Question

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.

Answer 1