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TUTORIAL ISTISNAA Ambank Islamic entered into a 4 year Istisnaa contract with the Malaysian government to build a bridge over the Kelang river at $100

TUTORIAL ISTISNAA

Ambank Islamic entered into a 4 year Istisnaa contract with the Malaysian government to build a bridge over the Kelang river at $100 million and payable by the Malaysia governments as follows:

On signing of contract

10%

End of 1st year

20%

2nd year

20%

End of 3rd year

30%

End of 4th year

20%

The bank billed the Malaysian government on schedule and the government paid promptly.

The istisnaa contract stipulated any increase in costs will be bome by the bank and will not be passed on to the government. However, the government would not charge any penalty for late completion of up to a year.

At the same time, Ambank Islamic entered into a parallel istisnaa contract worth $80 million with United Engineers Malaysia to build, test and hand over the bridge over a two year period. United Engineers did not agree to bear any additional cost over run. The bank agreed to pay United Engineers a 10% initial payment on the signing of the contract. Subsequent payments by the bank would be in 30 days after each progress billing was made to the bank.

In the first year, United Engineers billed $32 million to the bank. In the second year however. Costs escalated and United Engineers informed the bank that it would cost an additional $25 million to complete the bridge and required an extension of 6 months. They billed the bank another $50 million during the second year.

In the third year, United Engineers completed the bridge. However, the actual costs had only gone up by $20 million and United Engineers agreed to pay a penalty of $5 million according to the istisnaa contract for late completion. The SSB of Ambank Islamic had established that any late payments by sub contractors was not considered as riba and to be taken as revenue of the bank. UEM billed the bank remaining amount during the third year and was paid accordingly in the same year.

Required:

Journal entries in the books of Ambank Islamic for the above transactions from year 1 to 4 if profits are recognized on a percentage of completion basis.

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