Question
In: Accounting
KL Islamic Bank entered a two-year Istisna' contract to construct a power generator for a total...
KL Islamic Bank entered a two-year Istisna' contract to construct a power generator for a total price of $600.00 commencing 1 January 2007. The following costs were estimated at the time of concluding the contract.
| 31 December 2007 | 31 December 2008 | Total | |
| Materials | 120,000 | 60,000 | 180,000 |
| Wages | 180,000 | 120,000 | 300,000 |
| Total | 300,000 | 180,000 | 480,000 |
Billings were made in year for 2008 for $225,000 and the remaining balance was billed at the end of year 2008.
Following is the payment schedule that was agreed with the client of KL Islamic Bank:
| Year | % of total price |
| 2007 | 25% |
| 2008 | 30% |
| 2009 | 45% |
There was a substantial increase in material cost in 2008 due to the liquidation of a major supplier for the said material. Accordingly, the bank revised its cost estimate for material to be $60,000 higher than previously planned.
The bank recognizes revenue based on the percentage of completion method.
Required:
a. prepare all necessary journal entries for the year 2007 to 2009 to record the above transactions in the books of KL Islamic Bank.
b. prepare the Statement of Financial Position (extract) and Income Statements (extract) for the year 2007 and 2008 to present tne transactions relating to the contract.
Solutions
Expert Solution
Part a)
The journal entries are given as follows:
| Year - 2007 | |||
| Account Titles | Debit | Credit | |
| Istisna' WIP | $300,000 | ||
| Cash | $300,000 | ||
| Istisna' Receivable | $225,000 | ||
| Istisna' Billings | $225,000 | ||
| Cash (600,000*25%) | $150,000 | ||
| Istisna' Receivable | $150,000 | ||
| Cost of Istisna' Revenue | $300,000 | ||
| Istisna' WIP | $75,000 | ||
| Istisna' Revenue | $375,000 | ||
| Year - 2008 | |||
| Istisna' WIP | $240,000 | ||
| Cash | $240,000 | ||
| Istisna' Receivable | $375,000 | ||
| Istisna' Billings | $375,000 | ||
| Cash (600,000*30%) | $180,000 | ||
| Istisna' Receivable | $180,000 | ||
| Cost of Istisna' Revenue | $240,000 | ||
| Istisna' WIP | $15,000 | ||
| Istisna' Revenue | $225,000 | ||
| Istisna' Asset | $600,000 | ||
| Istisna' WIP | $600,000 | ||
| Istisna' Billings | $600,000 | ||
| Istisna' Asset | $600,000 | ||
| Year - 2009 | |||
| Cash (600,000*45%) | $270,000 | ||
| Istisna' Receivable | $270,000 |
_____
Part b)
The statement of financial position (extract) and Income Statements (extract) for the year 2007 and 2008 to present tne transactions relating to the contract is provided as follows:
| Statement of Income For: | 2007 | 2008 |
| Istisna' Revenue | 375,000 | 225,000 |
| Cost of Istisna' Revenue | -300,000 | -240,000 |
| Istisna' Profit/(Loss) | $75,000 | -$15,000 |
_____
| Statement of Financial Position As At: | 2007 | 2008 |
| Istisna' Billings | 275,000 | |
| Istisna' WIP | -375,000 | |
| Istisna' Receivable | 45,000 | 270,000 |
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