Please read the case and answer all questions.

Bank Faisal Berhad has provided capital to Asnaf Maju Sdn. Bhd. based on the principles of musharakah mutanaqisah amounting to RM500,000 for a project. Profit and loss sharing ratio as agreed by both parties is 40:60 (Bank:Customer) at the beginning of the contract. The Bank and Asnaf Maju Sdn. Bhd. have also agreed for the profit-sharing ratio to change to 30:70 for year 3 and 4. The repayment shall be equal throughout the contract period.

However, Asnaf Maju Sdn. Bhd. has financial difficulties during year 2 and thus only managed to pay 50% instalment on the capital for that year. The entrepreneur also faced with financial difficulties in year 4 whereby the repayment outstanding is amounting to RM 10,000 at the end of the contract. The profit and loss for the above project is as follows: Year 1 Profit of RM90,000 Year 2 Loss of RM40,000 Year 3 Profit of RM120,000 Year 4 Loss of RM50,000

a) You are required to prepare extract of journal entries from the beginning until the end of the contract to record the recognition of asset and profit/loss of musharakah mutanaqisah financing provided by Bank Faisal Berhad based on the following recognition methods: i. Accrual basis ii. Cash basis (50 Marks)

b) Discuss about the cash basis and accrual basis approaches in recognition of profit or income in the contract of Musharakah? (10 Marks)