QUESTION 7-3

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 initial sale price of the equipment. The murabaha sale was to be paid in equal installment of RM300,000 over next 5 years. It was agreed that a late penalty payment of 5% of the installment receivable was to be made by Malaysian Constructions Bhd., should the 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. 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.
Year 1 Jan 1 Equipment Cash (Purchase of the asset by the bank) Dr Year 1 Jan 1 Murabaha Financing a/c Equipment Deferred Profit Financing) (from Murabaha 1,500,000 1,000,000 500,000 Cr Dr 1,000,000 1,000,000 Cr

Journal Entries

(Recognition of Murabaha Financing)

Journal Entries (Cont)

ii. Dec 31, year 1 the client paid the bank RM300,000 as scheduled.
Year 1 Dec 31 Cash Murabaha Financing a/c (Repayment by the customer) Year 1 Dec 31 Deferred Profit P&L a/c (income from Murabaha Financing) (Recognition of Income) Dr 100,000 100,000 Cr Dr 300,000 300,000 Cr

Journal Entries (Cont)

iii. Dec 31, year 2, the client paid the bank RM300,000 as scheduled.
Year 2 Dec 31 Cash Murabaha Financing a/c (Repayment by the customer) Year 2 Dec 31 Deferred Profit P&L a/c (income from Murabaha Financing) (Recognition of Income) Dr 100,000 100,000 Cr Dr 300,000 300,000 Cr

Journal Entries (Cont)

iv. Dec 31, Year 3, the client could not pay on time but

subsequently paid RM300,000 and penalty in Feb 28, year 4.

Year 3 Dec 31 a/c Receivable Dr 300,000 Cr

Murabaha Financing a/c

(Default Payment) Year 3 Dec 31 Deferred Profit P&L a/c (income from Murabaha Financing) (Recognition of Income) Year 3 Dec 31 a/c Receivable (5% x RM3000,000) Dr 15,000 Dr 100,000

300,000

Cr 100,000

Cr

Charity Payable a/c

(Penalty charged and credited to charity account)

15,000

Journal Entries (Cont)

Year 4 Dr Cr 315,000

Feb 28 Cash
a/c Receivable (Repayment of year 3 in year 4) Year 4 Feb 28 Charity Payable a/c Cash (Penalty paid by the customer)

315,000

Dr 15,000

Cr 15,000

Journal Entries (Cont)

v.

Dec 31, year 4, the client paid the bank RM300,000 as scheduled.
Dr Cash Murabaha Financing a/c 300,000 300,000 Cr

Year 4 Dec 31

(Repayment by the customer) Year 4 Dec 31 Deferred Profit P&L a/c (income from Murabaha Financing) (Recognition of Income) Dr 100,000 100,000 Cr

Journal Entries (Cont)

vi. On Jan 31st, year 5 Malaysian constructions decided to pay

off the assets in full and requested Bank Islam Brunei for a rebate. Bank Islam Brunei decided to give a 50% rebate on pro rata basis (to the nearest month) on the balance of the profits. On the same day, Malaysian construction settled the difference.
Year 5 Jan 31 Cash Dr 254,166.67 Cr

Deferred Profit
Murabaha Financing a/c (Early Settlement by the customer )

45,833.33
300,000

Journal Entries (Cont)

Year 5 Jan 31 Deferred profit P&L a/c (income from Murabaha Financing) Murabaha Financing a/c (Recognition of Income and rebate received for early settlement) Dr 100,000 54,166.67 45,833.33 Cr