Fig 7.3: Transaction flow and accounting event. No. Transactions /Events DR CR. 1 Purchase of Asset by Bank Equipment Cash/Creditors Murabaha Financing Equipment at cost 2 Murabaha sale (cost+profit) Deferred profit with profit 3 Installment receipt Cash Murabaha Financing 4 Recognition of profit as each Deferred profit Profit and Loss installment s receved 5. Termination of contract A/c Receivable Murahaha Financing 6 Rebate for early payment Deferred Profit Murabaha Financing 7.5 Measurement of Murabah financing Assets . Upon acquisition of Assets: With obligation : Assets should be measured at lower of historical cost or impaired value. (not to over value- prudence & protect the purchaser) Without Obligation: Assets should be measured at cash equivalent value. (reflect current value & protect the bank/ financier) A provision should reflect any decline between the acquisition cost and cash equivalent value. 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 Upon financing the customer: 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 Profits are recognized at time of contracting for cash or credit transaction not exceeding the current financial period. If credit period > one financial period with a single or several installment , the recognition methods are: Accrual basis method4 An Islamic Bank provides a Murabaha to the Purchase Orderer nancing 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