Orderer المرابحة والمرابحة للا مر بالشراء Definition of Murabaha and Murabaha to the Purchase Orderer. There are two types of Murabaha viz. Murabaha and Murabaha to the Puchase Orderer. We also have the controversial Malaysian Bai Bithaman Ajil. In Islam, a sale (sarf) can take place in the following ways: (i) (ii) (iii) on the spot exchange, where the buyer gets the goods and pays the price to the seller on the spot. Sale for deferred payment (bai al muajjal), where the seller sells the goods but the pays the agreed price at a future date in a full lump sum or in installments over a period. The buyer pays in advance for an agreed kind, quality, quantify of goods and the seller either makes it to order (istisna) or buys or produces it (salam) and delivers it to the buyer at a later agreed date. Murabaha comes under (ii), and in its original practice, not necessarily a credit sale. FAS2 defines murabaha as follows: Definitions A Murabaha is defined by Fuqaha (jurists) as the sale of goods at cost plus an agreed profit mark up.its characteristic is that the seller should inform the purchaser of the price at which he purchased the product and stipulate an amount of profit in addition to this. The Murabaha conditions include the following: a. The Islamic bank should make the cost or capital outlay known to the client. b. The first contract should be valid. c. The contract should be free of usury. d. The Islamic bank should disclose any fault which occurs after the purchase and should disclose all what is related to the fault. e. The Islamic bank should disclose the terms applicable to the purchase price, for example if the purchase was on credit.
4 Chapter 7. Accounting for Murabahah, Murabaha to the Purchase Orderer المرابحة والمرابحة للا مر بالشراء f. If any of the conditions in (a), (d) or (e) is not met, the purchaser shall have the option to: 1. proceed with the sale as it is; 2. have recourse to the seller for the discrepancy; or 3. cancel the contract. It is worth noting that a Murabaha sale in the above context means the selling of a product owned by the seller at the time of negotiation and contracting. (FAS 2, appendix B) It is also worth noting, that murabaha is not necessarily a sale on credit or deferred basis but to avail the experience of an expert buying agent. However, as practiced by Islamic banks, it is invariably due the need for credit that it is practiced. Under fiqh rules, the price for a murabaha sale need not be paid on spot, It can be deferred either to one lump sum in the future or paid in a series of installments. As a mode of Islamic financing product, we can redefine murabaha as a sale in which the Islamic bank informs the customer of its own cost and the profit it is taking on the transaction and where the sale price is paid in installments over an agreed period of time. We can depict the murabaha transaction as follows: VENDOR ISLAMIC BANK (3) CUSTOMER (1) (2) Fig 7.1: Murabaha transaction (1) The banks buys the goods for murabaha sale from the vendor and pays for it. (2) The Bank enters into a murabaha contract with a customer and delivers the good. (3) The customers pays the bank in installments over the contract period.
5 Chapter 7. Accounting for Murabahah, Murabaha to the Purchase Orderer المرابحة والمرابحة للا مر بالشراء Some Islamic banks such as the Kuwait Finance House practices this model, in the case of motor car financing. The bank has warehouses, where it keeps its cars which it has bought from manufacturers or dealers. The customer wanting to purchase a car with financing goes to the warehouse and selects a car, informs the bank and signs the murabaha contract. He drives off with the car and pays for it later in installments. However, most Islamic banks do not want to do this, as it involves trading and it is risky in the sense that the bank is an owner of the bought goods (and this is reflected in the balance sheet as inventory) and is thus liable for risk of loss, damage and decline in value until the time it manages to sell it to a customer. Hence, in most cases, Islamic Banks use Murabaha to the Purchase Orderer. This is defined as follows: Definitions Murabaha to the purchase orderer is a sale in which two parties or more negotiate and promise each other to execute an agreement according to which the orderer asks the purchaser to purchase an asset of which the latter will take legal possession. The orderer promises the purchaser to purchase the asset from him and give the ordered a profit thereon. The two parties would conclude a sale after the possession of the ordered to the asset (1). However, the purchase orderer may or may not be obliged to conclude the sale. (FAS 2 Appendix B1/2/1) We can depict the Murabaha to the purchase orderer as follows: The Murabaha to the Purchase Orderer transaction can be depicted as follows: VENDOR (2) ISLAMIC BANK (1) (3) CUSTOMER
6 Chapter 7. Accounting for Murabahah, Murabaha to the Purchase Orderer المرابحة والمرابحة للا مر بالشراء (4) Fig 7.2: Murabaha to the Purchase orderer transaction. (1) The customer orders the bank to purchase goods, which it promises (this may be binding or non binding) to buy from the bank giving it some profit. (2) The bank buys and pays for the goods from the vendor. (3) The banks executes a murabaha contract of sale to the customer and delivers the goods. (4) The customer pays for the goods on an installment basis to the bank. 7.3 Rules, principles and complexities in Murabaha. Besides the principles mentioned in the definition box of murabaha, we should note the following: In a murabaha to the purchase orderer, the promise to buy of the customer (the purchase orderer) may be binding or non binding. This result from different shari a opinions. One group of scholars view that the promise is non-binding because: (a)the bank cannot sell what it does not possess (at the time of making the promise) (b) The goods may be defective, deficient or unnecessary when delivered. However, this will present problems to the Islamic banks as it incurs cost to purchase the goods and as a financing institution would not want to be left with unsold inventory. In order to reduce the risk of the Islamic bank, the bank may require a deposit from the orderer (potential customer) to ensure his seriousness. Under the shari a, there are two types of deposits which the bank can demand. One is known as Hamish jiddiyah and the other urboun, each with different characteristics. These two deposits are defined by FAS2 as follows: Definitions Hamish jiddiyyah It is the amount paid by the purchase orderer upon request of the purchaser to make sure that the orderer is serious in his order of the asset. However, if the promise is binding and the purchase orderer declines to purchase the asset, the actual loss incurred to the purchaser shall be made good from this amount. Urboun It is the amount paid by the client (orderer) to the seller (i.e., the original purchaser) when the former purchases an asset from the
7 Chapter 7. Accounting for Murabahah, Murabaha to the Purchase Orderer المرابحة والمرابحة للا مر بالشراء Hamish Jiddiyayah is problematic, because, in case of a non-binding promise, the bank will have to return the deposit in full to the potential customer, even if it subsequently incurs a loss in selling the goods, which the original orderer had refused to take delivery. In case, the promise is binding and the customer declines, the bank can deduct any losses and expenses it incurs on transaction from the deposit and return the excess. If the loss is greater than the deposit, the customer becomes liable for the balance. In case of urboun deposit, this is deducted from the purchase price if the customer proceeds with the sale. If not, the customer looses his deposit, even if the deposit is more than the loss incurred by the bank. In order to make it safer for Islamic banks, it should make the contract a binding promise and then require Hamish Jiddiyah or Urboun. However, this does not solve the problem of credit risk i.e. payment default by customer. To mitigate this, the bank may request for a guarantee from the customer. The goods sold under murabaha can be a collateral for the debt. In this case, however, the customer cannot sell the goods untl the debt is repaid to the bank. In the case of late payment and procrastination by the customer, the bank normally cannot levy any penalty as this would amount to interest. If the shari a board agree on a penalty, then this penalty cannot be recognized as revenue but given away as charity. The Islamic bank can institute legal proceedings to recover the debt and financial damage caused by procrastination (e.g. legal fees, lost opportunity ). Unless
8 Chapter 7. Accounting for Murabahah, Murabaha to the Purchase Orderer المرابحة والمرابحة للا مر بالشراء the goods sold are collateral, the goods cannot be taken by the Islamic bank to settle outstanding debt. If the indebted owner is insolvent and fails to settle the debt, the bank should defer collection until he becomes solvent. If the bank gets a discount on the purchase price, this will belong to the bank unless it was obtained at the time of making the promise to buy (by the customer) or before the Murabaha sale was concluded. The last rule to consider is early settlement of the debt or a lump sum payment before scheduled time. Since, the transaction is a sale, the bank is under no obligation to give a discount to the customer. However, due to competitive pressures, the Islamic banks do give a discount for early settlement. This is allowed under the shari a and is called ibra. The amount must be agreed between the bank and the customer at the time of settlement or before the lump sum payment is made. Bai bithamin ajil model has been discussed in chapter?? and will not elaborated here. However, we will do an illustration of the accounting entries for the BBA later. 7.4 Recognition and Measurement and Journal Entries. The following diagram depicts the transaction flow and the recognition (recording) of the events in the accounts. Order Purchase Refusal Gain/Loss on disposal/deposit refund Financing Installmenr repayment Early payment/ default Deposit Disbursement Receivable / collateral Cash / cash equivalent Rebate/ Write -off
9 Chapter 7. Accounting for Murabahah, Murabaha to the Purchase Orderer المرابحة والمرابحة للا مر بالشراء Fig 7.3: Transaction flow and accounting event. No. Transactions /Events DR CR. 1 Purchase of Asset by Bank Equipment Cash/Creditors 2 Murabaha sale Murabaha Financing (cost+profit) Equipment at cost Deferred profit with profit 3 Installment receipt Cash Murabaha Financing 4 Recognition of profit as each Deferred profit Profit and Loss installment s receved 5. Termination of contract A/c Receivable Murahaha Financing 6 Rebate for early payment Deferred Profit Murabaha Financing 7.5 Measurement of Murabah financing Assets Upon acquisition of Assets: With obligation : Assets should be measured at lower of historical cost or impaired value. (not to over value- prudence & protect the purchaser) Without Obligation: Assets should be measured at cash equivalent value. (reflect current value & protect the bank/ financier) A provision should reflect any decline between the acquisition cost and cash equivalent value. Price discount if obtained after acquisition should not be treated as revenue but to reduce the cost of the relevant goods unless agreed by SSB. Upon financing the customer: Murabaha receivables should be recorded (by the bank) at face value (cash equivalent value) less provision for doubtful debts Income recognition of Murabaha financing assets Profits are recognized at time of contracting for cash or credit transaction not exceeding the current financial period. If credit period > one financial period with a single or several installment, the recognition methods are: Accrual basis method
10 Chapter 7. Accounting for Murabahah, Murabaha to the Purchase Orderer المرابحة والمرابحة للا مر بالشراء Cash basis method Accrual basis method recognizes profit based on a proportionate allocation of profits whether cash is received or otherwise Cash basis method recognizes profit as and when the installments are received and requires the approval of SSB 1. Principle of matching expenses with income is applied 2. Deferral profits (unearned) shall be offset against Murabaha receivables in ths statement of financial position 3. Settlement amount is based on outstanding financial amount (accrual basis) 7.6 Accounting Illustration of Murabaha Financing ILLUSTRATION 7-1: MURABAHA FINANCING An Islamic financial institution provides a financing of $100,000 at a constant rate of return of 10% for a period of 5 years and requires an annual installment payment of $ 30,000 Prepare an extract of the Balance Sheet and income statement at the beginning and end of Year 1 Workings: Unearned income = (5 x 30,000) 100,000 = RM 50,000 Balance sheet Year 0 Year 1 Murabaha financing 150, ,000 Unearned income (50,000) (40,000) Net receivable 100,000 80,000 Income statement Murabaha Income 10,000 Working : Income = 10% of RM100,000 per year.
11 CIPA Multiple Choice Questions 1. In a Murabaha transaction, if a client accelerates payment of one or more installments prior to the date specified for such payment, the Islamic Bank may deduct part of the profit to be agreed upon between the Islamic Bank and the client at the time of settlement. The deducted amount a) shall be debited to the Murabaha receivables account. b) shall be treated as a liability. c) shall be excluded from the profit related to the instalments being prepaid. d) shall be credited to the Murabaha payables account. 2. Rukyah purchased a house from Sameera through an Islamic banking facility. If the contract of the facility is based on Murabaha, which of the following scenarios would be valid: a) The Islamic bank establishes a Special Purpose Company which would collect the equal proportions of capital from both the Islamic bank and Rukyah before purchasing the house from Sameera. The title of ownership is shared by both parties until Rukyah purchases off the entire ownership. b) Rukyah pays Sameera a downpayment and gets the Islamic bank to finance the remaining amount. The title of ownership is passed to Rukyah upon making the downpayment. c) The bank purchases the house from Sameera and subsequently sells the house to Rukyah at cost plus a mark up. The title of ownership is passed to Rukyah upon concluding the sale agreement. d) The bank purchases the house from Sameera and subsequently sells the house to Rukyah at cost plus a mark up. The title of ownership is retained by the Islamic bank until full settlement. 3. Refer to the following statements and answer the question below: I. The settlement of debts under Murabaha to the purchase orderer should not be contingent upon the disposition of the goods sold. II. Measurement of asset value under Murabaha at acquisition is at cash equivalent value. III. Profits of a Murabaha shall only be recognized on proportionate allocation over the period of the credit/financing.
12 Which of the above statement(s) is false: a) I, II and III b) I and III only c) II and III only d) III only e) up. The title of ownership is retained by the Islamic bank until full settlement. 4 An Islamic Bank provides a Murabaha to the Purchase Orderer financing to Barakah Construction to purchase a specialized equipment to be used for Barakah Construction s business project. Financing is for US$ 500,000 at a constant rate of return of 10% for a period of 5 years. The annual installment payment is US$ 150,000. What is the Islamic Bank s journal entry at the start of the transaction in Year 1? a) Dr Cr Murabaha receivable 750,000 Cash 500,000 Unearned Income 250,000 b) Dr Cr Murabaha receivable 500,000 Cash 500,000 Unearned Income - c) Dr Cr Murabaha receivable 500, 000 Cash 500,000 Unearned Income - d) Dr Cr Murabaha receivable 650,000 Cash 500,000 Unearned Income 150,000
13 5 Mr. ABC made a non-binding promise to an Islamic Bank that he would buy a van from the latter through a Murabaha transaction. Based on that promise, the Islamic Bank collected hamish jiddiyah of US$ 500 from him, and bought a van from a vendor for US$ 3,000 in cash. After the van is delivered to the Islamic Bank, Mr. ABC decided not to buy it. The Islamic Bank then sold the van to another customer, Mr. DEF, for US$ 2,800 in cash. Which of the following should apply? a) The Islamic Bank should return US$ 500 to Mr. ABC. b) The Islamic Bank should return US$ 300 to Mr. ABC. c) The Islamic Bank should not return any money to Mr. ABC. d) The Islamic Bank should not return any money to Mr. ABC but pass US$ 300 to Mr. DEF. 6. One of the strengths of the Murabaha contract for retail transactions is: a) The contract of Murabaha requires the repayment amount to be distributed over a certain period of time. b) The contract of Murabaha requires the selling price to be fixed without any hidden cost. c) The contract of Murabaha allows for flexible repayment plan negotiated with the bank and allows for early redemption with rebate on the unearned income. d) The contract of Murabaha requires the selling price to be fixed and allows for late payment charges.
14 Question 7-1 Question 7-1 a. Bank Syari ah Berhad provides a financing facility based on Bai Bithaman Ajil (BBA) principles to Ahmad bin Ali for the purpose of house purchase. The financing is amounting to RM300,000 at a constant rate of return 8% for a period of 5 years. At the end of the contract, Ahmad owes the bank amounting to RM32,000. As part of the normal requirements, the customers will be charged a penalty fee of 3% per month for any outstanding amount due at the end of the contract and the amount collected is normally disbursed as charity. You are required to : (i) (ii) Prepare an extract of the balance sheet and income statement of Bank Syari ah Berhad from the beginning till the end of the contract to show the amount of net receivable and Murabaha (BBA) income. Prepare journal entries to record all the above transactions in the book of Bank Syari ah Berhad (including the treatment for penalty fee). b. Explain the similarities and the differences between Murabaha to the Purchase Orderer and Bai Bithaman Ajil financing. (IIUM B.Acc, semester 1, 2004 / 2005, q1) Question 7-2
15 Kuwait Finance House (M) Bhd is a newly setup Malaysian subsidiary of a foreign Islamic bank which is in the process commencing operations in Malaysia. It started its operations by providing a BBA financing facility of RM 1 Million to Bumi Ventures (M) Bhd. to purchase its factory machinery. The terms of the contract are: Mark up 10 % on cost Period of financing 4 years Repayment in four equal yearly installments Early payment rebate 50 % of outstanding profit Bumi ventures paid all the installments for the first 3 years on schedule. At the end of the 3rd year Bumi ventures informed the bank that it wanted to settle the financing immediately and asked the bank to inform it of the balance after rebate. You are required to : a) Show journal entries for the transactions for the 3 years in the books of KFH. b) Show the extract of the balance sheet and income statements of KFH in respect of the above transactions at the end of the first 3 years and the beginning of the fourth year showing clearly what the amount owing by Bumi Ventures after rebate. ( IIUM B.Acc, mid term sem /2005, q2 ) Question 7-3
16 Bank Islam Brunei provided a murabaha financing facility to purchase construction equipment for Malaysian Constructions Bhd., for RM1,000,000. The mark up was agreed at 10% per year on the initial sale price of the equipment. The murabaha sale was to be paid in equal instalments of RM300,000 over the next 5 years. It was agreed that a late penalty payment of 5% of the instalment receivable was to be made by Malaysian Constructions Bhd., should they not pay on time. The SSB of the bank has decided that the penalty should be credited to a charity account. The following events took place in the five years. (i) (ii) (iii) (iv) (v) (vi) Jan 1, year 1, the murabaha contract was signed and the bank purchased the equipment for RM1,000,000 which was delivered directly to the clients construction site. The bank paid for the equipment in cash. Dec 31, year 1, the client paid the bank RM 300,000 as scheduled. Dec 31, year 2, the client paid the bank RM 300,000 as scheduled. Dec 31, year 3, the client could not pay on time but subsequently paid RM 300,000 and the penalty in Feb 28, year 4. Dec 31, year 4, the client paid the bank RM 300,000 as scheduled. On Jan 31st, year 5, Malaysian constructions decided to pay off the asset in full and requested Bank Islam Brunei for a rebate. Bank Islam Brunei decided to give a 50% rebate on a pro rata basis (to the nearest month) on the balance of the profits. On the same day, Malaysian constructions settled the difference. Required: a. Show journal entries for all transactions involving the murabaha. b. Show extracts of the income statement balance sheet at the end of each year to year 5. Question 7-4
17 Bank Muamalat provides a Bai Bithaman Ajil financing facility to Dodik for the purpose of buying a shop lot. The financing is amounting to RM400,000 at a constant rate of return 10% for a period of 4 years. At the end of the contract, Ahmad owes the bank amounting to RM40,000. It is the policy of the bank to charge customers a penalty fee of 4% per month for any outstanding amount due at the end of the contract and the amount collected is disbursed as charity. You are required to: i. Prepare an extract of the balance sheet and income statement of Bank Muamalat from the beginning till the end of the contract to show the amount of net receivable and Murabaha (BBA) income. ii. Prepare journal entries to record all the above transactions in the book of Bank Muamalat (including the treatment for penalty fee). Question 7-5 A customer of an Islamic Bank is interested to obtain short-term credit for his working capital financing and has approached you to seek your advice on Murabaha Financing. Required: a. Explain the usefulness of Murabaha Financing and the mechanism of Murabaha to the Purchase Orderer. b. State the limitations of Murabaha Financing.
18 (IIUM B.Acc, semester 1, 2000/2001, q3) Question Bank Muslimin Berhad provided a financing facility based on Murabaha principles to Ahmad Construction Sdn. Bhd. The financing amounted to RM1,000,000 at a constant rate of return 15% for a period of 5 years. The annual installment payment is RM350,000. You are required to prepare an extract of the balance sheet and income statement of Bank Muslimin Berhad from the beginning of the contract up to year 5 to show the amount of net receivable and Murabaha income. (IIUM B.Acc, semester 2, 2002/2003, q1b) 2. Explain the conceptual and contractual differences between Murabaha; Murabaha to the Purchase Orderer (as defined by the AAOIFI FAS 2) ; and Bai Bithaman Ajil (as practiced by Malaysian financial institutions); (IIUM B.Acc, semester 2, 2002/2003, 3a) Question 7-7 Bank Muamalah Berhad provides a financing facility based on the principles Murabaha to the Purchase Orderer to Barakah Construction Sdn. Bhd. to purchase a specialized equipment to be used for their business project. The
19 financing amounted to RM500,000 at a constant rate of return of 10% for a period of 5 years. The annual installment payment is RM150,000. You are required to: i. Prepare journal entries for Bank Muamalah Berhad only for the first year and final year of the contract. ii. Present a statement showing the amount of net receivable and murabaha income for the whole duration of the contract. (IIUM B.Acc, semester 1, 2003/2004, q1b) Question 7-8 One of the major forms of financing offered by Islamic financial institutions is Bai Bitham Ajil Financing. Essentially this is a deferred Instalment Sale with a Mark-up Price. A customer has paid several installments amounting to RM 100,000 including RM 60,000 of profit realized by the bank. The financing amount is RM 250,000 including a mark-up of RM90,000. Required:
20 a. Discuss the relevance and importance of Murabaha in financial reporting and disclosure. b. Explain the usefulness of Provision of Unearned income in the accrual basis accounting. c. Based on the murabaha transaction, prepare the following extracts of banks financial statement. i. Balance sheet extract at year end using accrual basis accounting ii. Balance sheet extract at year end using cash basis accounting iii. Journal entries for early settlement (IIUM B.Acc, semester 1, 1999/2000, 3) Question 7-9 In financing the purchase of property, Islamic bank provides Bai Bithaman ajil finacing (BBA). The Islamic bank finaced a completed semi-detached house of RM500,000 at 12% per annum financing rate for 15 years. The monthly instalment is RM5,941 per month. In addition the customer has to place a two-month security deposit at the beginning of the period. Required: a. Compute the unearned income at beginning of the period and determine realized income after one year using the gross margin and constant rate of return methods. b. If the customer agrees to make early settlement after 5 years how much will the outstanding principal c. Show the relevant accounting entries of both (a) and (b)
21 (IIUM B.Acc, semester 1, 1999/2000, 3) Question 7-10 Hong Leong Islamic Bank (HLIB) gave a 5 year financing facility based on BBA to Zaitun Industries to purchase factory machinery costing RM550,000 on 1 st January Zaitun would pay a deposit of RM50,000 of the amount to the manufacturer as buying agent of Hong Leong. The bank would take a profit of 8% per annum on a constant rate of return on the financing it provided to Zaitun. Payment to be made on a semi-annual basis. A penalty charge of 5% of the outstanding amount would be made for any payments more than 30 days late. The Shariah Supervisory Board of Hong Leong Islamic Bank had declared that any penalty on contracts can be taken as revenue of the company provided that the customer has been informed about it. Otherwise no penalty could be charged. In 2008, Zaitun industries paid the instalment due on 30 June 2008, only on 30 th August and was charged penalty which it disputed because it was not told about the penalty clause and the contract accidentally omitted it. It also informed Hong Leong Islamic Bank that it would like to pay the balance of the price on January 1 st and requested HLIB for a rebate based on ibra principles. HLIB decided to give an ibra of 20% of the remaining profit. Zaitun paid off the requested amount to HLIB and ended the contract. Required: (i) Give the journal entries for year 2006, year 2008 and year 2009 in the books of HLIB together with the extract of the Balance Sheet and Income Statement for the year ended 31 st December from the beginning until the end of the contract. (iii) Assuming the deposit paid by Zaitun was treated as the 1 st ijarah rental and the whole contract was an Ijara muntahia bitamlik where the repayments under BBA in (a) was considered to be ijarah rental payments and all the payments were made on time to Hong Leong and Zaitun
22 decided to rent the machinery until the 5 year ijarah contract expired. Give the journal entries in the books HLIB for 2006 and 2010 as well as the income statement and balance sheet for 31 st December 2006 and 2010 provide HLIB follows FAS8 of AAOIFI. Depreciate the machine on a straight line basis with no residual value. (iii) From the difference in treatment of the above transactions suggest reasons why Islamic banks in Malaysia rejected the original ED on MASBi- 2 on Ijarah which closely followed FAS8? (IIUM B.Acc, semester 1,2006/2007, Q2)
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