8/11/2019 Accounting for Ijarah Transaction
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Bank Amanah Berhad entered into an ijarah contract with Sincere
Quality SDN BHD to lease
equipment for a period of 3 years. Bank Amanah Berhad purchased
equipment from a local
trader on 1stof January 2000 for RM60, 000. The bank also
incurred legal fees of RM500
relating to the ijarah contract, which the bank considered to be
material.
Other details about the ijarah are as follows:
Fair value of equipment:
At the beginning of 2000 RM60, 000
At the end of the lease:
31 December 2002 RM2, 000
Number of installments on quarterly basis 12
Rentals at the end of each quarter RM6, 000
Estimated useful life 3 years
Estimated residual value at the end of useful life RM4, 000
Estimated expenditure incurred in the second year RM1, 200
Question:
Prepare journal entries to record the above ijarah contract in
the books of Bank Amanah Berhad
assuming the lease was treated as Ijarah Muntahia Bitamleek
through sale for a tokenconsideration (agreed to be equivalent to
50% of the estimated residual value at the end of useful
life) for the following periods:
At the beginning of ijarah
On receipt of first rental
At the end of first year; and
At the end of ijarah term
8/11/2019 Accounting for Ijarah Transaction
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On 1stJanuary 2007 Bank ISLAM Pakistan Ltd arranged an Ijarah
Muntahiya Bitamleek
financing for Pakistan Car Rental for a 4 year period. The
package was for 10 proton gen 2 cars
from the Malaysian manufacturer at a cost of RM100, 000 (total
cost) at a yearly of RM37, 500.
The bank entered into a maintenance contract with Proton for a
major service at a yearly cost of
RM500 per car.
The rentals to be paid in yearly installments over the four
years in advance. During discussion
with Pakistan Car Rental, the bank considered the following
options:
Option A:
The bank promises to give the cars as a gift at the end of the
contract.
Option B:
Pakistan Car Rental to undertake a binding promise to buy the
cars at RM2, 000 per car at the
end of the ijarah period. However, in this case, the ijarah
rentals to be RM35, 000 per year
payable yearly.
Question:
i) Work out the profits for the bank in each case and advise the
customer which is the
best option for them in terms of cost.
ii) Provide in columnar form, the balance sheet and the income
statement extracts from
inception until the expiry of lease for both options.
Answeri)
Option A Option B
Total installment
Sale price
Total revenue
(less)
Cost of car
Maintenance cost
Total cost
Profit
