Question

On 1 February 2014, MM Islamic Bank entered into a Salam Financing contract with Linggi Estate in Negeri Sembilan to supply 100 metric tonnes of Grade A palm oil at RM500 per tonnes (RM50,000). Linggi is to deliver the palm oil on 15 October 2014. On 10 May 2014, the bank entered into a Parallel Salam contract to supply the same to Oleo Sdn Bhd. The sale to Oleo is RM600 per tonnes (RM60,000) and palm oil is to be delivered on 30 October 2014. On 15 October 2014, Linggi could only deliver 80 tonnes of the palm oil. The bank was forced to purchase 20 tonnes from the open market at RM550 per tonne. It was agreed that the extra RM50 per tonne is to be borne by Linggi. As at 31 December 2014, Linggi still has not paid the difference to the bank. However, all palm oil was delivered to Oleo on the agreed date.

Required:

Record journal entries for the Salam and Parallel Salam transactions in the books of the bank.

Answer 1

 

 

1/2/2014	Debit. Salam Financing   Credit. Cash (Purchase of commodities paid in full on the spot)	RM50,000    RM50,000
10/5/2014	Debit. Cash   Credit. Parallel Salam (Entered into Parallel Salam with the customer)	RM60,000   RM60,000
15/10/2014	Debit. Salam Commodities   Credit. Salam Financing (Received first shipment from seller 80 tonnes @ RM500)	RM40,000   RM40,000
15/10/2014	Debit. Salam Commodities   Credit. Cash (Purchased remaining commodities 20 tonnes)	RM11,000   RM11,000
15/10/2014	Debit. Account Receivable   Credit. Profit or Loss (Profit from cost charged to the seller)	RM1,000   RM1,000
30/10/2014	Debit. Parallel Salam   Credit. Salam Commodities (Transfer of commodities to customer 100 tonnes)	RM51,000   RM51,000
30/10/2014	Debit. Parallel Salam   Credit. Profit from Parallel Salam (Transfer of commodities worth RM51,000 for RM60,000 = RM9,000 profit)	RM9,000   RM9,000

 

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Debit. Cash   Credit. Account Receivable (Payment made by seller for the cost liable)

RM1,000   RM1,000

 

Salam  financing shall  be recognized  when the capital  of Salam  is paid  (whether in  cash, kind  or benefit)  to  Al-muslam  Ileihi  [seller  of  goods]  or when  it  is  made  available  to him.  Parallel  Salam transactions shall be recognized when the Islamic bank receives the capital of Salam. Capital is measured by the amount paid. Capital provided in kind or benefit shall be measured at the fair value.

 

At the end of a financial period capital is measured by the amount paid. However if it is probable that seller will not deliver the goods in part or in full or it is probable that value of goods to be delivered will decline, the Islamic bank shall make a provision for estimated deficit. Parallel Salam transaction shall be presented in the financial statement as liability.

 

Assets received by the Islamic bank in accordance with the contract are recorded at historical cost. In the case of receipt of a similar kind of goods, but of a different quality; if the market value of the received goods is  equal to the value of  contracted goods, the received  goods shall be  measured at book value, however,  if the  market  value is  lower,  then  the difference  shall  be  recognized  as loss  [same  is the treatment for substituted goods]. 

 

In case of failure to  receive goods at due date and extension granted to  seller, no  change in  Salam capital. If contract cancelled and client does not repay the capital of Salam the amount shall be recognized as receivable due from the client. In case  Islamic bank has  the securities pledged for  Al-muslam Fihi [Salam goods] and proceeds from  sale of the securities are less than book value of Salam goods, the difference is recognized as a receivable due from the client. However if proceeds are more than the book value, then the difference is credited to the client.

 

At the end of a financial period, assets acquired through Salam financing shall be measured at the lower of cost and cash equivalent value; loss (if any) shall be recognized in income statement. 

 

Upon delivery of goods by the Islamic bank to the client in a parallel Salam transaction, the difference between amount paid by the client and the cost of Salam goods shall be recognized as profit or loss.