Question

Asian Islamic Bank entered a three-year Istisna' contract to construct a bungalow for a total price of $1,200,000 commencing 1 January 2008. The following costs were estimated at the time of concluding the contract:

	31 Dec 2008	31 Dec 2009	31 Dec 2010	Total
Materials	120,000	180,000	50,000	350,000
Wages	180,000	120,000	50,000	350,000
Total	300,000	300,000	100,000	700,000

 

Billings were made in year 2008 for $600,000, $300,000 in year 2009 and the remaining balance was billed at the end of year 2010. Following is the payment schedule that was agreed with the client of Asian Islamic Bank:

Year	Total
2008	10%
2009	10%
2010	20%
2011	30%
2012	30%

 

There was a substantial increase in material cost in 2010 due to the liquidation of a major supplier for the said material. Accordingly, the bank revised its cost estimate for material to increase by 10% higher from overall original cost. In order to anticipate the increase in cost, the customer and the bank has agreed to incorporate the increase in the selling price by the same amount.

The bank recognizes profit based on the percentage of completion method.

 

Required:

1.       Prepare ledger accounts in the books of Asian Islamic Bank for all relevant transactions for the accounting periods ending;

1. 31st Dec 2008
2. 31st Dec 2009
3. 31st Dec 2010
4. 31st Dec 2011, and
5. 31st Dec 2012

 

2.    Prepare the Statements of Financial Position (extract) and Income Statements (extract) for the year 2008 to 2010 to present the transactions relating to the contract

 

Answer 1

ANSWER QUESTION 1

1. 31^st December 2008

	Dr ($)	Cr ($)
Istisna’ WIP	300,000
Cash		300,000
Istisna’ Receivable	600,000
Istisna’ Billings		600,000
Cash	120,000 (1,200,000*10%)
Istisna’ Receivable		120,000
Cost of Istisna’ Revenue	300,000
Istisna’ WIP	214,286 (500,000*300,000/700,000)
Istisna’ Revenue		514,286

 

2. 31^st December 2009 

	Dr	Cr
Istisna’ WIP	300,000
Cash		300,000
Istisna’ Receivable	8300,000
Istisna’ Billings		300,000
Cash	120,000 (1,200,000*10%)
Istisna’ Receivable		120,000
Cost of Istisna’ Revenue	300,000
Istisna’ WIP	214,286 (500,000*300,000/700,000)
Istisna’ Revenue		514,286

 

3. 31^st December 2010 

	Dr	Cr
Istisna’ WIP	135,000
Cash		135,000
Istisna’ Receivable	300,000
Istisna’ Billings		300,000
Cash	240,000 (1,200,000*20%)
Istisna’ Receivable		240,000
Cost of Istisna’ Revenue	135,000
Istisna’ WIP	36,428
Istisna’ Revenue		171,428

4. 31^st December 2011

	Dr	Cr
Cash	360,000
Istisna’ Receivable		360,000

 

5. 31^st December 2012

	Dr	Cr
Cash	360,000
Istisna’ Receivable		360,000

 

ANSWER QUESTION 2

Income Statement (extract) for

	2008	2009	2010
Istisna’ revenue	514,286	514,286	171,428
Cost of Istisna’ Revenue	(300,000)	(300,000)	(135,000)
Istisna’ Profit	214,286	214,286	36,428

 

Statement of Financial Position (extract) as at

	2008	2009	2010
Istisna’ Billings	600,000	900,000	-
Istisna’ WIP	(514,286)	(1,028,572)	-
Istisna’ Receivable	480,000	660,000	720,000

 

Refer answer details for answer question 1 and 2