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Chapter 7. Accounting for Murabahah,
Murabaha to the Purchase Orderer
‫اﻟﻤﺮاﺑﺤﺔ واﻟﻤﺮاﺑﺤﺔ ﻟﻶﻣﺮ ﺑﺎﻟﺸﺮاء‬
‫ﺟﻨﺎح أن ﺗﺒﺘﻐﻮا ﻓﻀﻼً ﻣﻦ رﺑﻜﻢ‬
‫ﺲ َﻋﻠ ﻜﻢ‬
ٌ
َ ْ َ ‫ ﻟ‬..
“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( اﻟﻨﺎﻗﺔ ﻣﻦ أﺑﻲ ﺑﻜﺮ‬
..‫ﺒﺘ ﺎ ﻟ ﻗﺎل ﺑﻞ ﺑﺎﻟﺜﻤﻦ‬ª ‫ﻟﻠ ﺠﺮة ﺑﺎﻟﺘﻮﻟ ﺔ ﻷﻧ ﺣ ﻦ أراد أﺑﻮ 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
7
CHAPTER LEARNING OBJECTIVES:
At the end of this chapter you will, insha Allah you will be able to:
i.
ii.
iii.
iv.
v.
vi.
Explain the meaning of and differences between murabaha,
murabaha to the purchase orderer and how they are used by
Islamic banks to finance customers
List the principles of murabaha and mtpo financing as well as the
rules
Journalise accounting entries for murabaha and mtpo.
Prepare the balance sheet and income statement extracts for
murabaha transactions
Apply accounting treatment for penalties
Account for deposits, refundable and non-refundable.
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Chapter 7. Accounting for Murabahah,
Murabaha to the Purchase Orderer
‫اﻟﻤﺮاﺑﺤﺔ واﻟﻤﺮاﺑﺤﺔ ﻟﻶﻣﺮ 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.
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Chapter 7. Accounting for Murabahah,
Murabaha to the Purchase Orderer
‫اﻟﻤﺮاﺑﺤﺔ واﻟﻤﺮاﺑﺤﺔ ﻟﻶﻣﺮ 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.
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Chapter 7. Accounting for Murabahah,
Murabaha to the Purchase Orderer
‫اﻟﻤﺮاﺑﺤﺔ واﻟﻤﺮاﺑﺤﺔ ﻟﻶﻣﺮ 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:
ISLAMIC BANK
VENDOR
(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.
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Chapter 7. Accounting for Murabahah,
Murabaha to the Purchase Orderer
‫اﻟﻤﺮاﺑﺤﺔ واﻟﻤﺮاﺑﺤﺔ ﻟﻶﻣﺮ 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:
(1)
(2)
VENDOR
ISLAMIC
BANK
(3)
CUSTOMER
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Chapter 7. Accounting for Murabahah,
Murabaha to the Purchase Orderer
‫اﻟﻤﺮاﺑﺤﺔ واﻟﻤﺮاﺑﺤﺔ ﻟﻶﻣﺮ 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
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Chapter 7. Accounting for Murabahah,
Murabaha to the Purchase Orderer
‫اﻟﻤﺮاﺑﺤﺔ واﻟﻤﺮاﺑﺤﺔ ﻟﻶﻣﺮ 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
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Chapter 7. Accounting for Murabahah,
Murabaha to the Purchase Orderer
‫اﻟﻤﺮاﺑﺤﺔ واﻟﻤﺮاﺑﺤﺔ ﻟﻶﻣﺮ 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.
Refusal
Order
Purchase
Financing
Deposit
Gain/Loss on
disposal/deposit
refund
Installmenr
repayment
Early
payment/
default
Cash / cash
equivalent
Rebate/
Write -off
Disbursement
Receivable /
collateral
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Chapter 7. Accounting for Murabahah,
Murabaha to the Purchase Orderer
‫اﻟﻤﺮاﺑﺤﺔ واﻟﻤﺮاﺑﺤﺔ ﻟﻶﻣﺮ ﺑﺎﻟﺸﺮاء‬
Fig 7.3: Transaction flow and accounting event.
No.
Transactions /Events
1 Purchase of Asset by Bank
2 Murabaha sale
3 Installment receipt
Recognition of profit as each
4
installment s receved
5. Termination of contract
6 Rebate for early payment
DR
Equipment
Murabaha Financing
(cost+profit)
Cash
Deferred profit
CR.
Cash/Creditors
Equipment at cost
Deferred profit with
profit
Murabaha Financing
Profit and Loss
A/c Receivable
Deferred Profit
Murahaha Financing
Murabaha Financing
7.5 Measurement of Murabah financing Assets
l Upon acquisition of Assets:
Ø With obligation : Assets should be measured at lower of historical cost
or impaired value. (not to over value- prudence & protect the purchaser)
Ø Without Obligation: Assets should be measured at cash equivalent
value. (reflect current value & protect the bank/ financier)
Ø A provision should reflect any decline between the acquisition cost and
cash equivalent value.
l 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.
l Upon financing the customer:
Ø 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
l Profits are recognized at time of contracting for cash or credit transaction not
exceeding the current financial period.
l If credit period > one financial period with a single or several installment , the
recognition methods are:
• Accrual basis method
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Chapter 7. Accounting for Murabahah,
Murabaha to the Purchase Orderer
‫اﻟﻤﺮاﺑﺤﺔ واﻟﻤﺮاﺑﺤﺔ ﻟﻶﻣﺮ ﺑﺎﻟﺸﺮاء‬
•
Cash basis method
l Accrual basis method recognizes profit based on a proportionate allocation of
profits whether cash is received or otherwise
l 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
w Workings:
Unearned income =
(5 x 30,000) – 100,000 = RM 50,000
Balance sheet
Murabaha financing
Unearned income
Net receivable
Income statement
Murabaha Income
Year 0
150,000
(50,000)
100,000
Year 1
120,000
(40,000)
80,000
10,000
Working : Income = 10% of RM100,000 per year.
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Chapter 7. Accounting for Murabaha/BBA
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.
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Chapter 7. Accounting for Murabaha/BBA
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
Murabaha receivable
Cash
Unearned Income
b)
Cr
750,000
500,000
250,000
Dr
Murabaha receivable
Cash
Unearned Income
c)
500,000
500,000
-
Dr
Murabaha receivable
Cash
Unearned Income
d)
Murabaha receivable
Cash
Unearned Income
Cr
Cr
500, 000
500,000
Dr
650,000
Cr
500,000
150,000
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Chapter 7. Accounting for Murabaha/BBA
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.
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Chapter 7. Accounting for Murabaha/BBA
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)
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.
(ii)
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
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Chapter 7. Accounting for Murabaha/BBA
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 2 2004/2005, q2 )
Question 7-3
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Chapter 7. Accounting for Murabaha/BBA
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.
b.
Show journal entries for all transactions involving the murabaha.
Show extracts of the income statement balance sheet at the end of each
year to year 5.
Question 7-4
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Chapter 7. Accounting for Murabaha/BBA
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.
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Chapter 7. Accounting for Murabaha/BBA
(IIUM B.Acc, semester 1, 2000/2001, q3)
Question 7-6
1. 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
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Chapter 7. Accounting for Murabaha/BBA
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:
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Chapter 7. Accounting for Murabaha/BBA
a.
b.
c.
Discuss the relevance and importance of ‘Murabaha’ in financial reporting
and disclosure.
Explain the usefulness of ‘Provision of Unearned income’ in the accrual
basis accounting.
Based on the murabaha transaction, prepare the following extracts of banks’
financial statement.
i.
ii.
iii.
Balance sheet extract at year end using accrual basis accounting
Balance sheet extract at year end using cash basis accounting
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)
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Chapter 7. Accounting for Murabaha/BBA
(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 1st January 2006. . 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
30th 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 1st 2009. 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 31st December from the beginning until the
end of the contract.
(iii) Assuming the deposit paid by Zaitun was treated as the 1st 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
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Chapter 7. Accounting for Murabaha/BBA
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 31st 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 MASBi2 on Ijarah which closely followed FAS8?
(IIUM B.Acc, semester 1,2006/2007, Q2)